As filed with the Securities and Exchange Commission on February 26, 2019
1933 Act File
No. 333-150525
1940 Act File
No. 811-22201
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20543
FORM
N-1A
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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[ X
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Pre-Effective
Amendment
No.
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Post-Effective Amendment No.
239
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[ X
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and/or
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REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
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[ X
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Amendment No.
241
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[ X
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(Check appropriate box or boxes.)
DIREXION SHARES ETF TRUST
(Exact name of Registrant as Specified in Charter)
1301 Avenue of the Americas (6
th
Avenue),
28
th
Floor
New York, New York 10019
(Address of Principal Executive Office) (Zip Code)
Registrants Telephone Number, including Area Code: (646)
572-3390
Daniel D. ONeill, Chief Executive Officer
1301 Avenue of the Americas (6
th
Avenue),
28
th
Floor
New York, New York 10019
(Name and Address of Agent for Service)
Copy to:
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Angela Brickl
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Stacy L. Fuller
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Direxion Advisors, LLC
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K&L Gates LLP
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1301 Avenue of the Americas (6
th
Avenue)
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1601 K Street, NW
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28
th
Floor
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Washington, DC 20006
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New York, New York 10019
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It is proposed that this filing will become effective (check appropriate box)
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immediately upon filing pursuant to paragraph (b)
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[ X ]
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On February 28, 2019 pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)(1)
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On (date) pursuant to paragraph (a)(1)
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75 days after filing pursuant to paragraph (a)(2)
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on (date) pursuant to paragraph (a)(2) of Rule 485.
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If appropriate, check the following box:
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This post-effective amendment designates a new effective date for a previously filed post-effective amendment.
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DIREXION SHARES ETF TRUST
CONTENTS OF REGISTRATION STATEMENT
This
registration document is comprised of the following:
Cover Sheet;
Contents of Registration Statement:
Prospectuses and Statements of Additional Information for the Funds listed on Appendix A;
Part C of Form
N-1A;
Signature Page; and
Exhibits.
Appendix A
Direxion Auspice Broad Commodity Strategy ETF
Direxion All Cap Insider Sentiment Shares
Direxion
NASDAQ-100
®
Equal Weighted Index
Shares
Direxion Zacks MLP High Income Index Shares
Direxion Daily S&P 500
®
Bear 1X Shares
Direxion Daily
7-10
Year Treasury Bear 1X Shares
Direxion Daily 20+ Year Treasury Bear 1X Shares
Direxion Daily Total Bond Market Bear 1X Shares
Direxion Daily CSI 300 China A Share Bear 1X Shares
Direxion Daily Small Cap Bear 1X Shares
Direxion Daily Municipal Bond Taxable Bear 1X Shares
Direxion Daily MSCI China A Bear 1X Shares
Direxion Daily CSI China Internet Index Bear 1X Shares
Direxion Daily MSCI Real Estate Bear 1X Shares
Direxion Daily S&P 500
®
Bull 2X Shares
Direxion Daily Small Cap Bull 2X Shares
Direxion Daily CSI 300 China A Share Bull 2X Shares
Direxion Daily CSI China Internet Index Bull 2X Shares
Direxion Daily MSCI China A Bull 2X Shares
Direxion Daily High Yield Bear 2X Shares
Direxion Daily MSCI European Financials Bull 2X Shares
Direxion Daily MSCI European Financials Bear 2X Shares
Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares
Direxion Daily Preferred Stock Bull 2X Shares
Direxion Daily Mid Cap Bull 3X Shares
Direxion Daily Mid Cap Bear 3X Shares
Direxion Daily S&P 500
®
Bull 3X Shares
Direxion Daily S&P 500
®
Bear 3X Shares
Direxion Daily Small Cap Bull 3X Shares
Direxion Daily Small Cap Bear 3X Shares
Direxion Daily Dow 30 Bull 3X Shares
Direxion Daily Dow 30 Bear 3X Shares
Direxion Daily MSCI Brazil Bull 3X Shares
Direxion Daily MSCI Canada Bull 3X Shares
Direxion Daily MSCI Canada Bear 3X Shares
Direxion Daily FTSE China Bull 3X Shares
Direxion Daily FTSE China Bear 3X Shares
Direxion Daily MSCI Developed Markets Bull 3X Shares
Direxion Daily MSCI Developed Markets Bear 3X Shares
Direxion Daily MSCI Emerging Markets Bull 3X Shares
Direxion Daily MSCI Emerging Markets Bear 3X Shares
Direxion Daily FTSE Europe Bull 3X Shares
Direxion Daily EURO STOXX 50
®
Bull 3X Shares
Direxion Daily EURO STOXX 50
®
Bear 3X Shares
Direxion Daily MSCI India Bull 3X Shares
Direxion Daily MSCI Italy Bull 3X Shares
Direxion Daily MSCI Italy Bear 3X Shares
Direxion Daily MSCI Japan Bull 3X Shares
Direxion Daily Latin America Bull 3X Shares
Direxion Daily MSCI Mexico Bull 3X Shares
Direxion Daily MSCI Mexico Bear 3X Shares
Direxion Daily Russia Bull 3X Shares
Direxion Daily Russia Bear 3X Shares
Direxion Daily MSCI South Korea Bull 3X Shares
Direxion Daily Aerospace & Defense Bull 3X Shares
Direxion Daily Aerospace & Defense Bear 3X Shares
Direxion Daily S&P Biotech Bull 3X Shares
Direxion Daily S&P Biotech Bear 3X Shares
Direxion Daily Communication Services Index Bull 3X Shares
Direxion Daily Communication Services Index Bear 3X Shares
Direxion Daily Consumer Discretionary Bull 3X Shares
Direxion Daily Consumer Discretionary Bear 3X Shares
Direxion Daily Consumer Staples Bull 3X Shares
Direxion Daily Consumer Staples Bear 3X Shares
Direxion Daily Energy Bull 3X Shares
Direxion Daily Energy Bear 3X Shares
Direxion Daily Financial Bull 3X Shares
Direxion Daily Financial Bear 3X Shares
Direxion Daily Gold Miners Index Bull 3X Shares
Direxion Daily Gold Miners Index Bear 3X Shares
Direxion Daily Healthcare Bull 3X Shares
Direxion Daily Homebuilders & Supplies Bull 3X Shares
Direxion Daily Industrials Bull 3X Shares
Direxion Daily Industrials Bear 3X Shares
Direxion Daily Junior Gold Miners Index Bull 3X Shares
Direxion Daily Junior Gold Miners Index Bear 3X Shares
Direxion Daily Metals & Mining Bull 3X Shares
Direxion Daily Metals & Mining Bear 3X Shares
Direxion Daily Natural Gas Related Bull 3X Shares
Direxion Daily Natural Gas Related Bear 3X Shares
Direxion Daily Pharmaceutical & Medical Bull 3X Shares
Direxion Daily Pharmaceutical & Medical Bear 3X Shares
Direxion Daily MSCI Real Estate Bull 3X Shares
Direxion Daily MSCI Real Estate Bear 3X Shares
Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
Direxion Daily Regional Banks Bull 3X Shares
Direxion Daily Regional Banks Bear 3X Shares
Direxion Daily Retail Bull 3X Shares
Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
Direxion Daily Semiconductor Bull 3X Shares
Direxion Daily Semiconductor Bear 3X Shares
Direxion Daily Technology Bull 3X Shares
Direxion Daily Technology Bear 3X Shares
Direxion Daily Transportation Bull 3X Shares
Direxion Daily Transportation Bear 3X Shares
Direxion Daily Utilities Bull 3X Shares
Direxion Daily Utilities Bear 3X Shares
Direxion Daily
7-10
Year Treasury Bull 3X Shares
Direxion Daily
7-10
Year Treasury Bear 3X Shares
Direxion Daily 20+ Year Treasury Bull 3X Shares
Direxion Daily 20+ Year Treasury Bear 3X Shares
Direxion Daily Preferred Stock Bull 3X Shares
Direxion Shares ETF Trust
1301
Avenue of the Americas (6th Avenue), 28th Floor
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New York,
New York 10019
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866-476-7523
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www.direxioninvestments.com
Direxion Auspice Broad Commodity Strategy ETF (COM)
February 28, 2019
The shares offered in this prospectus (the “Fund”)
are listed and traded on the NYSE Arca, Inc. The Fund is an actively managed exchange-traded fund.
There is no assurance that the Fund will
achieve its investment objective and an investment in the Fund could lose money. The Fund is not a complete investment program.
IMPORTANT NOTE: Beginning on January 1, 2021, as permitted
by regulations adopted by the Securities and Exchange Commission, paper copies of the Fund’s annual and semi-annual shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the shareholder reports
from your financial intermediary, such as a broker-dealer or bank. Instead, annual and semi-annual shareholder reports will be available on a website, and you will be notified by mail each time a report is posted and provided with a website link to
access the report.
You may elect to receive all future
annual and semi-annual shareholder reports in paper free of charge. To elect to continue to receive paper copies of shareholder reports through the mail or to otherwise change your delivery method, contact your financial intermediary or follow the
instructions included with this disclosure. Your election to receive shareholder reports in paper will apply to all funds that you hold through the financial intermediary. If you already elected to receive shareholder reports electronically, you
will not be affected by this change and you need not take any action.
These securities have not been approved or disapproved by
the U.S. Securities and Exchange Commission (“SEC”) or the U.S. Commodity Futures Trading Commission (“CFTC”), nor have the SEC or CFTC passed upon the adequacy of this Prospectus. Any representation to the contrary is a
criminal offense.
Direxion
Auspice Broad Commodity Strategy ETF
Investment Objective
The Direxion Auspice Broad
Commodity Strategy ETF (the “Fund”) seeks to provide total return that exceeds that of the Auspice Broad Commodity Index (the “Index”) over a complete market cycle.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
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0.50%
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Distribution
and/or Service (12b-1) Fees
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0.00%
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Other
Expenses of the Fund
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0.34%
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Total
Annual Fund Operating Expenses
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0.84%
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Expense
Cap/Reimbursement
(1)
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-0.14%
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Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
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0.70%
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(1)
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Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.70% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
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Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
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Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
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3
Years
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5
Years
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10
Years
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$72
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$254
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$452
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$1,024
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Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives were reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal Investment Strategy
The Fund is an
actively managed exchange-traded fund (“ETF”) that seeks to provide total return that exceeds that of the Index over a complete market cycle. The Fund will generally seek to maintain a portfolio of instruments similar to those included
in the Index by utilizing exchange-traded commodity futures contracts, swap contracts and investments in other investment companies, including exchange-traded funds, or exchange-traded notes, thereby obtaining exposure to the commodities markets.
The Fund will invest up to 25% of its total assets in a wholly owned and controlled subsidiary (the “Subsidiary”). The Fund attempts to exceed the return of the Index primarily through the active management of a portfolio of Treasury
bills, other government securities, money market funds, cash, other short-term bond funds, highly rated corporate or other non-government fixed-income securities, with maturities of up to 12 months. The Fund expects to use the fixed-income
securities as collateral for its commodity-linked derivative exposure on a day-to-day basis. The Fund is an actively managed ETF that does not seek to replicate the performance of a specified index and is not required to invest in the specific
components of the Index.
The Index is a rules-based index that
attempts to capture trends in the commodity markets. The Index uses a quantitative methodology to track a diversified portfolio of 12 different commodity futures contracts, or “components.” The position size of each component included in
the Index is dependent on the historical volatility of that component and the total Index value, and is independent of the volatility and position of other components in the Index. Each Index component is then positioned either long or flat (no
position, which has the effect of removing exposure to a particular commodity) by the Index, depending upon the prevailing price trend of an individual component. The Index will modify the position size of each component at each month-end based on
the factors discussed above, however, each component’s position may be adjusted as frequently as daily. When the Index rules indicate that a component should have a flat position in a component, the Index will not have exposure to that
component and at times the Index may not have exposure to all 12 commodities that comprise the
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Trust Prospectus
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Index. The Fund will generally reposition the size
of each portfolio holding following each month-end in accordance with the rebalancing of the Index, but also may change the position in a component from a long position to a flat or no position, or vice versa, in any given commodity on a daily basis
if the Index is so adjusted.
The Fund may
invest in futures contracts on the 12 commodities that comprise the Index, which are soybeans, corn, wheat, cotton, sugar, crude oil, natural gas, gasoline, heating oil, copper, gold, and silver. These 12 components are grouped into 3 sectors:
Agriculture, Energy, and Metals. As of December 31, 2018, the Index had exposure to natural gas, gold, and sugar and had exposure to the Agriculture, Energy and Metals sectors. As of December 31, 2018, the Index did not have exposure to soybeans,
corn, wheat, cotton, crude oil, gasoline, heating oil, copper, and silver. The concentration in a sector or specific commodity may change over time.
The Index will replace expiring
futures contracts based on an optimization process that selects a contract from the universe of all exchange-traded futures contracts within the next 13 month period. Futures contracts on commodities generally are agreements between two parties
where one party agrees to buy, and the counterparty to sell, a set amount of a physical commodity (or, in some contracts, a cash equivalent) at a pre-determined future date and price. The value of commodity futures contracts is based upon the price
movements of the underlying commodities.
The Fund’s
investment in the Subsidiary is expected to provide the Fund with exposure to commodity returns within the limits of the federal tax laws, which limit the ability of investment companies such as the Fund to invest directly in such instruments.
Unlike the Fund, the Subsidiary may invest without limitation in commodity-linked derivatives and will invest principally in commodity futures and swap contracts, as well as certain fixed-income investments intended to serve as margin or collateral
for the Subsidiary’s derivatives positions. The Adviser will use its discretion to determine how much of the Fund’s total assets to invest in the Subsidiary, however, the Fund’s investment in the Subsidiary may not exceed 25% of
the value of its total assets at the end of each quarter of its taxable year. The Subsidiary is a limited partnership operating under Cayman Islands law and is wholly-owned and controlled by the Fund and is advised by the Adviser. The Subsidiary has
the same investment objective as the Fund and will follow the same general investment policies and restrictions. Except as noted, for purposes of this Prospectus, references to the Fund’s investment strategies and risks include those of its
Subsidiary.
Although
the Fund, through the Subsidiary, will generally invest in commodity futures contracts that are components of the Index, the Fund and the Subsidiary will be actively managed and will not be required to invest in all, or limit their investments
solely to, such commodity futures contracts. In this regard, the Fund and the Subsidiary may hold the same commodity futures contracts in approximately, but not exactly, the same weights as the Index. The Fund and the Subsidiary also may hold such
commodity futures contracts with the same maturity and weightings as the Index, but
may select a different month of maturity or weighting
in seeking to achieve better performance than the Index.
After investing in the Subsidiary,
the Fund seeks to exceed the performance of the Index by investing its remaining assets directly in cash, Treasury bills, other government securities, money market funds, other short-term bond funds, highly-rated corporate or other non-government
fixed-income securities, with maturities of up to 12 months that provide liquidity and have differing maturity rates, with the Adviser actively managing such investments to outperform the fixed income component of the Index. The Fund will hold such
fixed income instruments directly, whereas the Subsidiary will hold commodity futures contracts as well as such fixed income instruments and cash directly.
The Fund is
“non-diversified,” meaning that a relatively high percentage of its assets may be invested in a limited number of issuers of securities. References to the Fund include the Subsidiary.
The Commodities Futures Trading
Commission (the “CFTC”) has adopted certain requirements that subject registered investment companies and their advisors to regulation by the CFTC if a registered investment company invests more than a prescribed level of its net assets
in CFTC-regulated futures, options and swaps, or if a registered investment company markets itself as providing investment exposure to such instruments. Due to the Fund’s potential use of CFTC-regulated futures and swaps above the prescribed
levels, it is considered a “commodity pool” under the Commodity Exchange Act.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Leverage Risk
—
To achieve its investment objective, the Fund will make investments in derivative instruments, such as futures
contracts and swap agreements. These derivatives provide the economic effect of financial leverage by creating additional investment exposure to the swings in prices of an asset class underlying a derivatives contract and results in increased
volatility, which means that the Fund will have the potential for greater gains, as well as the potential for greater losses, than if leverage was not used. Leveraging tends to magnify, sometimes significantly, the effect of any increase or decrease
in exposure to an asset class and may cause the Fund’s net asset value to be volatile. If the Fund uses leverage through activities such as borrowing, entering into short sales, purchasing securities on margin or on a “when-issued”
basis or purchasing derivative instruments in an effort to increase its returns, the Fund has the risk of magnified capital losses. In addition, leverage may involve the creation of a liability that requires the Fund to pay interest.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments
Direxion Shares
ETF Trust Prospectus
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that impact specific economic sectors, industries or
segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide, which could have an adverse effect on the
Fund.
Historically, market
cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Liquidity Risk
—
Some securities held by the Fund may be difficult to sell or illiquid, particularly during times of market turmoil.
Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the United States. Illiquid
securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the security’s true
market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a security that is deemed
liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that the Fund's holdings decrease, the Fund may be one of many market participants that are attempting to transact in the Fund's holdings or correlated instruments. Under such circumstances, the market for the Fund's
holdings may lack sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in its holdings or correlated investments and the Fund's transactions could exacerbate the price change of an
investment.
Derivatives
Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those
associated with directly investing in securities or other investments, including risk related to the market, leverage, imperfect correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions.
The Fund may use futures contracts
and swaps on components of the Index or the Index itself to track the performance of the Index. The performance of the futures contract or swap on an underlying commodity component or the Index may not track the performance of the Index due to fees
and other costs associated with a futures contract or swap agreement. The use of derivatives may result in larger losses or smaller gains than directly investing in the underlying securities. Investments in such derivatives may generally be subject
to market risks that may cause their prices to fluctuate over time and may increase the volatility of the Fund. When the Fund uses derivatives, there may be imperfect correlation between the value of the underlying reference assets and the
derivative, which may prevent the Fund from achieving
its investment objective. Because derivatives often
require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested. Any financing, borrowing or other costs associated with using derivatives may also have the effect of
lowering the Fund’s return. In addition, the Fund’s investments in derivatives, as of the date of this Prospectus, are subject to the following risks:
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Futures Contracts.
Futures contracts are typically exchange traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts.
In addition, there is a risk
that the Fund may not be able to enter into a closing transaction due to an illiquid market. Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to
implement its investment strategy. Futures markets are highly volatile and the use of futures may increase the volatility of the Fund. Futures are also subject to leverage and liquidity risks.
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Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to
exchange the return (or differentials in rates of return) earned or realized on particular predetermined reference or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index. Total return swaps are subject to counterparty risk, which relates to credit risk of the
counterparty and liquidity risk of the swaps themselves.
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Commodity-Linked Derivatives Risk
—
The value of a commodity-linked derivative investment typically is based upon the price movements of a physical
commodity and may be affected by changes in overall market movements, volatility of the Index, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, embargoes, tariffs and international
economic, political and regulatory developments. Investments in commodity-linked derivatives may be subject to greater volatility than non-derivative based investments. Commodity-linked derivatives also may be subject to credit and interest rate
risks that in general affect the values of debt securities.
Futures Strategy Risk
—
The use of futures contracts is subject to special risk considerations. The primary risks associated with the use of
futures contracts are (a) the imperfect correlation between the change in market value of the instruments held by the Fund and the price of the futures contract; (b) possible lack of a liquid secondary market for a futures contract and the resulting
inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the Adviser’s inability to predict correctly the
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Trust Prospectus
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direction of securities prices, interest rates,
currency exchange rates and other economic factors; (e) the possibility that the counterparty will default in the performance of its obligations; and (f) if the Fund has insufficient cash, it may have to sell securities or financial instruments from
its portfolio to meet daily variation margin requirements, which may lead to the Fund selling securities or financial instruments at a time when it may be disadvantageous to do so.
As a futures contract approaches its
settlement date, the Fund may sell futures contracts and replace the position with a similar contract with a more distant settlement date. This process is referred to as “rolling” a futures contract. The successful use of such a strategy
depends upon the Adviser’s skill and experience. Although the Fund will attempt to roll from an expiring futures contract to another contract that the Adviser believes will generate the greatest yield for the Fund, the Fund nevertheless may
endure a cost to “roll” the contracts. In the event of a commodity futures market where near month contracts to expire trade at a higher price than the next expiring month contract, a situation referred to as “backwardation,”
then absent the impact of the overall movement in commodity prices, the Fund may benefit because it would be selling more expensive contracts and buying less expense contracts when it “rolls” the futures contracts. Conversely, in the
event of a commodity futures market where near month contracts trade at a lower price than next expiring month contract, a situation referred to as “contango,” then absent the impact of the overall movement in commodity prices, the Fund
may experience an adverse impact because it would be selling less expensive contracts and buying more expense contracts. The impact of backwardation and contango may cause the total return of the Fund to vary significantly from the total return of
other price references, such as the spot price of the commodities comprising the Index. In the event of a prolonged period of contango, and absent the impact of rising or falling commodity prices, there could be a significant negative impact on the
Fund when it “rolls” its futures contract positions.
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations
and realization on collateral if such remedies are stayed or eliminated under
special resolutions adopted in the United States, the
European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its investment objective.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Other Investment
Companies (including ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company
and as a result, Fund shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund
must rely on the other investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to
achieve its investment objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on
national stock exchanges, their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the
market, the Fund may not be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Subsidiary Investment Risk
—
By investing in the Subsidiary, the Fund is indirectly exposed to the risks associated with the Subsidiary’s
investments. Since the Subsidiary is organized under the law of the Cayman Islands and is not registered with the SEC under the Investment Company Act of 1940, as amended, the Fund will not receive all of the protections offered to shareholders of
registered investment companies. Changes in the laws of the United States and/or the Cayman Islands could result in the inability of the Fund and/or the Subsidiary to operate as intended, which may negatively affect the Fund and its
shareholders.
Interest Rate Risk
—
When interest rates increase, fixed income securities or instruments held by the Fund will generally decline in value.
The historically low interest rate environment, together with recent modest rate increases, heightens the risks associated with rising interest rates. A rising interest rate environment may adversely impact the
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ETF Trust Prospectus
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liquidity of fixed-income securities and lead to
increased volatility of fixed-income markets. Long-term fixed income securities or instruments will normally have more price volatility because of this risk than short-term fixed income securities or instruments. The risks associated with changing
interest rates may have unpredictable effects on the markets and the Fund’s investments. Fluctuations in interest rates may also affect the liquidity of fixed income securities and instruments held by the Fund.
Tax Risk
—
To qualify as a regulated investment company (“RIC”), the Fund must meet certain requirements
concerning the source of its income. The Fund’s investment in the Subsidiary is intended to provide exposure to commodities in a manner that is consistent with the “qualifying income” requirement applicable to RICs. The Internal
Revenue Service (“IRS”) has ceased issuing private letter rulings regarding whether the use of subsidiaries by investment companies to invest in commodity-linked instruments constitutes qualifying income. If the IRS determines that this
source of income is not “qualifying income,” the Fund may cease to qualify as a RIC because the Fund has not received a private letter ruling and is not able to rely on private letter rulings issued to other taxpayers. Failure to qualify
as a RIC could subject the Fund to adverse tax consequences, including a federal income tax on its net income at regular corporate rates, as well as a tax to shareholders on such income when distributed as an ordinary dividend.
Based on the principles underlying
private letter rulings previously issued to other taxpayers, the Fund intends to treat its income from the Subsidiary as qualifying income without any such ruling from the IRS. The tax treatment of the Fund’s investment in the Subsidiary may
be adversely affected by future legislation, court decisions, Treasury Regulations and/or guidance issued by the IRS that could affect whether income derived from such investments is “qualifying income” under Subchapter M of the Internal
Revenue Code, or otherwise affect the character, timing and/or amount of the Fund’s taxable income or any gains or distributions made by the Fund.
Agriculture Investment Risk
—
Investments in, and/or exposure to, the agriculture sector may be highly volatile and may change quickly and
unpredictably due to a number of factors, including the supply of and demand of each commodity, legislative or regulatory developments relating to food safety, political, legal, financial, accounting and tax matters and other events that the Fund
cannot control. In addition, increased competition caused by economic recession, labor difficulties and changing consumer tastes and spending can affect the demand for agricultural products, and consequently the value of investments in that sector.
As a result, the price of an agricultural commodity could decline, which would materially affect an investment in the Fund if it held or had exposure to that commodity.
Energy Commodity Risk
—
Investment in, and/or exposure to, the energy sector and energy commodities may be highly volatile and can change
quickly and unpredictably due to a number of factors, including legislative or regulatory changes, adverse market conditions, increased competition affecting the energy sector, financial, accounting and tax
matters and other events that the Fund cannot
control. In addition, the value of energy commodities may fluctuate widely due to the supply and demand. As a result, the price of an energy commodity could decline, which would materially impact the Fund is it had exposure to that commodity.
Metals Investment Risk
—
Investments in gold, silver, and copper may be highly volatile and can change quickly and unpredictably due to a
number of factors, including the supply and demand of each metal, environmental or labor costs, political, legal, financial, accounting and tax matters and other events that the Fund cannot control. In addition, changes in international monetary
policies or economic and political conditions can affect the supply of metals, and consequently the value of metal investments. The United States or foreign governments may pass laws or regulations limiting metal investments for strategic or other
policy reasons. Further, the principal supplies of metal industries may be concentrated in a small number of countries and regions. Consequently, the price of a metal held by the Fund could decline, which would materially impact the Fund’s
performance.
Gap Risk
—
The Fund is subject to the risk that a commodity price will change between the periods of trading. Usually such
movements occur when there are adverse news announcements while commodity markets are closed, which can cause the price of a commodity to drop substantially from the previous day’s closing price.
Clearing Broker Risk
—
Investment in exchange-traded futures contracts may expose the Fund to the risks of a clearing broker (or a futures
commission merchant (“FCM”)). Under current regulations, a clearing broker or FCM maintains customers’ assets in a bulk segregated account. There is a risk that Fund assets deposited with the clearing broker to serve as margin may
be used to satisfy the broker’s own obligations or the losses of the broker’s other clients. In the event of default, the Fund could experience lengthy delays in recovering some or all of its assets and may not see any recovery at
all.
U.S. Government Securities Risk
—
A security backed by the U.S. Treasury or the full faith and credit of the United States is guaranteed only as to the
timely payment of interest and principal when held to maturity. The market prices for such securities are not guaranteed and will fluctuate. In addition, because many types of U.S. government securities trade actively outside the United States,
their prices may rise and fall as changes in global economic conditions affect the demand for these securities. In addition, U.S. Treasury obligations may differ from other securities in their interest rates, maturities, times of issuance and other
characteristics. Changes in the financial condition or credit rating of the U.S government may cause the value of U.S. Treasury obligations to decline.
Cybersecurity Risk
-
Failures or breaches of the electronic systems of the Fund or its services providers may cause disruptions and
negatively impact the Fund’s business operations, potentially resulting
in financial losses to the Fund.
While the Fund has
established business continuity plans and risk management systems
seeking to
address system
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Direxion Shares ETF
Trust Prospectus
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breaches or
failures, these plans and systems are inherently limited. Further, cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests
in non-U.S. securities or other securities or
instruments that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the net
asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no
guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or
create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
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During the period of time shown in
the bar chart, the Fund’s highest calendar quarter return was 2.26% for the quarter ended June 30, 2018 and its lowest calendar quarter return was -3.20% for the quarter ended December 31, 2018. The year-to-date return as of December 31, 2018
was -0.15%.
Average Annual Total
Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(3/30/17)
|
Return
Before Taxes
|
-0.15%
|
-1.01%
|
Return
After Taxes on Distributions
|
-1.09%
|
-1.56%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-0.08%
|
-1.00%
|
Auspice
Broad Commodity Index
(reflects no deduction for fees, expenses or taxes)
|
-0.98%
|
-2.23%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
5.52%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in March 2017
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception in March 2017
|
Portfolio
Manager
|
Purchase and Sale of Fund Shares
The Fund’s shares are not
individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as creation units, each of which is
comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may
trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The Index is the exclusive property
of Auspice Capital Advisors Ltd. (“Auspice”). Auspice and the Auspice index name are service mark(s) of Auspice or its affiliates and have been licensed for use for certain purposes by the Direxion Auspice Broad Commodity Strategy ETF.
The financial securities referred to herein are not sponsored, endorsed, or promoted by Auspice, and Auspice bears no liability with respect to any such financial securities. No purchaser, seller or holder of this product, or any other person or
entity, should use or refer to any Auspice trade name, trademark or service mark to sponsor, endorse, market or promote this product without first contacting Auspice to determine whether Auspice’s permission is required. Under no circumstances
may any person or entity claim any affiliation with Auspice without the prior written permission of Auspice.
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Direxion Shares ETF
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The Direxion Shares ETF Trust
(the “Trust”) is a registered investment company offering a number of separate exchange-traded funds (“ETFs”). This Prospectus describes the Direxion Auspice Broad Commodity ETF (the "Fund"). Rafferty Asset Management, LLC
serves as the investment advisor to the Fund ("Rafferty" or the "Adviser").
Principal Investment Strategy.
The Fund seeks to provide total return that exceeds the return of the Auspice Broad Commodity Index (the “Index”). The Fund will seek excess return above the Index primarily through the active management of
a portfolio of Treasury bills, other government securities, money market funds, cash, other short-term bond funds, highly rated corporate or other non-government fixed-income securities, with maturities of up to 12 months.
At the Adviser’s discretion,
the Fund may invest in portfolio of Treasury bills, other government securities, money market funds, cash, other short-term bond funds, highly rated corporate or other non-government fixed-income securities, with maturities of up to 12 months for
temporary defensive purposes. The Fund will limit the notional value of any one futures contracts with the same underlying reference asset to less than 30% of the Fund’s net assets. Additionally the Fund will limit the notional value of
futures contracts with any five or fewer references assets to less than 65% of the Fund’s net assets.
The Fund will
invest up to 25% of its total assets in a wholly owned and controlled subsidiary, the Direxion BCS Fund, Ltd (the “Subsidiary”). When viewed on a consolidated basis, the Subsidiary is subject to the same investment restrictions and
limitations, and follows the same compliance policies and procedures, as the Fund. The Fund, directly and/or indirectly through the Subsidiary, may invest in a combination of commodity and financial futures and commodity-related swap agreements. The
Fund may invest directly in certain futures and swap contracts, ETFs and other investment companies that provide exposure to commodities and fixed-income securities that include U.S. government securities, investment grade short-term fixed-income
securities, money market instruments, overnight and fixed-term repurchase agreements, cash, and other cash equivalents that have terms-to-maturity less than 397 days. The Fund’s portfolio is expected to consist principally of securities.
The Fund’s investment
in the Subsidiary may not exceed 25% of the value of its total assets, as measured at the end of the quarter of its taxable year. This limitation is imposed by the Internal Revenue Code of 1986, as amended. The Subsidiary, which is organized under
the laws of the Cayman Islands, is wholly owned and controlled by the Fund. The Fund invests in the Subsidiary in order to gain exposure to the investment returns of the commodities markets within the limitations of the federal tax law requirements
applicable to regulated investment companies. The Subsidiary may invest principally in commodity and financial futures, options and swap contracts, as well as certain fixed-income investments intended to serve as margin or collateral for the
Subsidiary’s derivatives positions. Unlike the Fund, the Subsidiary may invest without limitation in commodity-linked derivatives, though the Subsidiary, on a consolidated basis, will comply with the same Investment Company Act of 1940, as
amended (the “1940 Act”), asset coverage requirements with respect to its investments in commodity-linked derivatives that apply to the Fund’s transactions in these instruments. To the extent applicable, the Subsidiary is, on a
consolidated basis, subject to the same fundamental and non-fundamental investment restrictions as the Fund and, in particular, to the same requirements relating to portfolio leverage, liquidity, and the timing and method of valuation of portfolio
investments and Fund shares described elsewhere in this Prospectus and in the Statement of Additional Information (“SAI”). The Fund is the sole shareholder of the Subsidiary and does not expect shares of the Subsidiary to be offered or
sold to other investors.
The Fund is
“non-diversified,” meaning that a relatively high percentage of its assets may be invested in a limited number of issuers of securities.
Shares of the Fund
(“Shares”) are listed and traded on the NYSE Arca, Inc. (the “Exchange”), where the market prices for the Shares may be different from the intra-day value of the Shares disseminated by the Exchange and from their net asset
value (“NAV”). Unlike conventional mutual funds, Shares are not individually redeemable directly with the Fund. Rather, the Fund issues and redeems Shares on a continuous basis at NAV only in large blocks of Shares called “Creation
Units.” A Creation Unit consists of 50,000 Shares. Creation Units of the Fund are issued and redeemed in cash and/or in-kind for securities included in the underlying index. As a result, retail investors generally will not be able to purchase
or redeem Shares directly from, or with, the Fund. Most retail investors will purchase or sell Shares in the secondary market through a broker.
In order to provide additional
information regarding the value of Shares of the Fund, the Exchange, a market data vendor or other information provider, disseminates an Intraday Optimized Portfolio Value (“IOPV”) for the Fund. The Fund’s IOPV is expected to be
disseminated every 15 seconds during the regular trading hours of the Exchange. The IOPV is based on the current market value of the securities and cash required to be deposited in exchange for a Creation Unit. The IOPV does not necessarily reflect
the precise composition of the current portfolio holdings of the Fund as of a particular point in time, or an accurate valuation of the current portfolio. The quotations of certain Fund holdings may not be updated during U.S. trading hours if such
holdings do not trade in the U.S. The Fund is not involved in, nor responsible for, the calculation or dissemination of the IOPV and makes no representations or warranty as to its accuracy.
There is no assurance that the Fund will
achieve its investment objective and an investment in the Fund could lose money. No single Fund is a complete investment program.
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Changes in Investment Objective
. The Fund’s investment objective is not a fundamental policy and may be changed by the Fund's Board of Trustees without shareholder approval.
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Additional Information Regarding Principal
Risks
An investment in
the Fund entails risks. The Fund may not achieve its investment objective and may decline in value. The Fund presents risks not traditionally associated with other mutual funds and ETFs. It is important that investors closely review and understand
all of the Fund’s risks before making an investment. The Fund is not a complete investment program. Risks of investing in the Fund are described below.
Leverage Risk
To achieve its investment objective, the Fund will
make investments in derivative instruments, such as futures contracts and swap agreements. These derivatives provide the economic effect of financial leverage by creating additional investment exposure to the swings in prices of an asset class
underlying a derivatives contract and results in increased volatility, which means that the Fund will have the potential for greater gains, as well as the potential for greater losses, than if leverage was not used. Leveraging tends to magnify,
sometimes significantly, the effect of any increase or decrease in exposure to an asset class and may cause the Fund’s net asset value to be volatile. If the Fund uses leverage through activities such as borrowing, entering into short sales,
purchasing securities on margin or on a “when-issued” basis or purchasing derivative instruments in an effort to increase its returns, the Fund has the risk of magnified capital losses. In addition, leverage may involve the creation of a
liability that requires the Fund to pay interest.
Market Risk
Market risks include political, regulatory, market
and economic developments, including developments that impact specific economic sectors, industries or segments of the market. The Fund typically would lose value on a day when the Index declines and would gain value on a day when the Index
increases. During a general downturn in the securities market, multiple asset classes may be negatively impacted.
Turbulence in the financial markets
and reduced liquidity may negatively affect issuers, which could have an adverse effect on the Fund. The Fund’s NAV could decline over short periods due to short-term market movements and over longer periods during market downturns.
Aggressive Investment Techniques
Risk
Using investment techniques that may be
considered aggressive, such as futures contracts, forward contracts, options and swap agreements, includes the risk of potentially dramatic changes (losses) in the value of the instruments, imperfect correlations between the price of the instrument
and the underlying security or index, and volatility of the Fund.
Liquidity Risk
Some securities held by the Fund, including
derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including, but not limited to, an economic crisis, natural
disasters, new legislation or regulatory changes inside or outside the United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell
an illiquid security at an unfavorable time or
price, the Fund may incur a loss. Certain market conditions may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There is no assurance that a security that is deemed liquid when purchased will
continue to be liquid.
Market
illiquidity may cause losses for the Fund. The Fund may be one of many market participants that are attempting to transact in the Fund's holdings or correlated instruments. Under such circumstances, the market for the Fund's holdings may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in its holdings or correlated investments and the Fund's transactions could exacerbate the price change of an investment.
Additionally, a minor adverse change in the value of the Fund's holdings should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
The Fund’s
investments in derivatives may be considered aggressive and pose risks in addition to, and greater than, those associated with directly investing in securities and other investments, including: 1) the risk that there may be imperfect correlation
between the price of the derivative and movement in the prices of the reference assets; 2) credit or counterparty risk on the amount the Fund expects to receive from a counterparty; 3) the risk that securities prices and interest rates will move
adversely and the Fund will incur significant losses; 4) the risk that the cost of holding a derivative might exceed its total return; 5) the possible absence of a liquid secondary market for a particular instrument and possible exchange-imposed
price fluctuation limits, either of which may make it difficult or impossible to adjust the Fund’s position in a particular instrument when desired; and 6) the use of derivatives may result in larger losses or smaller gains than directly
investing in or shorting the underlying securities. Investments in such derivatives may generally be subject to market risks that may cause their prices to fluctuate over time and may increase the volatility of the Fund. Because derivatives often
require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested. The use of derivatives may also cause the Fund to be subject to additional regulations, which may generate
additional Fund expenses.
The
Fund may use futures contracts and swaps on components of the Index or the Index itself to track the performance of the Index. The performance of the futures contract or swap on an underlying commodity component or the Index may not track the
performance of the Index due to fees and other costs associated with a futures contract or swap
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ETF Trust Prospectus
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10
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agreement. Any financing, borrowing or other costs
associated with using derivatives may also have the effect of lowering the Fund’s return. In addition, the Fund’s investments in derivatives are subject to the following risks:
•
|
Futures Contracts.
A futures contract is a contract to purchase or sell a particular security, or the cash value of an index, at a specified future date at a price agreed upon when the contract is made. Under such contracts, no delivery of
the actual securities is required. Rather, upon the expiration of the contract, settlement is made by exchanging cash in an amount equal to the difference between the contract price and the closing price of a security or index at expiration, net of
the variation margin that was previously paid.
|
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified
period which may range from one
day to
more than one year. In a standard swap transaction, two parties
agree
to exchange the return
(or differentials in rates of
return)
earned or
realized on particular predetermined reference or underlying securities or instruments. The gross return to be exchanged or swapped between the parties
is calculated based
on a notional amount or the return on or change in value of a particular dollar
amount invested in a basket of securities representing a particular
index. Total return swaps are subject to counterparty risk, which relate to credit risk of the counterparty and liquidity risk of the swaps themselves.
|
Commodity-Linked Derivatives Risk
The value of a commodity-linked derivative
investment is typically based upon the price movements of a physical commodity (such as heating oil, precious metals, livestock, or agricultural products), a commodity futures contract or commodity index, or some other readily measurable economic
variable. Commodity-linked derivatives provide exposure, which may include long and/or short exposure, to the investment returns of physical commodities that trade in the commodities markets without investing directly in physical commodities. The
value of commodity-linked derivative instruments may be affected by changes in overall market movements, volatility of the underlying index, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods,
weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. The value of commodity-linked derivatives will rise or fall in response to changes in the underlying commodity or related index.
Investments in commodity-linked derivatives may be subject to greater volatility than non-derivative based investments. A highly liquid secondary market may not exist for certain commodity-linked derivatives, and there can be no assurance that one
will develop.
Futures Strategy
Risk
Successful use of futures contracts draws
upon the Adviser’s skill and experience with respect to such instruments and is subject to special risk considerations. The primary risks associated with the use of futures contracts are (a) the imperfect correlation between the change in
market value of the instruments held by the Fund and the price of the
futures contract; (b) possible lack of a liquid
secondary market for a futures contract and the resulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the Adviser’s inability to predict
correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors; (e) the possibility that the counterparty will default in the performance of its obligations; and (f) if the Fund has insufficient
cash, it may have to sell securities from its portfolio to meet daily variation margin requirements, and the Fund may have to sell securities at a time when it may be disadvantageous to do so.
As a futures contract approaches its
settlement date, the Fund may sell futures contracts and replace the position with a similar contract with a more distant settlement date. This process is referred to as “rolling” a futures contract. The successful use of such a strategy
depends upon the Adviser’s skill and experience. Although the Fund will attempt to roll from an expiring futures contract to another contract that the Adviser believes will generate the greatest yield for the Fund, the Fund nevertheless may
endure a cost to “roll” the contracts. In the event of a commodity futures market where near month contracts to expire trade at a higher price than the next expiring month contract, a situation referred to as “backwardation,”
then absent the impact of the overall movement in commodity prices, the Fund may benefit because it would be selling more expensive contracts and buying less expense contracts when it “rolls” the futures contracts. Conversely, in the
event of a commodity futures market where near month contracts trade at a lower price than next expiring month contract, a situation referred to as “contango,” then absent the impact of the overall movement in commodity prices, the Fund
may experience an adverse impact because it would be selling less expensive contracts and buying more expense contracts. The impact of backwardation and contango may cause the total return of the Fund to vary significantly from the total return of
other price references, such as the spot price of the commodities comprising the Index. In the event of a prolonged period of contango, and absent the impact of rising or falling commodity prices, there could be a significant negative impact on the
Fund when it “rolls” its futures contract positions.
Counterparty Risk
Counterparty risk
is the risk that a counterparty is unwilling or unable to make timely payments to meet its contractual obligations with respect to the amount the Fund expects to receive from a counterparty to a financial instrument entered into by the Fund. The
Fund generally enters into derivatives transactions, such as the swap agreements, with counterparties such that either party can terminate the contract without penalty prior to the termination date. The Fund may be negatively impacted if a
counterparty becomes bankrupt or otherwise fails to perform its obligations under such a contract, or if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access
such collateral. If the counterparty becomes bankrupt or defaults on its payment obligations to the Fund, it may experience significant delays
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in obtaining any recovery, may obtain only a limited
recovery or obtain no recovery and the value of an investment held by the Fund may decline. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral, if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions. European Union rules and regulations intervene when a financial institution is experiencing financial
difficulties and could reduce, eliminate, or convert to equity a counterparty’s obligations to the Fund (sometimes referred to as a “bail in”).
The Fund typically enters into
transactions with counterparties that present minimal risks based on the Adviser’s assessment of the counterparty’s creditworthiness, or its capacity to meet its financial obligations during the term of the derivative agreement or
contract. The Adviser considers factors such as counterparty credit rating among other factors when determining whether a counterparty is creditworthy. The Adviser regularly monitors the creditworthiness of each counterparty with which the Fund
transacts. The Fund generally enters into swap agreements or other financial instruments with major, global financial institutions and seeks to mitigate risks by generally requiring that the counterparties for the Fund to post collateral, marked to
market daily, in an amount approximately equal to what the counterparty owes the Fund, subject to certain minimum thresholds. To the extent any such collateral is insufficient or there are delays in accessing the collateral, the Fund will be exposed
to the risks described above. If a counterparty’s credit ratings decline, the Fund may be subject to a bail-in, as described above.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. There is a risk
that no suitable counterparties are willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its investment objective. Additionally, although a counterparty to a centrally
cleared swap agreement and/or an exchange-traded futures contract is often backed by a futures commission merchant (“FCM”) or a clearing organization that is further backed by a group of financial institutions, there may be instances in
which a FCM or a clearing organization would fail to perform its obligations, causing significant losses to the Fund.
Cash Transaction Risk
Unlike most ETFs, the Fund currently intends to
effect creation and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial instruments held by the Fund. As such, investment in the Fund may be less tax efficient than investment in a
conventional ETF. ETFs generally are able to make in-kind redemptions and avoid being taxed on gains on the distributed portfolio securities at the fund level. Because the Fund currently intends to effect redemptions principally for cash, the Fund
may be required to sell portfolio securities in order to obtain the cash needed to distribute redemption
proceeds. The Fund may recognize a capital gain on
these sales that might not have been incurred if such Fund had made a redemption in-kind and this may decrease the tax efficiency of the Fund compared to ETFs that utilize an in-kind redemption process.
Other Investment Companies (including
ETFs) Risk
Investment in the securities of
other investment companies, including ETFs, may involve duplication of advisory fees and certain other expenses. By investing in another investment company or ETF, the Fund becomes a shareholder of that investment company or ETF. As a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses paid by shareholders of the other investment company or ETF, in addition to the fees and expenses Fund shareholders bear in connection with the Fund’s
own operations. As a shareholder, the Fund must rely on the investment company or ETF to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment
companies or ETFs. If the investment company or ETF fails to achieve its investment objective, the value of the Fund’s investment will decline, thus affecting the Fund’s performance. In addition, because closed-end investment companies
and ETFs are listed on national stock exchanges and are traded like stocks on an exchange, their shares potentially may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could
result in greater expenses to the Fund. Finally, because the value of closed-end investment company or ETF shares depends on the demand in the market, the Adviser may not be able to liquidate the Fund’s holdings in those shares at the most
optimal time, adversely affecting the Fund’s performance.
Subsidiary Investment Risk
The Fund’s
investments in the Subsidiary generally will not exceed 25% of the value of its total assets (ignoring any subsequent market appreciation in the Subsidiary’s value). This limitation is pursuant to the Internal Revenue Code of 1986, as amended,
and is measured at each taxable year quarter-end. The Subsidiary, which is organized under the laws of the Cayman Islands, is wholly owned and controlled by the Fund. The Fund will invest in the Subsidiary in order to gain exposure to the investment
returns of the commodities markets within the limitations of the federal tax law requirements applicable to regulated investment companies. The Subsidiary will invest principally in commodity and financial futures, options and swap contracts, as
well as certain fixed-income investments intended to serve as margin or collateral for the Subsidiary’s derivatives positions. Unlike the Fund, the Subsidiary may invest without limitation in commodity-linked derivatives, though the Subsidiary
will comply with the same 1940 Act asset coverage requirements with respect to its investments in commodity-linked derivatives that apply to the Fund’s transactions in these instruments. To the extent applicable, the Subsidiary otherwise is
subject to the same fundamental and non-fundamental investment restrictions as the Fund and, in particular, to the same requirements relating to portfolio leverage, liquidity, and the timing and method of valuation of portfolio investments
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and Fund shares, described elsewhere in this
Prospectus and in the SAI. By investing in the Subsidiary, the Fund is indirectly exposed to the risks associated with the Subsidiary’s commodity-linked derivatives investments.
The Subsidiary is not registered with
the SEC as an investment company under the 1940 Act, and is not subject to the investor protections of the 1940 Act. As an investor in the Subsidiary, the Fund does not have the same protections offered to shareholders of registered investment
companies.
The Fund and the
Subsidiary may not be able to operate as described in this Prospectus in the event of changes to the laws of the United States or the Cayman Islands. If the laws of the Cayman Islands required the Subsidiary to pay taxes to a governmental authority,
the Fund would be likely to suffer decreased returns.
Interest Rate Risk
Debt securities, and securities that provide
exposure to debt securities, have varying levels of sensitivity to changes in interest rates. In addition, the Fund is subject to the risk that interest rates may change and exhibit increased volatility, thus affecting the performance of the Fund.
Interest rates across the U.S. economy have recently increased and may continue to increase, which may expose the Fund to heightened interest rate risk and volatility. Securities with longer maturities can be more sensitive to interest rate changes.
To the extent the Fund’s Index includes a substantial portion of its assets in fixed-income securities with longer-term durations, rising interest rates may cause the value of the Index to decline significantly. An increase in interest rates
may lead to heightened volatility in the fixed-income markets and adversely affect the liquidity of certain fixed-income investments. A decrease in fixed-income market maker capacity may act to decrease liquidity in the fixed-income markets and act
to further increase volatility, affecting the Fund’s return.
In addition, short-term and long-term
interest rates do not necessarily move in the same amount or the same direction. Short-term securities tend to react to changes in short-term interest rates, and long-term securities tend to react to changes in long-term interest rates. The impact
of an interest rate change may be significant for other asset classes as well, whether because of the impact of interest rates on economic activity or because of changes in the relative attractiveness of asset classes due to changes in interest
rates. For instance, higher interest rates may make investments in debt securities more attractive, thus reducing investments in equities. The link between interest rates and debt security prices tends to be weaker with lower-rated debt securities
than with investment-grade debt securities.
The historically low interest rate
environment was created in part by the U.S. Board of Governors of the Federal Reserve System (the “Fed”) and certain foreign banks keeping the federal funds and equivalent foreign rates at or near zero percent. The Fed recently raised
its benchmark interest rate several times as the U.S. labor market strengthened and economic activity accelerated. The Fed indicated that it expects its accommodative monetary policy stance to support strong labor market conditions and a sustained
return to target inflation, which increases the likelihood of rising interest
rates in the future. Fed policy going forward is less
clear given recent changes in Fed leadership.
Tax Risk
To qualify as a regulated investment company
(“RIC”), the Fund must meet certain requirements concerning the source of its income. The Fund’s investment in the Subsidiary is intended to provide exposure to commodities in a manner that is consistent with the “qualifying
income” requirement applicable to RICs. The Internal Revenue Service (“IRS”) has ceased issuing private letter rulings regarding whether the use of subsidiaries by investment companies to invest in commodity-linked instruments
constitutes qualifying income. If the IRS determines that this source of income is not “qualifying income,” the Fund may cease to qualify as a RIC because the Fund has not received a private letter ruling and is not able to rely on
private letter rulings issued to other taxpayers. Failure to qualify as a RIC could subject the Fund to adverse tax consequences, including a federal income tax on its net income at regular corporate rates, as well as a tax to shareholders on such
income when distributed as an ordinary dividend.
Based on the principles underlying
private letter rulings previously issued to other taxpayers, the Fund intends to treat its income from the Subsidiary as qualifying income without any such ruling from the IRS. The tax treatment of the Fund’s investment in the Subsidiary may
be adversely affected by future legislation, court decisions, Treasury Regulations and/or guidance issued by the IRS that could affect whether income derived from such investments is “qualifying income” under Subchapter M of the Internal
Revenue Code, or otherwise affect the character, timing and/or amount of the Fund’s taxable income or any gains or distributions made by the Fund.
Agriculture Investment Risk
Investments in, and/or exposure to, the agriculture
sector may be highly volatile and can change quickly and unpredictably due to a number of factors, including the supply of and demand of each commodity, legislative or regulatory developments relating to food safety, political, legal, financial,
accounting and tax matters and other events that the Fund cannot control. In addition, increased competition caused by economic recession, labor difficulties and changing consumer tastes and spending may impact the demand for agricultural products,
and consequently the value of investments in that sector. As a result, the price of an agricultural commodity could decline, which would affect an investment in the Fund if it held or had exposure to that commodity.
Energy Commodity Risk
Investments in, and/or exposure to, the energy
sector, which includes energy commodities such as oil, gasoline, and natural gas, may be highly volatile and can change quickly and unpredictably due to a number of factors, including the legislative or regulatory changes, adverse market conditions,
increased competition affecting the energy sector, financial, accounting and tax matters and other events that the Fund cannot control. In addition, the value of energy commodities may fluctuate widely due to the supply and demand. As a result, the
price of an energy commodity could decline, which
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would adversely affect an investment in the Fund if it
held that commodity.
Metals
Investment Risk
Prices of gold, silver or
other metals, and of gold, silver and other metal related securities, historically have been very volatile. Additionally, the securities of companies in the mining and metals sector have had a history of marked volatility. This may be due to a
number of factors, including the changes in inflation, the outlook for inflation and changes in industrial and commercial demand for metals. Additionally, increased environmental or labor costs may depress the value of metal investments.
Further, changes in international
monetary policies or economic and political conditions can affect the supply of metals, and consequently the value of metal investments. The United States or foreign governments may pass laws or regulations limiting metal investments for strategic
or other policy reasons. The principal supplies of metal industries also may be concentrated in a small number of countries and regions. As a result of these conditions, the price of a metal could decline, which would adversely affect an investment
in the Fund if it held that metal.
Gap Risk
The Fund is subject to the risk that a commodity
price will change between the periods of trading. Usually such movements occur when there are adverse news announcements, which can cause the price of a commodity to drop substantially from the previous day’s closing price.
Clearing Broker Risk
Investment in exchange-traded futures contracts may
expose the Fund to the risks of a clearing broker (or a futures commission merchant (“FCM”)). Under current regulations, a clearing broker or FCM maintains customers’ assets in a bulk segregated account. There is a risk that Fund
assets deposited with the clearing broker to serve as margin may be used to satisfy the broker’s own obligations or the losses of the broker’s other clients. In the event of default, the Fund could experience lengthy delays in recovering
some or all of its assets and may not see any recovery at all.
Commodity Pool Registration Risk
Under
amended regulations promulgated by the U.S. Commodities Futures Trading Commission (“CFTC”), the Fund and the Subsidiary are considered commodity pools, and therefore each is subject to regulation under the Commodity Exchange Act and
CFTC rules. The Adviser is registered as a commodity pool operator and will manage the Fund and the Subsidiary in accordance with CFTC rules as well as the rules that apply to registered investment companies, which includes registering the Fund as
commodity pools. Registration as a commodity pool subjects the registrant to additional laws, regulations and enforcement policies, all of which may potentially increase compliance costs and may affect the operations and financial performance of the
Fund and the Subsidiary. Additionally, the Subsidiary’s positions in futures contracts may have to be liquidated at disadvantageous times or prices to prevent the Fund from exceeding any applicable position limits established by the CFTC. Such
actions may subject the Fund to substantial losses.
U.S. Government Securities Risk
A security
backed by the U.S. Treasury or the full faith and credit of the United States is guaranteed only as to the timely payment of interest and principal when held to maturity. The market prices for such securities are not guaranteed and will fluctuate.
In addition, because many types of U.S. government securities trade actively outside the United States, their prices may rise and fall as changes in global economic conditions affect the demand for these securities. In addition, U.S. Treasury
obligations may differ from other securities in their interest rates, maturities, times of issuance and other characteristics. Changes in the financial condition or credit rating of the U.S government may cause the value of U.S. Treasury obligations
to decline. On August 5, 2011, S&P Global Ratings downgraded U.S. Treasury securities from a AAA rating to a AA+ rating. A further downgrade of the ratings of U.S. government debt obligations could result in higher interest rates for individual
and corporate borrowers, cause disruptions in bond markets and have a substantial negative effect on the U.S. economy.
Adverse Market Conditions Risk
The performance of the Fund is designed to correlate
to the performance of the Index. As a consequence, the Fund’s performance will suffer during conditions which are adverse to its investment objective. For example, if the Index has fallen on a given day, the Fund’s performance also
should fall. Conversely, if the Index has risen on a given day, the Fund’s performance should rise.
Cybersecurity
Risk
The increased use of technologies, such
as the internet, to conduct business increases the operational, information security and related “cyber” risks both directly to the Fund and through its service providers. Similar types of cyber security risks are also present for
issuers of securities in which the Fund may invest, which could result in material adverse consequences for such issuers. Unlike many other types of risks faced by the Fund, these risks typically are not covered by insurance. Cyber incidents can
result from deliberate attacks or unintentional events. Cyber incidents may include, but are not limited to, gaining unauthorized access to digital systems (
e.g.
, through “hacking” or malicious
software coding) for purposes of misappropriating assets or sensitive information, corrupting data, causing physical damage to computer or network systems, or causing operational disruption. Cyber attacks may also be carried out in a manner that
does not require gaining unauthorized access, such as causing denial-of-service attacks on websites (
i.e
., efforts to make network services unavailable to intended users).
Failures or breaches of the
electronic systems of the Fund, the Fund’s advisor, distributor, other service providers, counterparties, securities trading venues, or the issuers of securities in which the Fund invests have the ability to cause disruptions and negatively
impact the Fund’s business operations, potentially resulting in financial losses to the Fund and its shareholders. Cyber attacks may also interfere with the Fund’s calculation of its NAV, result in the submission of erroneous trades or
erroneous creation or redemption orders, and could lead to violations of applicable privacy and other laws, regulatory fines, penalties, reputational
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damage, reimbursement or other compensation costs
and/or additional compliance costs. While the Fund has established business continuity plans, there are inherent limitations in such plans, including the possibility that certain risks have not been identified and that prevention and remediation
efforts will not be successful. Furthermore, the Fund cannot control the cyber security plans and systems of the Fund’s service providers or issuers of securities in which the Fund invests.
Early Close/Trading Halt Risk
An exchange or market may close or issue trading
halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. For example, there is a
risk that sharp price declines in securities owned by the Fund may trigger trading halts, which may result in the Fund’s shares trading at an increasingly large discount to NAV during part of, or all of, the trading day. In such circumstances,
the Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
Investment Risk
An investment in the Fund is not a deposit in a bank
and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
Money market instruments, including money market
funds, depositary accounts and repurchase agreements may be used for cash management purposes. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject
to credit risk with respect to the financial institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase
agreements may be subject to market and credit risk related to the collateral securing the repurchase agreement. Money market instruments may also be subject to credit risks associated with the instruments in which they invest. There is no guarantee
that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
The Fund invests a high percentage of its assets in
a limited number of securities. The Fund’s NAV and total return may fluctuate more, or fall greater, in times of weaker markets than a diversified mutual fund because the Fund may invest its assets in a smaller number of issuers or may invest
a larger proportion of its assets in a single issuer. As a result, the gains or losses on a single investment may have a greater impact on the Fund’s NAV and may make the Fund more volatile than more diversified funds.
Regulatory Risk
The Fund is subject to the risk that a change in
U.S. law and related regulations will impact the way the Fund operates,
increase the particular costs of the Fund’s
operations and/or change the competitive landscape.
Additional
legislative or regulatory changes could occur that may materially and adversely affect the Fund. For example, the regulatory environment for derivative instruments in which the Fund may invest is evolving, and changes in the regulation or taxation
of derivative instruments may materially and adversely affect the ability of the Fund to pursue its investment objective or strategies. Such legislative or regulatory changes could pose additional risks and result in material adverse consequences to
the Fund. There is no guarantee that the Fund will be permitted to continue to indirectly invest in commodity-linked derivatives through the Subsidiary.
Securities Lending Risk
Securities lending
involves the risk that the Fund may lose money because the borrower of the loaned securities fails to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided
for loaned securities, a decline in the value of any investments made with cash collateral, or a “gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also
trigger adverse tax consequences for the Fund. In the event of a large redemption while the Fund has loaned portfolio securities, the Fund may suffer losses (
e.g
. overdraft fees) if it is unable to recall the
securities on loan in time to fulfill the redemption.
Special Risks of Exchange-Traded
Funds
Authorized Participants Concentration Risk
. The Fund may have a limited number of financial institutions that may act as Authorized Participants. Only Authorized Participants who have entered into agreements with a Fund’s distributor may
engage in creation or redemption transactions directly with the Fund. To the extent that those Authorized Participants exit the business or are unable to process creation and/or redemption orders, Shares may trade at a discount to NAV and possibly
face trading halts and/or delisting. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or investments that have lower trading volumes.
Market Price
Variance Risk
. Shares of the Fund that are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at NAV. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than NAV (a premium) or less than NAV
(a discount). The Adviser cannot predict if Shares will trade at a
premium or discount to the Fund’s NAV. Given the fact that Shares can be created and redeemed in creation units, the
Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and a shareholder may trade shares at a premium or a discount to the
Fund’s NAV. The Fund’s investment results are measured
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based upon the daily NAV of the Fund over a period
of time. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent with those experienced by those creating and redeeming directly with the Fund. There is no guarantee that an active secondary
market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units,
trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues
. Trading in Shares on the Exchange may be halted due to market conditions or for reasons that, in the view of the Exchange, make trading in Shares inadvisable, such as extraordinary market volatility
or other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the Exchange or markets. There can be no assurance that Shares will continue to meet the listing requirements of the
Exchange, and the listing requirements may be amended from time to time.
A Precautionary Note to Retail
Investors
. The Depository Trust Company (“DTC”), a limited trust company and securities depositary that serves as a national clearinghouse for the settlement of trades for its participating banks and
broker-dealers, or its nominee, will be the registered owner of all outstanding Shares of each Fund of the Trust. Your ownership of Shares will be shown on the records of DTC and the DTC Participant broker through whom you hold the Shares. THE TRUST
WILL NOT HAVE ANY RECORD OF YOUR OWNERSHIP. Your account information will be maintained by your broker, who will provide you with account statements, confirmations of your purchases and sales of Shares, and tax information. Your broker also will be
responsible for ensuring that you receive shareholder reports and other communications from the Fund whose Shares you own. Typically, you will receive other services (
e.g.
, average basis information) only if your broker offers these services.
A Precautionary Note to Purchasers of
Creation Units
. Because new Shares may be issued on an ongoing basis, a “distribution” of Shares could be occurring at any time. As a dealer, certain activities on your part could, depending on the
circumstances, result in your being deemed a participant in the distribution, in a manner that could render you a statutory underwriter and subject you to the prospectus delivery and liability provisions of the Securities Act of 1933, as amended
(“Securities Act”). For example, you could be deemed a statutory underwriter if you purchase Creation
Units from an issuing Fund, break them down into the
constituent Shares and sell those Shares directly to customers, or if you choose to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for Shares. Whether a person is an
underwriter depends upon all of the facts and circumstances pertaining to that person’s activities, and the examples mentioned here should not be considered a complete description of all the activities that could cause you to be deemed an
underwriter. Dealers who are not “underwriters,” but are participating in a distribution (as opposed to engaging in ordinary secondary market transactions), and thus dealing with Shares as part of an “unsold allotment” within
the meaning of Section 4(3)(C) of the Securities Act, will be unable to take advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities Act.
A Precautionary Note
to Investment Companies
. For purposes of the Investment Company Act of 1940, as amended (“1940 Act”) the Fund is a registered investment company, and the acquisition of Shares by other investment
companies is subject to the restrictions of Section 12(d)(1) thereof. Section 12(d)(1) of the 1940 Act restricts investments by investment companies in the securities of other investment companies, including shares of the Fund. Provided, generally,
that the Fund’s investments comply with Section 12(d)(1)(A), registered investment companies are permitted to invest in the Fund beyond the limits set forth in Section 12(d)(1) subject to certain terms and conditions, including that such
investment companies enter into an agreement with the Fund.
The Trust and the Fund have obtained
an exemptive order from the U.S. Securities and Exchange Commission (the “SEC”) allowing a registered investment company to invest in the Fund beyond the limits of Section 12(d)(1) subject to certain conditions, including that a
registered investment company enters into a Participation Agreement with the Trust regarding the terms of the investment. Any investment company considering purchasing Shares of the Fund in amounts that would cause it to exceed the restrictions
under Section 12(d)(1) should contact the Trust.
A Precautionary Note Regarding Unusual
Circumstances
. The Trust can postpone payment of redemption proceeds for any period during which (1) the Exchange is closed other than customary weekend and holiday closings, (2) trading on the Exchange is
restricted, as determined by the SEC, (3) any emergency circumstances exist, as determined by the SEC, or (4) the SEC by order permits for the protection of shareholders of the Fund.
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Share Price of the Fund
A fund’s share price is known
as its NAV. The Fund’s share price is calculated at 2:30 p.m. Eastern Time (“Valuation Time”), each day the NYSE is open for business (“Business Day”). The NYSE is open for business, Monday through Friday, except in
observation of the following holidays: New Year’s Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The NYSE may close early on the business day
before each of these holidays and on the day after Thanksgiving Day. NYSE holiday schedules are subject to change without notice.
If the exchange or market on which the
Fund’s investments are primarily traded closes early, the NAV may be calculated prior to its normal calculation time. Creation/redemption transaction order time cutoffs would also be accelerated.
The value of the Fund’s assets
that trade in markets outside the United States or in currencies other than the U.S. Dollar may fluctuate when foreign markets are open but the Fund is not open for business.
Share price is calculated by dividing
the Fund’s net assets by its shares outstanding. In calculating its NAV, the Fund generally values its assets on the basis of market quotations, last sale prices, settlement prices, or estimates of value furnished by a pricing service or
brokers who make markets in such instruments. Futures contracts will be valued at the settlement price of the contract on the exchange on which it trades. If such information is not available for a security held by the Fund, is determined to be
unreliable, or (to the Adviser’s knowledge) does not reflect a significant event occurring after the close of the market on which the security principally trades (but before the close of trading on the NYSE), the security will be valued at
fair value estimates by the Adviser under guidelines established by the Board of Trustees. Foreign securities, currencies and other assets denominated in foreign currencies are translated into U.S. Dollars at the exchange rate of such currencies
against the U.S. Dollar, as provided by an independent pricing service or reporting agency. The Fund also relies on a pricing service in circumstances where the U.S. securities markets exceed a pre-determined threshold to value foreign securities
held in the Fund’s portfolio. The pricing service, its methodology or the threshold may change from time to time. Debt obligations with maturities of 60 days or less are valued at amortized cost.
Fair Value Pricing.
Securities are priced at a fair value as determined by the Adviser, under the oversight of the Board of Trustees, when reliable market quotations are not readily available, the Fund's pricing service does not provide a
valuation for such securities, the Fund's pricing service provides a valuation that in the judgment of the Adviser does not represent fair value, the Adviser believes that the market price is stale, or an event that affects the value of an
instrument (a “Significant Event”) has occurred since closing prices were established, but before the time as of which the Fund calculates its NAV. Examples of Significant Events may include: (1) events that relate to a single issuer or
to an entire market sector; (2) significant fluctuations in domestic or foreign markets; or (3) occurrences not tied directly to the securities markets, such as natural disasters, armed conflicts, or significant government actions. If such
Significant Events occur, the Fund may value the instruments at fair value, taking into account such events when it calculates the Fund’s NAV. Fair value determinations are made in good faith in accordance with procedures adopted by the Board
of Trustees. In addition, the Fund may also fair value an instrument if trading in a particular instrument is halted and does not resume prior to the closing of the exchange or other market.
Attempts to determine the fair value
of securities introduce an element of subjectivity to the pricing of securities. As a result, the price of a security determined through fair valuation techniques may differ from the price quoted or published by other sources and may not accurately
reflect the market value of the security when trading resumes. If a reliable market quotation becomes available for a security formerly valued through fair valuation techniques, Rafferty compares the market quotation to the fair value price to
evaluate the effectiveness of the Fund's fair valuation procedures and will use that market value in the next calculation of NAV.
Rule 12b-1 Fees
The Board of Trustees of the Trust
has adopted a Distribution and Service Plan (the “Plan”) pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year for certain
distribution-related activities and shareholder services.
No 12b-1 fees are currently paid by
the Fund, and there are no plans to impose these fees. However, in the event 12b-1 fees are charged in the future, because the fees are paid out of the Fund’s assets, over time these fees will increase the cost of your investment and may cost
you more than certain other types of sales charges.
Creations, Redemptions and Transaction
Fees
Creation Units.
Investors such as market makers, large investors and institutions who wish to deal in Creation Units directly with the Fund must have entered into an authorized participant agreement (“Authorized Participant
Agreement”) with the principal underwriter and the transfer agent, or purchase through a dealer that has entered into such an agreement.
17
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Direxion Shares ETF
Trust Prospectus
|
These investors are known as “Authorized
Participants.” Set forth below is a brief description of the procedures applicable to the purchase and redemption of Creation Units.
Purchase of the Fund.
The Fund only accepts cash to purchase Creation Units. The purchaser must transfer cash in an amount equal to the value of the Creation Unit(s) purchased and the applicable Transaction Fee. All purchase orders for
Creation Units must be placed by or through an Authorized Participant. Purchase orders will be processed either through a manual clearing process run at the DTC (“Manual Clearing Process”) or through an enhanced clearing process
(“Enhanced Clearing Process”) that is available only to those DTC participants that also are participants in the Continuous Net Settlement System of the National Securities Clearing Corporation (“NSCC”). Authorized
Participants that do not use the Enhanced Clearing Process will be charged a higher Transaction Fee (discussed below). A purchase order must be received in good order by the transfer agent by 2:30 p.m. Eastern Time, whether transmitted by mail,
through the transfer agent’s automated system, telephone, facsimile or other means permitted under the Participant Agreement in order to receive that day’s NAV per Share. The Trust will deliver Shares of the Fund upon payment of cash to
the Trust on or before the third Business Day following the Transmittal Date consistent with the terms of the Authorized Participant Agreement.
Redemption from the Fund.
Redemption proceeds will be paid in cash. As with purchases, redemptions may be processed either through the Manual Clearing Process or the Enhanced Clearing Process. Authorized Participants that do not use the Enhanced
Clearing Process will be charged a higher Transaction Fee (discussed below). A redemption order must be received in good order by the transfer agent by 2:30 p.m. Eastern Time, whether transmitted by mail, through the transfer agent’s automated
system, telephone, facsimile or other means permitted under the Participant Agreement in order to receive that day’s NAV per Share. All other procedures set forth in the Participant Agreement must be followed in order for you to receive the
NAV determined on that day.
Transaction Fees on Creation and
Redemption Transactions.
The Fund will impose Transaction Fees to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units. There is a fixed and a variable component
to the total Transaction Fee on transactions in Creation Units. A fixed Transaction Fee is applicable to each creation and redemption transaction, regardless of the number of Creation Units transacted. Purchasers and redeemers of Creation Units
effected through the Manual Clearing Process may be required to pay an additional charge to compensate for brokerage and other expenses related to the costs of transferring the Deposit Securities to the Trust. A variable Transaction Fee based upon
the value of each Creation Unit also may be applicable to each purchase or redemption transaction. However, in no instance will the fees charged exceed 2% of the value of the Creation Units subject to a redemption transaction. Purchasers and
redeemers of Creation Units are responsible for the costs of transferring securities to and from the Trust in connection with in-kind transactions. Investors who use the services of a broker or other such intermediary may pay additional fees for
such services. In addition, Rafferty may, from time to time, at its own expense, compensate purchasers of Creation Units who have purchased substantial amounts of Creation Units and other financial institutions for administrative or marketing
services.
The table below
summarizes the components of the Transaction Fees.
Direxion
Shares ETF Trust
|
Fixed
Transaction Fee
|
Maximum
Additional
Charge for
Redemptions*
|
|
In-Kind
|
Cash
|
NSCC
|
Outside
NSCC
|
Outside
NSCC
|
Direxion
Auspice Broad Commodity Strategy ETF
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
*
|
As a percentage of the amount
invested.
|
Frequent Purchases and Redemptions
. The Trust’s Board of Trustees has determined not to adopt policies and procedures designed to prevent or monitor for frequent purchases and redemptions of the Fund’s shares because the Fund sells and
redeems its shares at NAV only in Creation Units pursuant to the terms of an Authorized Participant Agreement between the Authorized Participant and the Distributor, and such direct trading between the Fund and Authorized Participants is critical to
ensuring that the Fund’s shares trade at or close to NAV. Further, the vast majority of trading in Fund shares occurs on the secondary market, which does not involve the Fund directly and therefore does not cause the Fund to experience many of
the harmful effects of market timing, such as dilution and disruption of portfolio management. In addition, the Fund imposes a Transaction Fee on Creation Unit transactions, which is designed to offset transfer and other transaction costs incurred
by the Fund in connection with the issuance and redemption of Creation Units and may employ fair valuation pricing to minimize potential dilution from market timing. Although the Fund reserves the right to reject any purchase orders, the Fund does
not currently impose any trading restrictions on frequent trading or actively monitor for trading abuses.
How to Buy and Sell Shares
The Fund issues and redeems Shares
only in large blocks of 50,000 Shares, called “Creation Units.”
Direxion Shares
ETF Trust Prospectus
|
18
|
Most investors will buy and sell
Shares of the Fund in secondary market transactions through brokers. Individual Shares of the Fund, once listed for trading on the Exchange, can be bought and sold throughout the trading day like other publicly traded securities. The Fund does not
require any minimum investment in such secondary market transactions.
When buying or selling Shares through
a broker, investors may incur customary brokerage commissions and charges, and may pay some or all of the spread between the bid and the offer prices in the secondary market. In addition, because secondary market transactions occur at market prices,
investors may pay more than NAV when buying Shares, and receive less than NAV when selling Shares.
The Adviser may pay brokers and other
financial intermediaries for educational training programs, the development of technology platforms and reporting systems or other administrative services related to the Fund. Ask your salesperson or visit your financial intermediary’s website
for more information.
The
Fund’s Exchange trading symbol is COM.
Share prices are reported in dollars and
cents per Share. For information about acquiring or selling Shares through a secondary market purchase, please contact your broker.
Book Entry
. Shares are held in book-entry form, which means that no stock certificates are issued. DTC or its nominee is the record owner of all outstanding Shares of the Fund and is recognized as the owner of all Shares for all
purposes.
Investors
owning Shares are beneficial owners as shown on the records of DTC or its participants. DTC serves as the securities depository for all Shares. Participants in DTC include securities brokers and dealers, banks, trust companies, clearing corporations
and other institutions that directly or indirectly maintain a custodial relationship with DTC. As a beneficial owner of Shares, you are not entitled to receive physical delivery of stock certificates or to have Shares registered in your name, and
you are not considered a registered owner of Shares. Therefore, to exercise any right as an owner of Shares, you must rely upon the procedures of DTC and its participants. These procedures are the same as those that apply to any other stocks that
you hold in book entry or “street name” through your brokerage account.
Rafferty provides
investment management services to the Fund. Rafferty has been managing investment companies since 1997. Rafferty is located at 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019. As of October 31, 2018, the Adviser had
approximately $12.8 billion in assets under management.
Under an investment advisory agreement
between the Trust and Rafferty, the Fund pays Rafferty a fee at an annualized rate based on a percentage of its average daily net assets of 0.50%.
For the fiscal year
ended October 31, 2018, the Adviser received a net management fee of 0.36% as a percentage of average daily net assets from the Fund.
A discussion regarding the basis on
which the Board of Trustees approved the investment advisory agreement for the Fund is included in the Fund's Annual Report for the period ended October 31, 2018.
Rafferty has entered into an
Operating Expense Limitation Agreement with the Fund. Under this Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse the Fund for Other Expenses through September
1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.70% of the Fund’s average daily net assets (excluding, as applicable, among other expenses, taxes, swap financing and related costs, acquired fund fees
and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
Any expense waiver or reimbursement
is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. Solely at Rafferty’s
option and discretion, Rafferty may pay, reimburse or otherwise assume one or more of the excluded expenses, in which case such expense will be subject to reimbursement by Rafferty in accordance with the Operating Expense Limitation Agreement. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
Paul Brigandi and Tony Ng are jointly
and primarily responsible for the day-to-day management of the Fund (the “Portfolio Managers”). An investment trading team of Rafferty employees assists the Portfolio Managers in the day-to-day management of the Fund subject to their
primary responsibility and oversight. The Portfolio Managers work with the investment trading team to decide the target allocation of the Fund’s investments and on a day-to-day basis, an individual portfolio trader executes transactions for
the Fund consistent with the target allocation. The members of the investment trading team rotate periodically among the various series of the Trust, including the Fund, so that no single individual is assigned to a specific Fund for extended
periods of time.
19
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Direxion Shares ETF
Trust Prospectus
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Mr. Brigandi has been a Portfolio
Manager at Rafferty since June 2004. Mr. Brigandi was previously involved in the equity trading training program for Fleet Boston Financial Corporation from August 2002 to April 2004. Mr. Brigandi is a 2002 graduate of Fordham University.
Mr. Ng has been a Portfolio Manager
at Rafferty since April 2006. Mr. Ng was previously a Team Leader in the Trading Assistant Group with Goldman Sachs from 2004 to 2006. He was employed with Deutsche Asset Management from 1998 to 2004. Mr. Ng graduated from State University at
Buffalo in 1998.
The Fund's SAI
provides additional information about the investment team members’ compensation, other accounts they manage and their ownership of securities in the Fund.
A description of the Fund's policies
and procedures with respect to the disclosure of the Fund's portfolio securities is available in the Fund's SAI.
Foreside Fund Services, LLC
(“Distributor”) serves as the Fund's distributor. U.S. Bancorp Fund Services, LLC (“USBFS”) serves as the Fund's administrator. Bank of New York Mellon (“BNYM”) serves as the Fund's transfer agent, fund
accountant, custodian and index receipt agent. The Distributor is not affiliated with Rafferty, USBFS, or BNYM.
Fund Distributions
. The Fund pays out dividends from its net investment income, and distributes any net capital gains, if any, to its shareholders at least annually. The Fund is authorized to declare and pay capital gain distributions in
additional Shares or in cash. The Fund may have extremely high portfolio turnover, which may cause it to generate significant amounts of taxable income. The Fund will generally need to distribute net short-term capital gain to satisfy certain tax
requirements. As a result of the Fund's high portfolio turnover, it could need to make larger and/or more frequent distributions than traditional ETFs.
Dividend Reinvestment Service
. Brokers may make the DTC book-entry dividend reinvestment service (“Reinvestment Service”) available to their customers who are shareholders of the Fund. If the Reinvestment Service is used with respect to
the Fund, its distributions of both net income and capital gains will automatically be reinvested in additional and fractional Shares thereof purchased in the secondary market. Without the Reinvestment Service, investors will receive Fund
distributions in cash, except as noted above under “Fund Distributions.” To determine whether the Reinvestment Service is available and whether there is a commission or other charge for using the service, consult your broker. Fund
shareholders should be aware that brokers may require them to adhere to specific procedures and timetables to use the Reinvestment Service.
As with any investment, you
should consider the tax consequences of buying, holding, and disposing of Shares. The tax information in this Prospectus is only a general summary of some important federal tax considerations generally affecting the Fund and its shareholders. No
attempt is made to present a complete explanation of the federal tax treatment of the Fund's activities, and this discussion is not intended as a substitute for careful tax planning. Accordingly, potential investors are urged to consult their own
tax advisers for more detailed information and for information regarding any state, local, or foreign taxes applicable to the Fund and to an investment in Shares.
Fund distributions to you and your
sale of your Shares will have tax consequences to you unless you hold your Shares through a tax-exempt entity or tax-deferred retirement arrangement, such as an individual retirement account (“IRA”) or 401(k) plan.
The Fund intends to continue to
qualify each taxable year for taxation as a “regulated investment company” under Subchapter M of the Internal Revenue Code. If the Fund so qualifies and satisfies certain distribution requirements, the Fund will not be subject to federal
income tax on income that is distributed in a timely manner to its shareholders in the form of income dividends or capital gain distributions.
Taxes on Distributions
. Dividends from the Fund’s investment company taxable income
–
generally, the sum of net investment income, the excess of net short-term capital gain over net long-term capital loss, and net gains and losses from certain foreign currency transactions, if any, all determined without
regard to any deduction for dividends paid
–
will be taxable
Direxion Shares
ETF Trust Prospectus
|
20
|
to you as ordinary income to the extent of its
earnings and profits, whether they are paid in cash or reinvested in additional Shares. However, dividends the Fund pays to you that are attributable to its “qualified dividend income” (i.e., dividends it receives on stock of most
domestic and certain foreign corporations with respect to which it satisfies certain holding period and other restrictions) generally will be taxed to you, if you are an individual, trust, or estate and satisfy those restrictions with respect to
your Shares, for federal income tax purposes, at the rates of 15% or 20% for such shareholders with taxable income exceeding certain thresholds (which will be indexed for inflation annually). A portion of the Fund’s dividends also may be
eligible for the dividends-received deduction allowed to corporations
–
the eligible portion may not exceed the aggregate dividends the Fund receives from domestic
corporations subject to federal income tax (excluding real estate investment trusts) and excludes dividends from foreign corporations
–
subject to similar
restrictions; however, dividends a corporate shareholder deducts pursuant to that deduction are subject indirectly to the federal alternative minimum tax. No Fund expects to earn a significant amount of income that would qualify for those maximum
rates or that deduction.
Distributions of the Fund’s
net capital gain (which is the excess of net long-term capital gain over net short-term capital loss) that it recognizes on sales or exchanges of capital assets (“capital gain distributions”), if any, will be taxable to you as long-term
capital gains, at the maximum rates mentioned above if you are an individual, trust, or estate, regardless of your holding period for the Shares on which the distributions are paid and regardless of whether they are paid in cash or reinvested in
additional Shares. The Fund’s capital gain distributions may vary considerably from one year to the next as a result of its investment activities and cash flows and the performance of the markets in which it invests. No Fund expects to earn a
significant amount of net capital gain.
Distributions in excess of the
Fund’s current and accumulated earnings and profits, if any, first will reduce your adjusted tax basis in your Shares in the Fund and, after that basis is reduced to zero, will constitute capital gain. That capital gain will be long-term
capital gain, and thus will be taxed at the maximum rates mentioned above if you are an individual, trust, or estate if the distributions are attributable to Shares you held for more than one year.
Investors should be aware that the
price of Shares at any time may reflect the amount of a forthcoming dividend or capital gain distribution, so if they purchase Shares shortly before the record date therefor, they will pay full price for the Shares and receive some part of the
purchase price back as a taxable distribution even though it represents a partial return of invested capital.
In general, distributions are subject to
federal income tax for the year when they are paid. However, certain distributions paid in January may be treated as paid on December 31 of the prior year.
Because of the possibility of high
portfolio turnover, the Fund may generate significant amounts of taxable income. Accordingly, the Fund may need to make larger and/or more frequent distributions than traditional unleveraged ETFs. A substantial portion of that income typically will
be short-term capital gain, which will generally be treated as ordinary income when distributed to shareholders.
Fund distributions to tax-deferred or
qualified plans, such as an IRA, retirement plan or pension plan, generally will not be taxable. However, distributions from such plans will be taxable to the individual participant notwithstanding the character of the income earned by the qualified
plan. Please consult a tax adviser for a more complete explanation of the federal, state, local and foreign tax consequences of investing in the Fund through such a plan.
Taxes When Shares are Sold.
Generally, you will recognize taxable gain or loss if you sell or otherwise dispose of your Shares. Any gain arising from such a disposition generally will be treated as long-term capital gain if you held the Shares for
more than one year, taxable at the maximum rates (15% or 20%) mentioned above if you are an individual, trust, or estate; otherwise, the gain will be treated as short-term capital gain. However, any capital loss arising from the disposition of
Shares held for six months or less will be treated as long-term capital loss to the extent of capital gain distributions, if any, received with respect to those Shares. In addition, all or a portion of any loss recognized on a sale or exchange of
Shares of the Fund will be disallowed to the extent other Shares of the same Fund are purchased (whether through reinvestment of distributions or otherwise) within a period of 61 days beginning 30 days before and ending 30 days after the date of the
sale or exchange; in that event, the basis in the newly purchased Shares will be adjusted to reflect the disallowed loss.
Holders of Creation Units
. A person who purchases Shares of the Fund by exchanging securities for a Creation Unit generally will recognize capital gain or loss equal to the difference between the market value of the Creation Unit and the
person’s aggregate basis in the exchanged securities, adjusted for any Balancing Amount paid or received. A shareholder who redeems a Creation Unit generally will recognize gain or loss to the same extent and in the same manner as described in
the immediately preceding paragraph.
Miscellaneous.
Backup Withholding
. The Fund must withhold and remit to the U.S. Treasury 24% of dividends and capital gain distributions otherwise payable to any individual or
certain other non-corporate shareholder who fails to certify that the social security or other taxpayer identification number furnished to the Fund is correct or who furnishes an incorrect number (together with the withholding described in the next
sentence, “backup withholding”). Withholding at that rate also is required from the Fund’s dividends and capital gain distributions otherwise payable to such a shareholder who is subject to backup withholding for any other reason.
Backup withholding is not an additional tax, and any amounts so withheld may be credited against a shareholder’s federal income tax liability or refunded.
21
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Direxion Shares ETF
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Additional Tax
. An individual must pay a 3.8% federal tax on the lesser of (1) the individual’s “net investment income,” which generally includes dividends, interest, and net gains from the disposition of investment
property (including dividends and capital gain distributions the Fund pays and net gains realized on the sale or redemption of Shares), or (2) the excess of the individual’s “modified adjusted gross income” over a threshold amount
($250,000 for married persons filing jointly and $200,000 for single taxpayers). This tax is in addition to any other taxes due on that income. A similar tax will apply for those years to estates and trusts. Shareholders should consult their own tax
advisers regarding the effect, if any, this provision may have on their investment in Fund shares.
Basis Determination
. A shareholder who wants to use the average basis method for determining basis in Shares he or she acquires after December 31, 2011 (“Covered Shares”), must elect to do so in writing (which may be electronic)
with the broker through which he or she purchased the Shares. A shareholder who wishes to use a different IRS-acceptable method for basis determination (
e.g.
, a specific identification method) may elect to do
so. Fund shareholders are urged to consult with their brokers regarding the application of the basis determination rules to them.
You may also be subject to state and
local taxes on Fund distributions and dispositions of Shares.
Non-U.S. Shareholders
. “A “non-U.S. shareholder” is an investor that, for federal tax purposes, is a nonresident alien individual, a foreign corporation or a foreign estate or trust. Except where discussed otherwise, the
following disclosure assumes that a non-U.S. shareholder’s ownership of Shares is not effectively connected with a trade or business conducted by such non-U.S. shareholder in the United States and does not address non-U.S. shareholders who are
present in the United States for 183 days or more during the taxable year. The tax consequences to a non-U.S. shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Non-U.S. shareholders
should consult their tax advisers with respect to the particular tax consequences to them of an investment in the Fund.
Withholding
. Dividends paid by the Fund to non-U.S. shareholders will be subject to withholding tax at a 30% rate or a reduced rate specified by an applicable income tax treaty to the extent derived from investment income (other
than “qualified interest income” or “qualified short-term capital gains,” as described below). In order to obtain a reduced rate of withholding, a non-U.S. shareholder will be required to provide an IRS Form W-8BEN (or
substitute form) certifying its entitlement to benefits under a treaty. The withholding tax does not apply to regular dividends paid to a non-U.S. shareholder who provides an IRS Form W-8ECI, certifying that the dividends are effectively connected
with the non-U.S. shareholder’s conduct of a trade or business within the United States. Instead, the effectively connected dividends will be subject to regular U.S. income tax as if the non-U.S. shareholder were a U.S. shareholder. A non-U.S.
corporation’s earnings and profits attributable to such dividends may also be subject to additional “branch profits tax” imposed at a rate of 30% (or lower treaty rate).
A non-U.S. shareholder who fails to
provide an IRS Form W-8BEN or other applicable form may be subject to backup withholding at the appropriate rate. See the discussion of backup withholding under “Miscellaneous” above.
Exemptions from Withholding
. In general, federal income tax will not apply to gain realized on the sale or other disposition of Shares or to any Fund distributions reported as capital gain dividends, short-term capital gain dividends, or
interest-related dividends.
“ Short-term capital gain
dividends” are dividends that are attributable to “qualified short-term gain” the Fund realizes (generally, the excess of the Fund’s net short-term capital gain over long-term capital loss for a taxable year, computed with
certain adjustments). “Interest-related dividends” are dividends that are attributable to “qualified net interest income” from U.S. sources. Depending on its circumstances, the Fund may report all, some or none of its
potentially eligible dividends as short-term capital gain dividends and interest-related dividends and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. To qualify for the exemption, a non-U.S.
shareholder will need to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN or substitute form). In the case of shares held through an intermediary, the
intermediary may withhold even if the Fund designates the payment as a short-term capital gain dividend or an interest-related dividend. Non-U.S. shareholders should contact their intermediaries with respect to the application of these rules to
their accounts.
Foreign Account
Tax Compliance Act (“FATCA”).
Under FATCA, “foreign financial institutions” (“FFIs”) or “non-financial foreign entities” (“NFFEs”) that are Fund
shareholders may be subject to a generally nonrefundable 30% withholding tax on income dividends. As discussed more fully in the Fund's SAI under “Taxes,” the FATCA withholding tax generally can be avoided (a) by an FFI, if it reports
certain information regarding direct and indirect ownership of financial accounts U.S. persons hold with the FFI and (b) by an NFFE, if it certifies as such and, in certain circumstances, that (i) it has no substantial U.S. persons as owners or (ii)
it does have such owners and reports information relating to them to the withholding agent. The U.S. Treasury has negotiated intergovernmental agreements (“IGAs”) with certain countries and is in various stages of negotiations with other
foreign countries with respect to one or more alternative approaches to implement FATCA; entities in those countries may be required to comply with the terms of the IGA instead of Treasury regulations. Non-U.S. shareholders should consult their own
tax advisers regarding the application of these requirements to their own situation and the impact thereof on their investment in the Fund.
More information about taxes is in the
Fund's SAI.
Direxion Shares
ETF Trust Prospectus
|
22
|
The Trust enters into contractual
arrangements with various parties, which may include, among others, the Fund's investment adviser, custodian, and transfer agent, who provide services to the Fund. Shareholders are not parties to any such contractual arrangements and are not
intended beneficiaries of those contractual arrangements, and those contractual arrangements are not intended to create in any shareholder any right to enforce them against the service providers or to seek any remedy under them against the service
providers, either directly or on behalf of the Trust.
This Prospectus provides information
concerning the Fund that you should consider in determining whether to purchase Fund shares. Neither this Prospectus nor the SAI is intended, or should be read, to be or give rise to an agreement or contract between the Trust or the Fund and any
investor, or to give rise to any rights in any shareholder or other person other than any rights under federal or state law that may not be waived.
The Auspice Broad Commodity Index
is the exclusive property of Auspice Capital Advisors Ltd. (“Auspice”). Auspice and the Auspice index name are service mark(s) of Auspice or its affiliates and have been licensed for use for certain purposes by the Fund. The financial
securities referred to herein are not sponsored, endorsed, or promoted by Auspice, and Auspice bears no liability with respect to any such financial securities. No purchaser, seller or holder of this product, or any other person or entity, should
use or refer to any Auspice trade name, trademark or service mark to sponsor, endorse, market or promote this product without first contacting Auspice to determine whether Auspice’s permission is required. Under no circumstances may any person
or entity claim any affiliation with Auspice without the prior written permission of Auspice.
23
|
Direxion Shares ETF
Trust Prospectus
|
The financial highlights table is
intended to help you understand the financial performance of the Fund for the periods indicated. The information set forth below was audited by Ernst & Young LLP, Independent Registered Public Accounting Firm, whose report, along with the Fund's
financial statements, is included in the Annual shareholder report, which is available upon request and incorporated by reference into the Fund's SAI. Certain information reflects financial results for a single Share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment in the Fund (assuming reinvestment of all dividends and distributions).
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asset
Value,
Beginning of
Year/Period
|
Net
Investment
Income
(Loss)
1
|
Net
Investment
Income
(Loss)
1,2
|
Net
Realized
and
Unrealized
Gain (Loss)
on Investments
3
|
Net
Increase
(Decrease)
in Net
Asset Value
Resulting
from Operations
|
Dividends
from Net
Investment
Income
|
Distributions
from Realized
Capital Gains
|
Distributions
from
Return of
Capital
|
Total
Distributions
|
Net
Asset
Value,
End of
Year/Period
|
Direxion
Auspice Broad Commodity Strategy ETF (Consolidated)
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$23.82
|
0.20
|
0.20
|
0.72
|
0.92
|
(0.16
)
|
–
|
–
|
(0.16
)
|
$24.58
|
For
the Period March 30, 2017
8
through October 31, 2017
|
$25.00
|
0.01
|
0.01
|
(1.19)
|
(1.18)
|
–
|
–
|
–
|
–
|
$23.82
|
Direxion Shares
ETF Trust Prospectus
|
24
|
Financial Highlights
(continued)
|
|
|
RATIOS
TO AVERAGE NET ASSETS
5
|
Portfolio
Turnover
Rate
7
|
|
|
Total
Return
4
|
Net
Assets,
End of
Year/Period
(000's omitted)
|
Net
Expenses
6
|
Total
Expenses
|
Net
Investment
Income (Loss)
after
Expense
Reimbursement
|
Net
Expenses
2,6
|
Total
Expenses
2
|
Net
Investment
Income (Loss)
after
Expense
Reimbursement
2
|
|
Direxion
Auspice Broad Commodity Strategy ETF (Consolidated)
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
3.84%
|
$52,847
|
0.70%
|
0.84%
|
0.80%
|
0.70%
|
0.84%
|
0.80%
|
0%
|
|
For
the Period March 30, 2017
8
through October 31, 2017
|
(4.72)%
|
$11,911
|
0.70%
|
1.35%
|
0.07%
|
0.70%
|
1.35%
|
0.07%
|
0%
|
|
1
|
Net investment income (loss)
per share represents net investment income dividend by the daily average shares of beneficial interest outstanding throughout each period.
|
2
|
Excludes interest expense and
extraordinary expenses which comprise of tax and litigation expenses.
|
3
|
Due to the timing of sales
and redemptions of capital shares, the net realized and unrealized gain (loss) per share will not equal the Fund's changes in net realized and unrealized gain (loss) on investments, in-kind redemptions, futures and swaps for the period.
|
4
|
Total return is calculated
assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period and redemption on the last day of the period. Total return calculated for
a period of less than one year is not annualized. The total return would have been lower if certain expenses had not been reimbursed/waived or recouped by the investment advisor.
|
5
|
For periods less than a year,
these ratios are annualized.
|
6
|
Net expenses include effects
of any reimbursement or recoupment.
|
7
|
Portfolio turnover rate is
not annualized and excludes the value of portfolio securities received or delivered as a result of in-kind creations or redemptions of the Fund's capital shares. Portfolio turnover rate does not include effects of turnover of the swap and future
contracts portfolio. Short-term securities with maturities less than or equal to 365 days are also excluded from portfolio turnover calculation.
|
8
|
Commencement of investment
operations.
|
25
|
Direxion Shares ETF
Trust Prospectus
|
1301
Avenue of the Americas (6th Avenue), 28th Floor
|
New York,
New York 10019
|
866-476-7523
|
More Information on the Direxion Shares ETF Trust
Statement of Additional Information
(“SAI”):
The Fund's SAI contains
more information on the Fund and its investment policies. The SAI is incorporated in this Prospectus by reference (meaning it is legally part of this Prospectus). A current SAI is on file with the Securities and Exchange Commission
(“SEC”).
Annual and Semi-Annual Reports
to Shareholders:
The Fund's reports will provide
additional information on the Fund's investment holdings, performance data and a letter discussing the market conditions and investment strategies that significantly affected the Fund's performance during that period.
To Obtain the SAI or Fund Reports Free of Charge:
Write
to:
|
Direxion
Shares ETF Trust
|
|
1301 Avenue
of the Americas (6th Avenue), 28th Floor
New York, New York 10019
|
Call:
|
866-476-7523
|
By
Internet:
|
www.direxioninvestments.com
|
These documents and other
information about the Fund can be reviewed and copied at the SEC Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at (202) 551-8090. Reports and other information
about the Fund may be viewed on screen or downloaded from the EDGAR Database on the SEC’s website at http://www.sec.gov. Copies of these documents may be obtained, after paying a duplicating fee, by electronic request at the following e-mail
address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-1520.
SEC File Number: 811-22201
Direxion Shares ETF Trust
Statement of Additional Information
1301
Avenue of the Americas (6th Avenue), 28th Floor
|
New York,
New York 10019
|
866-476-7523
|
www.direxioninvestments.com
Direxion Auspice Broad Commodity Strategy ETF (COM)
The Direxion Shares ETF Trust (“Trust”) is an
investment company that offers shares of a variety of exchange-traded funds, including the Direxion Auspice Broad Commodity Strategy ETF (the “Fund”) to the public. Shares of the Fund offered in this Statement of Additional Information
(“SAI”) are listed and traded on the NYSE Arca, Inc.
There is no assurance that the Fund will achieve its investment
objective and an investment in the Fund could lose money. No single Fund is a complete investment program.
This SAI, dated February 28, 2019, is not
a prospectus. It should be read in conjunction with the Fund's prospectus dated February 28, 2019 (“Prospectus”). This SAI is incorporated by reference into the Prospectus. In other words, it is legally part of the Prospectus. To receive
a copy of the Prospectus, without charge, write or call the Trust at the address or telephone number listed above.
February 28, 2019
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A-1
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Direxion Shares ETF Trust
The Trust is a
Delaware statutory trust organized on April 23, 2008 and is registered with the Securities and Exchange Commission (“SEC”) as an open-end management investment company under the Investment Company Act of 1940, as amended (“1940
Act”). The Trust currently consists of 120 separate series or “Funds.”
The Fund seeks to provide total
return that exceeds the return of the Auspice Broad Commodity Index (the “Index”). The Fund will seek excess return above the Index primarily through the active management of short duration, highly liquid, high quality bonds or other
short-term cash instruments.
The
Shares offered in this SAI are listed and traded on the NYSE Arca, Inc. (the “Exchange”).
The Fund issues and redeems Shares
only in large blocks of Shares called “Creation Units.” Most investors will buy and sell Shares of the Fund in secondary market transactions through brokers. Shares can be bought and sold throughout the trading day like other publicly
traded shares. There is no minimum investment. Although Shares are generally purchased and sold in “round lots” of 100 Shares, brokerage firms typically permit investors to purchase or sell Shares in smaller “odd lots,” at no
per-share price differential. Investors may acquire Shares directly from the Fund, and shareholders may tender their Shares for redemption directly to the Fund, only in Creation Units of 50,000 Shares, as discussed in the “Purchases and
Redemptions” section below.
Classification of the Fund
The Fund is a
“non-diversified” series of the Trust pursuant to the 1940 Act. The Fund is considered “non-diversified” because a relatively high percentage of its assets may be invested in the securities of a limited number of issuers. To
the extent that the Fund assumes large positions in the securities of a small number of issuers, the Fund’s net asset value ("NAV") may fluctuate to a greater extent than that of a diversified company as a result of changes in the financial
condition or in the market’s assessment of the issuers, and the Fund may be more susceptible to any single economic, political or regulatory occurrence than a diversified company.
Exchange Listing and Trading
The Shares are
listed and traded on the Exchange and may trade at prices that differ to some degree from their NAV. There can be no assurance that the requirements of the Exchange necessary to maintain the listing of Shares of the Fund will continue to be met. The
Exchange may, but is not required to, remove the Shares of the Fund from listing if (i) following the initial 12-month period beginning at the commencement of trading of the Fund, there are fewer than 50 beneficial owners of the Shares of the Fund;
(ii) the Fund's holdings no longer meet various liquidity and other metrics required by the Exchange's continued listing standards; (iii)such other event shall occur or condition exist that, in the opinion of the Exchange, makes further dealings on
the Exchange inadvisable. The Exchange will remove the Shares of the Fund from listing and trading upon termination of such Fund.
As is the case with other publicly
listed securities, when Shares of the Fund are bought or sold through a broker, an investor may incur a brokerage commission determined by that broker, as well as other charges.
The Trust reserves the right to
adjust the price levels of the Shares in the future to help maintain convenient trading ranges for investors. Any adjustments would be accomplished through stock splits or reverse stock splits, which would have no effect on the net assets of the
Fund or an investor’s equity interest in the Fund.
The trading prices of the
Fund’s shares in the secondary market generally differ from the Fund’s daily NAV per share and are affected by market forces such as supply and demand, economic conditions and other factors. Rafferty Asset Management, LLC ("Rafferty" or
"Adviser") may, from time to time, make payments to certain market makers in the Trust’s shares pursuant to an Exchange authorized program.
In order to provide additional
information regarding the value of Shares of the Fund, the Exchange, a market data vendor or other information provider, disseminates an Intraday Optimized Portfolio Value (“IOPV”) for the Fund. The Fund’s IOPV is expected to be
disseminated every 15 seconds during the regular trading hours of the Exchange. The IOPV is based on the current market value of the securities and cash required to be deposited in exchange for a Creation Unit. The IOPV does not necessarily reflect
the precise composition of the current portfolio holdings of the Fund as of a particular point in time, or an accurate valuation of the current portfolio. The quotations of certain Fund holdings may not be updated during U.S. trading hours if such
holdings do not trade in the U.S. The Fund is not involved in, nor responsible for, the calculation or dissemination of the IOPV and makes no representations or warranty as to its accuracy.
Investment Policies and Techniques
The Fund is an
“actively managed” exchange-traded fund (“ETF”) and does not seek to replicate the performance of a specified index. The Fund seeks to achieve its investment objective by investing in a combination of financial instruments
that are economically linked to the world’s tradable commodities, such as oil, gold, metals and grains.
The Fund’s investment objective is
a non-fundamental policy of the Fund that may be changed by the Board without shareholder approval.
With the exception of limitations
described in the “Investment Restrictions” section, the Fund may engage in the investment strategies discussed below. There is no assurance that any of these strategies or any other strategies and methods of investment available to the
Fund will result in the achievement of the Fund’s investment objective.
This section provides a description
of the securities in which the Fund may invest to achieve its investment objective, the strategies it may employ and the corresponding risks of such securities and strategies. The greatest risk of investing in an ETF is that its returns will
fluctuate and you could lose money.
The Fund has
invested in a wholly owned subsidiary organized under the laws of the Cayman Islands (the “Subsidiary”), the registered offices of which are located at Walkers SPV Limited, Walker House, 87 Mary Street, George Town, Grand Cayman
KY1-9002, Cayman Islands. The Fund is currently the sole shareholders of the Subsidiary, and does not expect shares of the Subsidiary to be offered or sold to other investors. The Fund’s investment in the Subsidiary may not exceed 25% of the
value of its total assets (ignoring any subsequent market appreciation in the Subsidiary’s value), which limitation is imposed by the Code and is measured at the end of each quarter of its taxable year.
The Fund may invest in the Subsidiary
in order to gain exposure to the investment returns of the commodities markets within the limitations of the federal tax law requirements applicable to RICs. The Subsidiary invests principally in commodity and financial futures, options and swap
contracts, as well as certain fixed-income investments intended to serve as margin or collateral for the Subsidiary’s derivatives positions. Unlike the Fund, the Subsidiary may invest without limitation in commodity-linked derivatives, though
the Subsidiary will comply with the same 1940 Act asset coverage requirements with respect to its investments in commodity-linked derivatives that apply to the Fund’s transactions in those instruments. To the extent applicable, the Subsidiary
otherwise is subject to the same fundamental and non-fundamental investment restrictions as the Fund and, in particular, to the same requirements relating to portfolio leverage, liquidity, and the timing and method of valuation of portfolio
investments and Fund shares. (Accordingly, references in this SAI to the Fund may also include the Subsidiary.) By investing in the Subsidiary, the Fund may be considered to be investing indirectly in the same investments as the Subsidiary and is
indirectly exposed to the risks associated with those investments.
The Subsidiary is not registered with
the SEC as an investment company under the 1940 Act and is not subject to the investor protections of the 1940 Act. As an investor in the Subsidiary, the Fund will not have the same protections offered to shareholders of registered investment
companies. However, because the Subsidiary is wholly owned and controlled by the Fund, which is managed by Rafferty Asset Management, LLC (“Rafferty” or the “Adviser”), it is unlikely that the Subsidiary will take action in
any manner contrary to the interest of the Fund or their shareholders. Because the Subsidiary has the same investment objective and, to the extent applicable, will comply with the same investment policies as the Fund, Rafferty manages the
Subsidiary’s portfolio in a manner similar to that of the Fund.
The Subsidiary has a board of
directors that oversees its activities. The Subsidiary has entered into a separate investment advisory agreement with Rafferty and pays Rafferty a fee for its services. The Subsidiary also has entered into agreements with the Fund’s service
providers for the provision of administrative, accounting, transfer agency and custody services.
The Fund and the Subsidiary may not
be able to operate as described in this SAI in the event of changes to the laws of the United States or the Cayman Islands. If the laws of the Cayman Islands required the Subsidiary to pay taxes to a governmental authority, the Fund would be likely
to suffer decreased returns.
The Fund may invest in
asset-backed securities of any rating or maturity. Asset-backed securities are securities issued by trusts and special purpose entities that are backed by pools of assets, such as automobile and credit-card receivables and home equity loans, which
pass through the payments on the underlying obligations to the security holders (less servicing fees paid to the originator or fees for any credit enhancement). Typically, the originator of the loan or accounts receivable paper transfers it to a
specially created trust, which repackages it as securities with a minimum denomination and a specific term. The securities are then privately placed or publicly offered. Examples include certificates for automobile receivables and so-called plastic
bonds, backed by credit card receivables.
The value of an asset-backed security
is affected by, among other things, changes in the market’s perception of the asset backing the security, the creditworthiness of the servicing agent for the loan pool, the originator of the loans and the financial institution providing any
credit enhancement. Payments of principal and interest passed through to holders of asset-backed securities are frequently supported by some form of credit enhancement, such as a letter of credit, surety
bond, limited guarantee by another entity or by
having a priority to certain of the borrower’s other assets. The degree of credit enhancement varies, and generally applies to only a portion of the asset-backed security’s par value. Value is also affected if any credit enhancement has
been exhausted.
Money Market Instruments
. The Fund may invest in bankers’ acceptances, certificates of deposit, demand and time deposits, savings shares and commercial paper of
domestic banks and savings and loans that have assets of at least $1 billion and capital, surplus, and undivided profits of over $100 million as of the close of their most recent fiscal year, or instruments that are insured by the Bank Insurance
Fund or the Savings Institution Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”). The Fund also may invest in high quality, short-term, corporate debt obligations, including variable rate demand notes, having
terms-to-maturity of less than 397 days. Because there is no secondary trading market in demand notes, the inability of the issuer to make required payments could impact adversely the Fund’s ability to resell when it deems advisable to do
so.
The Fund may invest
in foreign money market instruments, which typically involve more risk than investing in U.S. money market instruments. See “Foreign Securities” below. These risks include, among others, higher brokerage commissions, less public
information, and less liquid markets in which to sell and meet large shareholder redemption requests.
Bankers’ Acceptances
. Bankers’ acceptances generally are negotiable instruments (time drafts) drawn to finance the export, import, domestic shipment or storage
of goods. They are termed “accepted” when a bank writes on the draft its agreement to pay it at maturity, using the word “accepted.” The bank is, in effect, unconditionally guaranteeing to pay the face value of the instrument
on its maturity date. The acceptance may then be held by the accepting bank as an asset, or it may be sold in the secondary market at the going rate of interest for a specified maturity.
Certificates of Deposit (“CDs”)
. The FDIC is an agency of the U.S. government that insures the deposits of certain banks and savings and loan associations up to
$250,000 per deposit. The interest on such deposits may not be insured to the extent this limit is exceeded. Current federal regulations also permit such institutions to issue insured negotiable CDs in amounts of $250,000 or more without regard to
the interest rate ceilings on other deposits. To remain fully insured, these investments must be limited to $250,000 per insured bank or savings and loan association.
Commercial Paper
. Commercial paper includes notes, drafts or similar instruments payable on demand or having a maturity at the time of issuance not exceeding nine months,
exclusive of days of grace or any renewal thereof. The Fund may invest in commercial paper rated A-l or A-2 by Standard & Poor’s
®
Ratings
Services (“S&P
®
”) or Prime-1 or Prime-2 by Moody’s Investors Service
®
, Inc. (“Moody’s”), and in other lower quality commercial paper.
Corporate Debt Securities
The Fund may invest in investment
grade corporate debt securities of any rating or maturity. Investment grade corporate bonds are those rated BBB or better by S&P
®
or Baa or
better by Moody’s. Securities rated BBB by S&P
®
are considered investment grade, but Moody’s considers securities rated Baa to have
speculative characteristics. See Appendix A for a description of corporate bond ratings. The Fund may also invest in unrated securities.
Corporate debt securities are
fixed-income securities issued by businesses to finance their operations, although corporate debt instruments may also include bank loans to companies. Notes, bonds, debentures and commercial paper are the most common types of corporate debt
securities, with the primary difference being their maturities and secured or un-secured status. Commercial paper has the shortest term and is usually unsecured.
The broad category of corporate debt
securities includes debt issued by domestic or foreign companies of all kinds, including those with small-, mid- and large-capitalizations. Corporate debt may be rated investment-grade or below investment-grade and may carry variable or floating
rates of interest.
Because of
the wide range of types and maturities of corporate debt securities, as well as the range of creditworthiness of its issuers, corporate debt securities have widely varying potentials for return and risk profiles. For example, commercial paper issued
by a large established domestic corporation that is rated investment grade may have a modest return on principal, but carries relatively limited risk. On the other hand, a long-term corporate note issued by a small foreign corporation from an
emerging market country that has not been rated may have the potential for relatively large returns on principal, but carries a relatively high degree of risk.
Corporate debt securities carry both
credit risk and interest rate risk. Credit risk is the risk that the Fund could lose money if the issuer of a corporate debt security is unable to pay interest or repay principal when it is due. Some corporate debt securities that are rated below
investment grade are generally considered speculative because they present a greater risk of loss, including default, than higher-quality debt securities. The credit risk of a particular issuer’s debt security may vary based on its priority
for repayment. For example, higher ranking (senior) debt securities have a higher priority than lower ranking (subordinated) securities. This means that the issuer might not make payments on subordinated securities while continuing to make payments
on senior securities. In addition, in the event of bankruptcy, holders of higher-ranking senior
securities may receive amounts otherwise payable to
the holders of more junior securities. Interest rate risk is the risk that the value of certain corporate debt securities will tend to fall when interest rates rise. In general, corporate debt securities with longer terms tend to fall more in value
when interest rates rise than corporate debt securities with shorter terms.
On July 27, 2017, the U.K.-based
Financial Conduct Authority (the “FCA”) announced its intention to cease sustaining LIBOR after 2021. It is possible that the ICE Benchmark Administration (“IBA”) and the banks that offer reference rates could continue to
produce LIBOR on the current basis after 2021, but it cannot be assured that LIBOR will survive in its current form. The effect of the FCA’s decision not to sustain LIBOR, or, if changes are ultimately made to LIBOR, the effect of those
changes, cannot be predicted. In addition, it cannot be predicted what alternative index would be chosen should this occur. If LIBOR in its current form does not survive or if an alternative index is chosen, the market value and/or liquidity of
securities with distributions or interest rates based on LIBOR could be adversely affected.
Common Stocks
. The Fund may invest in common stocks. Common stocks represent the residual ownership interest in the issuer and are entitled to the income and increase in the
value of the assets and business of the entity after all of its obligations and preferred stock are satisfied. Common stocks generally have voting rights. Common stocks fluctuate in price in response to many factors including historical and
prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity.
Convertible Securities
. The Fund may invest in convertible securities that may be considered high yield securities. Convertible securities include corporate bonds, notes and
preferred stock that can be converted into or exchanged for a prescribed amount of common stock of the same or a different issue within a particular period of time at a specified price or formula. A convertible security entitles the holder to
receive interest paid or accrued on debt or dividends paid on preferred stock until the convertible stock matures or is redeemed, converted or exchanged. While no securities investment is without some risk, investments in convertible securities
generally entail less risk than the issuer’s common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a fixed income security. The
market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline. While convertible securities generally offer lower interest or dividend yields than nonconvertible debt
securities of similar quality, they do enable the investor to benefit from increases in the market price of the underlying common stock. When investing in convertible securities, the Fund may invest in the lowest credit rating category.
Preferred Stock
. The Fund may invest in preferred stock. A preferred stock blends the characteristics of a bond and common stock. It can offer the higher yield of a bond and
has priority over common stock in equity ownership, but does not have the seniority of a bond and its participation in the issuer’s growth may be limited. Preferred stock has preference over common stock in the receipt of dividends and in any
residual assets after payment to creditors if the issuer is dissolved. Although the dividend is set at a fixed annual rate, in some circumstances it can be changed or omitted by the issuer. When investing in preferred stocks, the Fund may invest in
the lowest credit rating category.
Warrants and Rights
. The Fund may purchase warrants and rights, which are instruments that permit the Fund to acquire, by subscription, the capital stock of a corporation at
a set price, regardless of the market price for such stock. Warrants may be either perpetual or of limited duration, but they usually do not have voting rights or pay dividends. The market price of warrants is usually significantly less than the
current price of the underlying stock. Thus, there is a greater risk that warrants might drop in value at a faster rate than the underlying stock.
The Fund may have both direct and
indirect exposure to foreign securities through investments in publicly traded securities such as stocks and bonds, stock index futures contracts, options on stock index futures contracts and options on securities and on stock indices to foreign
securities. In most cases, the best available market for foreign securities will be on exchanges or in OTC markets located outside the United States.
Investing in foreign securities
carries political and economic risks distinct from those associated with investing in the United States. Non-U.S. securities may be subject to currency risks or to foreign government taxes. There may be less information publicly available about a
non-U.S. issuer than about a U.S. issuer, and a foreign issuer may or may not be subject uniform accounting, auditing and financial reporting standards and practices comparable to those in the U.S. Other risks of investing in such securities include
political or economic instability in the country involved, the difficulty of predicting international trade patterns and the possibility of the imposition of exchange controls. The prices of such securities may be more volatile than those of U.S.
securities. There maybe also be the possibility of expropriation of assets or nationalization, imposition of withholding taxes on dividend or interest payments, difficulty obtaining and enforcing judgments against foreign entities or diplomatic
developments which could affect investment in these countries. Losses and other expenses may be incurred in converting currencies in connection with purchases and sales of foreign securities.
Non-U.S. stocks
markets may not be as developed or efficient as, and may be more volatile than, those in the U.S. While the volume of shares traded on non-U.S. stock markets generally has been growing, such markets usually have substantially less volume than U.S.
markets. Therefore, the Fund’s investment in non-U.S. equity securities may be less liquid and subject to more rapid and erratic price movements than comparable securities listed for trading on U.S. exchanges. Non-U.S. equity securities may
trade at price/earnings multiples higher than comparable U.S. securities and such levels may not be sustainable. There may be less government supervision and regulation of foreign stock exchanges, brokers, banks and listed companies abroad than in
the U.S. Moreover, settlement practices for transactions in foreign markets may differ from those in U.S. markets. Such differences may include delays beyond periods customary in the U.S. and practices, such as delivery of securities prior to
receipt of payment, that increase the likelihood of a failed settlement, which can result in losses to the Fund. The value of non-U.S. investments and the investment income derived from them may also be affected unfavorably by changes in currency
exchange control regulations. Foreign brokerage commissions, custodial expenses and other fees are also generally higher than for securities traded in the U.S. This may cause the Fund to incur higher portfolio transaction costs than domestic equity
funds. Fluctuations in exchanges rates may also affect the earning power and asset value of the foreign entity issuing a security, even on denominated in U.S. dollars. Dividend and interest payments may be repatriated based on the exchange rate at
the time of disbursement, and restrictions on capital flows may be imposed.
Developing and Emerging Markets
.
Emerging and developing markets abroad may offer special opportunities for
investing,
but may have greater risks than more developed foreign markets, such as those in Europe,
Canada,
Australia,
New Zealand and Japan.
There may be even less liquidity in their securities markets, and settlements of purchases and sales of
securities may be subject to additional delays. They are subject to greater risks of limitations on the repatriation of income and profits because of currency restrictions imposed by local governments. Those countries may also be subject to the risk
of greater political and economic instability, which can greatly affect the volatility of prices of securities in those countries.
Investing in emerging market
securities imposes risks different from, or greater than, risks of investing in foreign developed countries. These risks include: smaller market capitalization of securities markets, which may suffer periods of relative illiquidity; significant
price volatility; restrictions on foreign investment; and possible repatriation of investment income and capital. In addition, foreign investors may be required to register the proceeds of sales; future economic or political crises could lead to
price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization, or creation of government monopolies. The currencies of emerging market countries may experience significant declines against the U.S. Dollar.
Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries. Additional risks of emerging markets securities may include:
greater social, economic and political uncertainty and instability; more substantial governmental involvement in the economy; less governmental supervision and regulation; unavailability of currency hedging techniques; companies that are newly
organized and small; differences in auditing and financial reporting standards, which may result in unavailability of material information about issuers; and less developed legal systems. In addition, emerging securities markets may have different
clearance and settlement procedures, which may be unable to keep pace with the volume of securities transactions or otherwise make it difficult to engage in such transactions.
Asia-Pacific Countries
. In addition to the risks associated with foreign and emerging markets, the developing market Asia-Pacific countries in which the Fund may invest are
subject to certain additional or specific risks. The Fund may make substantial investments in Asia-Pacific countries. In the Asia-Pacific markets, there is a high concentration of market capitalization and trading volume in a small number of issuers
representing a limited number of industries, as well as a high concentration of investors and financial intermediaries. Many of these markets also may be affected by developments with respect to more established markets in the region, such as Japan
and Hong Kong. Brokers in developing market Asia-Pacific countries typically are fewer in number and less well-capitalized than brokers in the United States. These factors, combined with the U.S. regulatory requirements for open-end investment
companies and the restrictions on foreign investment, result in potentially fewer investment opportunities for the Fund and may have an adverse impact on the Fund’s investment performance.
Many of the developing market
Asia-Pacific countries may be subject to a greater degree of economic, political and social instability than is the case in the United States and Western European countries. Such instability may result from, among other things: (i) authoritarian
governments or military involvement in political and economic decision-making, including changes in government through extra-constitutional means; (ii) popular unrest associated with demands for improved political, economic and social conditions;
(iii) internal insurgencies; (iv) hostile relations with neighboring countries; and/or (v) ethnic, religious and racial disaffection. In addition, the governments of many of such countries, such as Indonesia, have a heavy role in regulating and
supervising the economy.
An
additional risk common to most such countries is that the economy is heavily export-oriented and, accordingly, is dependent upon international trade. The existence of overburdened infrastructure and obsolete financial systems also present risks in
certain countries, as do environmental problems. Certain economies also depend to a significant degree upon exports of primary commodities and, therefore, are vulnerable to changes in commodity prices that, in turn, may be affected by a variety of
factors. The legal systems in certain developing market Asia-Pacific countries also may have an adverse impact on the Fund. For example, while the potential liability of a shareholder in a U.S. corporation with respect to acts of the corporation is
generally limited to the amount of the shareholder's investment, the notion of limited liability is less clear in certain emerging market Asia-Pacific countries. Similarly, the rights of investors in developing market Asia-Pacific companies
may be more limited than those of shareholders of U.S.
corporations. It may be difficult or impossible to obtain and/or enforce a judgment in a developing market Asia-Pacific country.
Governments of many developing
market Asia-Pacific countries have exercised and continue to exercise substantial influence over many aspects of the private sector. In certain cases, the government owns or controls many companies, including the largest in the country. Accordingly,
government actions in the future could have a significant effect on economic conditions in developing market Asia-Pacific countries, which could affect private sector companies and the Fund itself, as well as the value of securities in the Fund's
portfolio. In addition, economic statistics of developing market Asia-Pacific countries may be less reliable than economic statistics of more developed nations.
It is possible that developing market
Asia-Pacific issuers may not be subject to the same accounting, auditing and financial reporting standards as U.S. companies. Inflation accounting rules in some developing market Asia-Pacific countries require companies that keep accounting records
in the local currency, for both tax and accounting purposes, to restate certain assets and liabilities on the company’s balance sheet in order to express items in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits for certain developing market Asia-Pacific companies. In addition, satisfactory custodial services for investment securities may not be available in some developing Asia-Pacific countries, which may result in
the Fund incurring additional costs and delays in providing transportation and custody services for such securities outside such countries.
Certain developing Asia-Pacific
countries are especially large debtors to commercial banks and foreign governments. Fund management may determine that, notwithstanding otherwise favorable investment criteria, it may not be practicable or appropriate to invest in a particular
developing Asia-Pacific country. The Fund may invest in countries in which foreign investors, including management of the Fund, have had no or limited prior experience.
Brazil
. Investing in Brazil involves certain considerations not typically associated with investing in the United States. Additional considerations include: (i) investment
and repatriation controls, which could affect the Fund’s ability to operate, and to qualify for the favorable tax treatment afforded to RICs for U.S. federal income tax purposes; (ii) fluctuations in the rate of exchange between the Brazilian
Real and the U.S. Dollar; (iii) the generally greater price volatility and lesser liquidity that characterize Brazilian securities markets, as compared with U.S. markets; (iv) the effect that balance of trade could have on Brazilian economic
stability and the Brazilian government's economic policy; (v) potentially high rates of inflation, a rising unemployment rate, and a high level of debt, each of which may hinder economic growth; (vi) governmental involvement in and influence on the
private sector; (vii) Brazilian accounting, auditing and financial standards and requirements, which differ from those in the United States; (viii) political and other considerations, including changes in applicable Brazilian tax laws; and (ix)
restrictions on investments by foreigners. In addition, commodities, such as oil, gas and minerals, represent a significant percentage of Brazil’s exports and, therefore, its economy is particularly sensitive to fluctuations in commodity
prices. Additionally, an investment in Brazil is subject to certain risks stemming from political and economic corruption. For example, the Brazilian Federal Police conducted a criminal investigation into corruption allegations, known as Operation
Car Wash, which led to charges against high level politicians and corporate executives and resulted in substantial fines for some of Brazil’s largest companies. This has had a widespread political and economic impact and may continue to affect
negatively the country and the reputation of Brazilian companies connected with the investigation, and therefore, the trading price of securities issued by those companies. While the economy of Brazil has enjoyed substantial economic growth in
recent years, there can be no guarantee that this growth will continue.
China
. Investing in China involves special considerations not typically associated with investing in countries with more democratic governments or more established economies
or currency markets. These risks include: (i) the risk of nationalization or expropriation of assets or confiscatory taxation; (ii) greater governmental involvement in and control over the economy, interest rates and currency exchange rates; (iii)
controls on foreign investment and limitations on repatriation of invested capital; (iv) greater social, economic and political uncertainty (including the risk of war); (v) dependency on exports and the corresponding importance of international
trade; (vi) currency exchange rate fluctuations; (vii) differences in, or lack of, auditing and financial reporting standards that may result in unavailability of material information about issuers; and (viii) the risk that certain companies in
which the Fund may invest may have dealings with countries subject to sanctions or embargoes imposed by the U.S. government or identified as state sponsors of terrorism.
For over three decades, the Chinese
government has been reforming economic and market practice and has been providing a larger sphere for private ownership of property. While currently contributing to growth and prosperity, the government may decide not to continue to support these
economic reform programs and could possible return to the completely centrally planned economy that existed prior to 1978. There is also a greater risk in China than in many other countries of currency fluctuations, currency non-convertibility,
interest rate fluctuations and higher rates of inflation as a result of internal social unrest or conflicts with other countries. China is an emerging market and demonstrates significantly higher volatility from time to time in comparison to
developed markets. The government of China maintains strict currency controls in support of economic, trade and political objectives and regularly intervenes in the currency market. The government's actions in this respect may not be transparent or
predictable. As a result, the value of the Yuan, and the value of securities designed to provide exposure to the Yuan, can change quickly and arbitrarily. Furthermore, it is difficult for foreign investors to directly access money market securities
in China because of investment and trading restrictions. While the economy of China has enjoyed substantial economic growth in recent years, there can be no guarantee this growth will continue. Reduction
in spending on Chinese products and services, the
institution of additional tariffs or other trade barriers, including as a result of heightened trade tensions between China and the United States, or a downturn in any of the economies of China’s key trading partners may have an adverse impact
on the Chinese economy. These and other factors may decrease the value and liquidity of the Fund's investments. The Chinese economy may experience a significant slowdown as a result of, among other things, a deterioration of global demand for
Chinese exports, as well as contraction in spending on domestic goods by Chinese consumers. In addition, China may experience substantial rates of inflation or economic recessions, which would have a negative effect on its economy and securities
market.
Recently, there has
been increased attention from the SEC and the Public Company Accounting Oversight Board (“PCAOB”) with regard to international auditing standards of U.S.-listed companies with significant operations in China as well as PCAOB-registered
auditing firms in China. Currently, the SEC and PCAOB are only able to get limited information about these auditing firms and are restricted from inspecting the audit work and practices of registered accountants in China. These restrictions may
result in the unavailability of material information about the Chinese issuers.
China A-shares are equity securities
of companies based in mainland China that trade on Chinese stock exchanges such as the Shanghai Stock Exchange (“SSE”) and the Shenzhen Stock Exchange (“SZSE”) (“A-shares”). Foreign investment in A-shares on the
SSE and SZSE has historically not been permitted other than through licenses granted by the People’s Republic of China (“PRC”) known as the Qualified Foreign Institutional Investor (“QFII”) and Renminbi Qualified
Foreign Institutional Investor (“RQFII”) licenses. Each license permits investment in A-shares only up to a specified quota.
Because restrictions continue to
exist and capital therefore cannot flow freely into and out of the A-Share market, it is possible that in the event of a market disruption, the liquidity of the A-Share market and trading prices of A-Shares could be more severely affected than the
liquidity and trading prices of markets where securities are freely tradable and capital therefore flows more freely. The nature and duration of such a market disruption or the impact that it may have on the A-Share market are unknown. In the event
that a Fund invests in A-Shares directly, a Fund may incur significant losses, or may not be able fully to implement or pursue its investment objectives or strategies, due to investment restrictions on RQFIIs and QFIIs, illiquidity of the Chinese
securities markets, or delay or disruption in execution or settlement of trades. A-Shares may become subject to frequent and widespread trading halts.
The Chinese government has in the
past taken actions that benefitted holders of A-Shares. As A-Shares become more available to foreign investors, such as a Fund, the Chinese government may be less likely to take action that would benefit holders of A-Shares. In addition, there is no
guarantee that an A-Shares quota will be sufficient for a Fund’s intended scope of investment.
The regulations which apply to
investments by RQFIIs and QFIIs, including the repatriation of capital, are relatively new. The application and interpretation of such regulations are therefore relatively untested. In addition, there is little precedent or certainty evidencing how
such discretion may be exercised now or in the future; and even if there were precedent, it may provide little guidance as PRC authorities would likely continue to have broad discretion.
Investment in eligible A-shares
listed and traded on the SSE is now permitted through the Stock Connect program. Stock Connect is a securities trading and clearing program established by Hong Kong Securities Clearing Company Limited, the SSE and Chinese Securities Depositary and
Clearing Corporation that aims to provide mutual stock market access between China and Hong Kong by permitting investors to trade and settle shares on each market through their local exchanges. Certain Funds may invest in other investment companies
that invest in A-shares through Stock Connect or on such other stock exchanges in China which participate in Stock Connect from time to time. Under Stock Connect, the Fund’s trading of eligible A-shares listed on the SSE would be effectuated
through its Hong Kong broker.
Although no individual investment
quotas or licensing requirements apply to investors in Stock Connect, trading through Stock Connect’s Northbound Trading Link is subject to aggregate and daily investment quota limitations that require that buy orders for A-shares be rejected
once the remaining balance of the relevant quota drops to zero or the daily quota is exceeded (although the Fund will be permitted to sell A-shares regardless of the quota balance). These limitations may restrict the Fund from investing in A-shares
on a timely basis, which could affect the Fund’s ability to effectively pursue its investment strategy. Investment quotas are also subject to change. Investment in eligible A-shares through Stock Connect is subject to trading, clearance and
settlement procedures that could pose risks to the Fund. A-shares purchased through Stock Connect generally may not be sold or otherwise transferred other than through Stock Connect in accordance with applicable rules. In addition, Stock Connect
will only operate on days when both the Chinese and Hong Kong markets are open for trading and when banks in both markets are open on the corresponding settlement days. Therefore, an investment in A-shares through Stock Connect may subject the Fund
to a risk of price fluctuations on days where the Chinese market is open, but Stock Connect is not trading.
Europe
.
Investing in European countries may impose economic and political risks associated with Europe in general and the specific European countries in which it invests.
The economies and markets of European countries are often closely connected and interdependent, and events in one European country can have an adverse impact on other European countries. The Fund makes investments in securities of issuers that are
domiciled in, or have significant operations in, member countries of the Economic and Monetary Union of the European Union (the “EU”), which requires member countries to comply with restrictions on inflation rates, deficits, interest
rates, debt levels and fiscal and monetary controls, each of which may significantly
affect every country in Europe. Decreasing imports
or exports, changes in governmental or EU regulations on trade, changes in the exchange rate of the euro (the common currency of certain EU countries), the default or threat of default by an EU member country on its sovereign debt, and/or an
economic recession in an EU member country may have a significant adverse effect on the economies of EU member countries and their trading partners, including some or all of the emerging markets materials sector countries. Although certain European
countries do not use the euro, many of these countries are obliged to meet the criteria for joining the euro zone. Consequently, these countries must comply with many of the restrictions noted above. The European financial markets have experienced
volatility and adverse trends in recent years due to concerns about economic downturns, rising government debt levels and the possible default of government debt in several European countries, including Greece, Ireland, Italy, Portugal and Spain. In
order to prevent further economic deterioration, certain countries, without prior warning, can institute “capital controls.” Countries may use these controls to restrict volatile movements of capital entering and exiting their country.
Such controls may negatively affect the Fund’s investments. A default or debt restructuring by any European country would adversely impact holders of that country’s debt and sellers of credit default swaps linked to that country’s
creditworthiness, which may be located in countries other than those listed above. In addition, the credit ratings of certain European countries were recently downgraded. These downgrades may result in further deterioration of investor confidence.
These events have adversely affected the value and exchange rate of the euro and may continue to significantly affect the economies of every country in Europe, including countries that do not use the euro and non-EU member countries. Responses to
the financial problems by European governments, central banks and others, including austerity measures and reforms, may not produce the desired results, may result in social unrest and may limit future growth and economic recovery or have other
unintended consequences. Further defaults or restructurings by governments and other entities of their debt could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, one or more
countries may abandon the euro and/or withdraw from the EU, including, with respect to the latter, the United Kingdom, which is a significant market in the global economy. The impact of these actions, especially if they occur in a disorderly
fashion, is not clear but could be significant and far-reaching and could adversely impact the value of investments in the region.
In a referendum
held on June 23, 2016, the United Kingdom (the “UK”) resolved to leave the EU (referred to as “Brexit”). The referendum has introduced significant uncertainties and instability in the financial markets as the UK negotiates
its exit from the EU, which is currently scheduled for March 29, 2019, however, this timing could change. The outcome of negotiations and the potential consequences remain uncertain. The effects of Brexit will depend on any agreements the UK makes
to retain access to the EU Common Market either during a transitional period or more permanently. Brexit could lead to legal and tax uncertainty and potentially divergent national laws and regulations as the UK determines which EU laws to replace or
replicate. Additionally, Brexit could lead to global economic uncertainty and result in significant volatility in the global stock markets and currency exchange rate fluctuations. The UK has one of the largest economies in Europe and is a major
trading partner with the other EU countries and the United States. If implemented, Brexit might negatively affect the City of London’s economy, which is heavily dominated by financial services, as banks might be forced to move staff and comply
with two separate sets of rules or lose business to banks in Continental Europe. In addition, Brexit would likely create additional economic stresses for the UK, including the potential for decreased trade, capital outflows, devaluation of the
British pound, wider corporate bond spreads due to uncertainty, and declines in business and consumer spending as well as foreign direct investment.
Brexit may also have a destabilizing
impact on the EU to the extent that other member states similarly seek to withdraw from the EU. Any further exits from the EU would likely cause additional market disruptions globally and introduce new legal and regulatory uncertainties.
India
. Investments in India involve special considerations not typically associated with investing in countries with more established economies or currency markets.
Political, religious, and border disputes persist in India. India has recently experienced and may continue to experience civil unrest and hostilities with certain of its neighboring countries, including Pakistan, and the Indian government has
confronted separatist movements in several Indian states, including Kashmir. Government control over the economy, currency fluctuations or blockage, and the risk of nationalization or expropriation of assets offer higher potential losses.
Governmental actions could have a negative effect on the economic conditions in India, which could adversely affect the value and liquidity of investments made by the Fund. The securities markets in India are comparatively underdeveloped with some
exceptions and consist of a small number of listed companies with small market capitalization, greater price volatility and substantially less liquidity than companies in more developed markets. The limited liquidity of the Indian securities market
may also affect the Fund’s ability to acquire or dispose of securities at the price or time that it desires or the Fund’s ability to track the Index.
The Indian government exercises
significant influence over many aspects of the economy, and the number of public sector enterprises in India is substantial. While the Indian government has implemented economic structural reform with the objectives of liberalizing India's exchange
and trade policies, reducing the fiscal deficit, controlling inflation, promoting a sound monetary policy, reforming the financial sector, and placing greater reliance on market mechanisms to direct economic activity, there can be no assurance that
these policies will continue or that the economic recovery will be sustained.
Global factors and foreign actions
may inhibit the flow of foreign capital on which India is dependent to sustain its growth. In addition, the Reserve Bank of India has imposed limits on foreign ownership of Indian companies, which may decrease
the liquidity of the Fund’s portfolio and
result in extreme volatility in the prices of Indian securities. In November 2016, the Indian government eliminated certain large denomination cash notes as legal tender, causing uncertainty in certain financial markets. These factors, coupled with
the lack of extensive accounting, auditing and financial reporting standards and practices, as applicable in the United States, may increase the risk of loss for the Fund.
Securities laws in India are
relatively new and unsettled and, as a result, there is a risk of significant and unpredictable change in laws governing foreign investment, securities regulation, title to securities and shareholder rights. Foreign investors in particular may be
adversely affected by new or amended laws and regulations. Certain Indian regulatory approvals, including approvals from the Securities and Exchange Board of India, the central government and the tax authorities (to the extent that tax benefits need
to be utilized), may be required before the Fund can make investments in Indian companies. Foreign investors in India still face burdensome taxes on investments in income producing securities.
While the Indian economy has enjoyed
substantial economic growth in recent years, there can be no guarantee this growth will continue. Technology and software sectors represent a significant portion of the total capitalization of the Indian securities markets. The value of these
companies will generally fluctuate in response to technological and regulatory developments, and, as a result, the Fund’s holdings are expected to experience correlated fluctuations. Natural disasters, such as tsunamis, flooding or droughts,
could occur in India or surrounding areas and could negatively affect the Indian economy. Agriculture occupies a prominent position in the Indian economy, therefore, it may be negatively affected by adverse weather conditions and the effects of
global climate change. These and other factors may decrease the value and liquidity of the Fund's investments.
Italy
.
Investment in Italian issuers involves risks that are specific to Italy, including, regulatory, political, currency, and economic risks. Italy’s economy is
dependent upon external trade with other economies
—
specifically Germany, France and
other Western European developed countries. As a result, Italy is dependent on the economies of these other countries and any change in the price or demand for Italy’s exports may have an adverse impact on its economy. Interest rates on
Italy’s debt may rise to levels that may make it difficult for it to service high debt levels without significant financial help from the EU and could potentially lead to default. Recently, the Italian economy has experienced volatility due to
concerns about economic downturn and rising government debt levels. Italy has been warned by the Economic and Monetary Union of the EU to reduce its public spending and debt and actions by Italy to cut spending or increase taxes in response could
have significant adverse effects on the Italian economy. These events have adversely impacted the Italian economy, causing credit agencies to lower Italy’s sovereign debt rating and could decrease outside investment in Italian companies. High
amounts of debt and public spending may stifle Italian economic growth or cause prolonged periods of recession.
Japan
. Japanese investments may be significantly affected by events influencing Japan’s economy and changes in the exchange rate between the Japanese yen and the U.S.
Dollar. Japan’s economy fell into a long recession in the 1990s. After a few years of mild recovery in the mid-2000s, Japan’s economy fell into another recession as a result of the recent global economic crisis. Japan is heavily
dependent on exports and foreign oil and may be adversely affected by higher commodity prices, trade tariffs, protectionist measures, competition from emerging economies, and the economic conditions of its trading partners, such as China.
Furthermore, Japan is located in a seismically active area, and in 2011 experienced an earthquake of a sizeable magnitude and a tsunami that significantly affected important elements of its infrastructure and resulted in a nuclear crisis. Since
these events, Japan’s financial markets have fluctuated dramatically. The full extent of the impact of these events on Japan’s economy and on foreign investment in Japan is difficult to estimate. The risks of natural disaster of varying
degrees, such as earthquakes and tsunamis, and the resulting damage, continue to exist. Japan’s economic prospects may be affected by the political and military situations of its near neighbors, notably North and South Korea, China, and
Russia. In addition, Japan’s labor market is adapting to an aging workforce, declining population, and demand for increased labor mobility. These demographic shifts and fundamental structural changes to the labor markets may negatively impact
Japan’s economic competiveness.
South Korea
. South Korean investments may be significantly affected by events influencing its economy, which is heavily dependent on exports and the demand for certain
finished goods. South Korea’s main industries include electronics, automobile production, chemicals, shipbuilding, steel, textiles, clothing, footwear, and food processing. Conditions that weaken demand for such products worldwide or in other
Asian countries could have a negative impact on the South Korean economy as a whole. The South Korean economy’s reliance on international trade makes it highly sensitive to fluctuations in international commodity prices, currency exchanges
rates and government regulation, and vulnerable to downturns of the world economy, particularly with respects to its four largest export markets (the EU, Japan, United States, and China). South Korea has experienced modest economic growth in recent
years, but such continued growth may slow due, in part, to the economic slowdown in China and the increased competitive advantage of Japanese exports with the weakened yen. The South Korean economy’s long-term challenges include an aging
population, inflexible labor market, and overdependence on exports to drive economic growth. Relations with North Korea could also have as significant impact on the economy of South Korea. Relations between South Korea and North Korea remain tense,
as exemplified in periodic acts of hostility, and the possibility of serious military engagement still exists. Armed conflict between North Korea and South Korea could have a severe adverse impact on the South Korean economy and its securities
markets.
Latin America
. Investments in Latin American countries involve special considerations not typically associated with investing in the United States. Most Latin American
countries have experienced, at one time or another, severe and persistent levels of inflation, including, in some cases, hyperinflation. This has, in turn, led to high interest rates, extreme measures by governments
to keep inflation in check, and a generally
debilitating effect on economic growth. Although inflation in many countries has lessened, there is no guarantee it will remain at lower levels. In addition, the political history of certain Latin American countries has been characterized by
political uncertainty, military intervention in civilian and economic spheres, and political corruption. Such developments, if they were to reoccur, could reverse favorable trends toward market and economic reform, privatization, and removal of
trade barriers, and result in significant disruption to the securities markets. Certain Latin American countries may also have managed currencies, which are maintained at artificial levels to the U.S. Dollar rather than at levels determined by the
market. This type of system can lead to sudden and large adjustments in the currency which, in turn, can have a disruptive and negative effect on foreign investors. For example, in late 1994, the value of the Mexican peso lost more than one-third of
its value relative to the U.S. Dollar. Certain Latin American countries also restrict the free conversion of their currency into foreign currencies, including the U.S. Dollar. There is no significant foreign exchange market for many currencies and
it would, as a result, be difficult for the Fund to engage in foreign currency transactions designed to protect the value of the Fund’s interests in securities denominated in such currencies. Finally, a number of Latin American countries are
among the largest debtors of developing countries. There have been moratoria on, and reschedulings of, repayment with respect to these debts. Such events can restrict the flexibility of these debtor nations in the international markets and result in
the imposition of onerous conditions on their economies.
Mexico
. Investment in Mexican issuers involves risks that are specific to Mexico, including regulatory, political, and economic risks. In the past, Mexico has experienced
high interest rates, economic volatility, significant devaluation of its currency (the peso), and high unemployment rates. The Mexican economy is dependent upon external trade with other economies, specifically with the United States and certain
Latin American countries. Additionally, a high level of foreign investment in Mexican assets may increase Mexico’s exposure to risks associated with changes in international investor sentiment. Recent political developments in the U.S. may
also have potential implications for the current trade arrangements between the U.S. and Mexico, which could affect the value of securities held by the Fund. For example, uncertainty regarding the status of the North American Free Trade Agreement
(NAFTA) or its recently negotiated successor -- the United States-Mexico-Canada Agreement -- may have a significant impact on Mexico’s economic outlook and the value of a fund’s investment in Mexico.
The Mexican economy is heavily
dependent on trade with, and foreign investment from, the U.S. and Canada, which are Mexico’s principal trading partners. Any changes in the supply, demand, price or other economic component of Mexico’s imports or exports, as well as any
reductions in foreign investment from, or changes in the economies of, the U.S. or Canada, may have an adverse impact on the Mexican economy. Because commodities such as oil and gas, minerals and metals represent a large portion of the
region’s exports, the economies of these countries are particularly sensitive to fluctuations in commodity prices. Mexico’s economy has also become increasingly oriented toward manufacturing in the years since NAFTA entered into force.
Because Mexico’s top export is automotive vehicles, its economy is strongly tied to the U.S. automotive market, and changes to certain segments in the U.S. market could have an impact on the Mexican economy. The automotive industry and other
industrial products can be highly cyclical, and companies in these industries may suffer periodic operating losses. These industries can also be significantly affected by labor relations and fluctuating component prices. The agricultural and mining
sectors of Mexico’s economy also account for a large portion of its exports, and Mexico is susceptible to fluctuations in the price and demand for agricultural products and natural resources. In addition, Mexico has privatized or has begun the
process of privatization of certain entities and industries, and some investors have suffered losses due to the inability of the newly privatized entities to adjust to a competitive environment and changing regulatory standards.
Mexico has been destabilized by local
insurrections, social upheavals and drug related violence. Additionally, violence near border areas, border-related political disputes, and other social upheaval may lead to strained international relations. Mexico has also experienced contentious
and very closely decided elections. Changes in political parties and other political events may affect the economy and contribute to additional instability. Recurrence of these or similar conditions may adversely impact the Mexican economy.
Russia
. Investing in Russia involves risks and special considerations not typically associated with investing in United States. Since the breakup of the Soviet Union at the
end of 1991, Russia has experienced dramatic political, economic, and social change. The political system in Russia is emerging from a long history of extensive state involvement in economic affairs. The country is undergoing a rapid transition from
a centrally-controlled command system to a market-oriented, democratic model. As a result, companies in Russia are characterized by a lack of: (i) management with experience of operating in a market economy; (ii) modern technology; and, (iii) a
sufficient capital base with which to develop and expand their operations. It is unclear what will be the future effect on Russian companies, if any, of Russia’s continued attempts to move toward a more market-oriented economy. Russia’s
economy has experienced severe economic recession, if not depression, since 1990 during which time the economy has been characterized by high rates of inflation, high rates of unemployment, declining gross domestic product, deficit government
spending, and a devalued currency. The economic reform program has involved major disruptions and dislocations in various sectors of the economy, and those problems have been exacerbated by growing liquidity problems. Russia’s economy is also
heavily reliant on the energy and defense-related sectors, and is therefore susceptible to the risks associated with these industries. Further, Russia presently receives significant financial assistance from a number of countries through various
programs. To the extent these programs are reduced or eliminated in the future, Russian economic development may be adversely impacted. The laws and regulations in Russia affecting Western business investment continue to evolve in an unpredictable
manner. Russian laws and regulations, particularly those involving taxation, foreign
investment and trade, title to property or
securities, and transfer of title, which may be applicable to the Fund’s activities are relatively new and can change quickly and unpredictably in a manner far more volatile than in the United States or other developed market economies.
Although basic commercial laws are in place, they are often unclear or contradictory and subject to varying interpretation, and may at any time be amended, modified, repealed or replaced in a manner adverse to the interest of the Fund.
As a result of
recent events involving Ukraine and Russia and other political conflicts, the United States and the European Union imposed sanctions on certain Russian individuals and companies, including certain financial institutions, and have limited certain
exports and imports to and from Russia. The United States and other nations or international organizations may impose additional, broader economic sanctions or take other actions that may adversely affect Russian-related issuers in the future. These
sanctions, any future sanctions or other actions, or even the threat of further sanctions or other actions, may negatively affect the value and liquidity of the Fund’s investments. Russia may undertake countermeasures or retaliatory actions
which may further impair the value and liquidity of the Fund’s investments.
To the extent the Fund invests in
stocks of foreign corporations, the Fund’s investment in such stocks may also be in the form of depositary receipts or other securities convertible into securities of foreign issuers. Depository receipts are receipts, typically issued by a
financial institution, with evidence of underlying securities issued by a non-U.S. issuer. Types of depositary receipts include American Depositary Receipts (“ADRs”), Global Depositary Receipts (“GDRs”) and European
Depositary Receipts (“EDRs”). Depository receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted.
ADRs are receipts typically issued by
an American bank or trust company that evidence ownership of underlying securities issued by a foreign corporation. Investments in ADRs have certain advantages over direct investment in the underlying foreign securities because: (i) ADRs are U.S.
dollar-denominated investments that are easily transferable and for which market quotations are readily available, and (ii) issuers whose securities are represented by ADRs are generally subject to auditing, accounting and financial reporting
standards similar to those applied to domestic issuers. By investing in ADRs rather than directly in the stock of foreign issuers outside the U.S. the Fund may avoid certain risks related to investing in foreign securities in non-U.S. markets,
however, ADRs do not eliminate all risks inherent in investing in the securities of foreign issuers.
EDRs are receipts issued in Europe
that evidence a similar ownership arrangement. GDRs are receipts issued throughout the world that evidence a similar arrangement. Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are
designed for use in European securities markets. GDRs are tradable both in the United States and in Europe and are designed for use throughout the world.
Depositary receipts may be purchased
through “sponsored” or “unsponsored” facilities, in which the Fund may invest. A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a depositary may establish an
unsponsored facility without participation by the issuer of the depositary security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts of the deposited securities.
Fund investments in depositary receipts,
which include ADRs, GDRs and EDRs, are deemed to be investments in foreign securities for purposes of the Fund’s investment strategy.
The Fund may invest directly and
indirectly in foreign currencies. Investments in foreign currencies are subject to numerous risks not least being the fluctuation of foreign currency exchange rates with respect to the U.S. Dollar. Exchange rates fluctuate for a number of
reasons.
Inflation
. Exchange rates change to reflect changes in a currency’s buying power. Different countries experience different inflation rates due to different monetary
and fiscal policies, different product and labor market conditions, and a host of other factors.
Trade
Deficits
. Countries with trade deficits tend to experience a depreciating currency. Inflation may be the cause of a trade deficit, making a country’s goods more expensive and less competitive and so
reducing demand for its currency.
Interest
Rates
. High interest rates may raise currency values in the short term by making such currencies more attractive to investors. However, since high interest rates are often the result of high inflation,
long-term results may be the opposite.
Budget Deficits and Low Savings Rates
. Countries that run large budget deficits and save little of their national income tend to suffer a depreciating currency because they
are forced to borrow abroad to finance their deficits. Payments of
interest on this debt can inundate the currency
markets with the currency of the debtor nation. Budget deficits also can indirectly contribute to currency depreciation if a government chooses inflationary measures to cope with its deficits and debt.
Political
Factors
. Political instability in a country can cause a currency to depreciate. Demand for a certain currency may fall if a country appears a less desirable place in which to invest and do
business.
Government Control
. Through their own buying and selling of currencies, the world’s central banks sometimes manipulate exchange rate movements. In addition,
governments occasionally issue statements to influence people’s expectations about the direction of exchange rates, or they may instigate policies with an exchange rate target as the goal.
The value of the Fund’s
investments is calculated in U.S. Dollars each day that the New York Stock Exchange (“NYSE”) is open for business. As a result, to the extent that the Fund’s assets are invested in instruments denominated in foreign currencies and
the currencies appreciate relative to the U.S. Dollar, the Fund’s NAV per share as expressed in U.S. Dollars (and, therefore, the value of your investment) should increase. If the U.S. Dollar appreciates relative to the other currencies, the
opposite should occur.
The
currency-related gains and losses experienced by the Fund will be based on changes in the value of portfolio securities attributable to currency fluctuations only in relation to the original purchase price of such securities as stated in U.S.
Dollars. Gains or losses on shares of the Fund will be based on changes attributable to fluctuations in the NAV of such shares, expressed in U.S. Dollars, in relation to the original U.S. Dollar purchase price of the shares. The amount of
appreciation or depreciation in the Fund’s assets also will be affected by the net investment income generated by the money market instruments in which the Fund invests and by changes in the value of the securities that are unrelated to
changes in currency exchange rates.
The Fund may incur currency exchange
costs when it sells instruments denominated in one currency and buys instruments denominated in another.
Currency Transactions
. The Fund conducts currency exchange transactions on a spot basis. Currency transactions made on a spot basis are for cash at the spot rate prevailing
in the currency exchange market for buying or selling currency. The Fund also enters into forward currency contracts. See “Futures Contracts, Options, and Other Derivative Strategies” section below. A forward currency contract is an
obligation to buy or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are entered into on the
interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A currency forward contract will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the
currency that is purchased, similar to when a fund sells a security denominated in one currency and purchases a security denominated in another currency. For example, the Fund may enter into a forward contract when it owns a security that is
denominated in a non-U.S. currency and desires to “lock in” the U.S. dollar value of the security.
The Fund may invest in a combination
of forward currency contracts and U.S. Dollar-denominated market instruments in an attempt to obtain an investment result that is substantially the same as a direct investment in a foreign currency-denominated instrument. This investment technique
creates a “synthetic” position in the particular foreign-currency instrument whose performance the Adviser is trying to duplicate. For example, the combination of U.S. Dollar-denominated instruments with “long” forward
currency exchange contracts creates a position economically equivalent to a money market instrument denominated in the foreign currency itself. Such combined positions are sometimes necessary when the money market in a particular foreign currency is
small or relatively illiquid.
The Fund may invest in forward
currency contracts to hedge either specific transactions (transaction hedging) or portfolio positions (position hedging). Transaction hedging is the purchase or sale of forward currency contracts with respect to specific receivables or payables of
the Fund in connection with the purchase and sale of portfolio securities. Position hedging is the sale of a forward currency contract on a particular currency with respect to portfolio positions denominated or quoted in that currency.
The Fund may use forward currency
contracts for position hedging if consistent with its policy of trying to expose its net assets to foreign currencies. The Fund is not required to enter into forward currency contracts for hedging purposes and it is possible that the Fund may not be
able to hedge against a currency devaluation that is so generally anticipated that the Fund is unable to contract to sell the currency at a price above the devaluation level it anticipates. It also is possible, under certain circumstances, that the
Fund may have to limit its currency transactions to qualify as a “regulated investment company” (“RIC”) under Subchapter M of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986, as amended (“Code”). See
“Dividends, Other Distributions and Taxes.”
The Fund currently does not intend to
enter into a forward currency contract with a term of more than one year, or to engage in position hedging with respect to the currency of a particular country to more than the aggregate market value (at the time the hedging transaction is entered
into) of its portfolio securities denominated in (or quoted in or currently convertible into or directly related through the use of forward currency contracts in conjunction with money market instruments to) that particular currency.
Under definitions
adopted by the Commodity Futures Trading Commission (“CFTC”) and SEC, non-deliverable forwards are considered swaps, and therefore are included in the definition of “commodity interests.” Although non-deliverable forwards
have historically been traded in the over-the-counter (“OTC”) market, as swaps they may in the future be required to be centrally cleared and traded on public facilities. For more information on central clearing and trading of cleared
swaps, see “Cleared swaps,” “Risks of cleared swaps,” “Comprehensive swaps regulation” and “Developing government regulation of derivatives.” Currency forwards that qualify as deliverable forwards are
not regulated as swaps for most purposes, and are not included in the definition of “commodity interests.” However these forwards are subject to some requirements applicable to swaps, including reporting to swap data repositories,
documentation requirements, and business conduct rules applicable to swap dealers. CFTC regulation of currency forwards, especially non-deliverable forwards, may restrict the Fund’s ability to use these instruments in the manner described
above or subject the investment manager to CFTC registration and regulation as a commodity pool operator (“CPO”).
At or before the maturity of a
forward currency contract, the Fund may either sell a portfolio security and make delivery of the currency, or retain the security and terminate its contractual obligation to deliver the currency by buying an “offsetting” contract
obligating it to buy, on the same maturity date, the same amount of the currency. If the Fund engages in an offsetting transaction, it may later enter into a new forward currency contract to sell the currency.
If the Fund engages in an offsetting
transaction, it will incur a gain or loss to the extent that there has been movement in forward currency contract prices. If forward prices go down during the period between the date the Fund enters into a forward currency contract for the sale of a
currency and the date it enters into an offsetting contract for the purchase of the currency, the Fund will realize a gain to the extent that the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to buy. If
forward prices go up, the Fund will suffer a loss to the extent the price of the currency it has agreed to buy exceeds the price of the currency it has agreed to sell.
Since the Fund invests in money
market instruments denominated in foreign currencies, it may hold foreign currencies pending investment or conversion into U.S. Dollars. Although the Fund values its assets daily in U.S. Dollars, it does not convert its holdings of foreign
currencies into U.S. Dollars on a daily basis. The Fund will convert its holdings from time to time, however, and incur the costs of currency conversion. Foreign exchange dealers do not charge a fee for conversion, but they do realize a profit based
on the difference between the prices at which they buy and sell various currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at one rate, and offer to buy the currency at a lower rate if the Fund tries to resell the currency
to the dealer.
Risks of currency forward contracts
.
The successful use of these transactions will usually depend on the Adviser’s ability to accurately forecast currency exchange
rate movements. Should exchange rates move in an unexpected manner, the Fund may not achieve the anticipated benefits of the transaction, or it may realize losses. In addition, these techniques could result in a loss if the counterparty to the
transaction does not perform as promised, including because of the counterparty’s bankruptcy or insolvency. While the Fund uses only counterparties that meet its credit quality standards, in unusual or extreme market conditions, a
counterparty’s creditworthiness and ability to perform may deteriorate rapidly, and the availability of suitable replacement counterparties may become limited. Currency forward contracts may limit potential gain from a positive change in the
relationship between the U.S. Dollar and foreign currencies. Unanticipated changes in currency prices may result in poorer overall performance for the Fund than if it had not engaged in such contracts. Moreover, there may be an imperfect correlation
between the Fund’s portfolio holdings of securities denominated in a particular currency and the currencies bought or sold in the forward contracts entered into by the Fund. This imperfect correlation may cause the Fund to sustain losses that
will prevent the Fund from achieving a complete hedge or expose the Fund to risk of foreign exchange loss.
Foreign Currency Options
. The Fund may invest in foreign currency-denominated securities and may buy or sell put and call options on foreign currencies. The Fund may buy or
sell put and call options on foreign currencies either on exchanges or in the OTC market. A put option on a foreign currency gives the purchaser of the option the right to sell a foreign currency at the exercise price until the option expires. A
call option on a foreign currency gives the purchaser of the option the right to purchase the currency at the exercise price until the option expires. Currency options traded on U.S. or other exchanges may be subject to position limits which may
limit the ability of the Fund to reduce foreign currency risk using such options. OTC options differ from traded options in that they are two-party contracts with price and other terms negotiated between buyer and seller, and generally do not have
as much market liquidity as exchange-traded options.
Foreign Currency
Exchange-Related Securities
Foreign Currency Warrants
. Foreign currency warrants such as Currency Exchange Warrants
SM
(“CEWs
SM
”) are warrants which entitle the
holder to receive from their issuer an amount of cash (generally, for warrants issued in the United States, in U.S. Dollars) which is calculated pursuant to a predetermined formula and based on the exchange rate between a specified foreign currency
and the U.S. Dollar as of the exercise date of the warrant. Foreign currency warrants generally are exercisable upon their issuance and expire as of a specified date and time. Foreign currency warrants have been issued in connection with U.S.
Dollar-denominated debt offerings by major corporate issuers in an attempt to reduce the foreign currency exchange risk which, from the point of view of prospective purchasers of the securities, is inherent in the international
fixed-income
marketplace. Foreign currency warrants may attempt
to reduce the foreign exchange risk assumed by purchasers of a security by, for example, providing for a supplemental payment in the event that the U.S. Dollar depreciates against the value of a major foreign currency such as the Japanese yen or the
Euro. The formula used to determine the amount payable upon exercise of a foreign currency warrant may make the warrant worthless unless the applicable foreign currency exchange rate moves in a particular direction
(
e.g.
, unless the U.S. Dollar appreciates or depreciates against the particular foreign currency to which the warrant is linked or indexed). Foreign currency warrants are severable from the debt obligations
with which they may be offered, and may be listed on exchanges. Foreign currency warrants may be exercisable only in certain minimum amounts, and an investor wishing to exercise warrants who possesses less than the minimum number required for
exercise may be required either to sell the warrants or to purchase additional warrants, thereby incurring additional transaction costs. In the case of any exercise of warrants, there may be a time delay between the time a holder of warrants gives
instructions to exercise and the time the exchange rate relating to exercise is determined, during which time the exchange rate could change significantly, thereby affecting both the market and cash settlement values of the warrants being exercised.
The expiration date of the warrants may be accelerated if the warrants should be delisted from an exchange or if their trading should be suspended permanently, which would result in the loss of any remaining “time value” of the warrants
(
i.e.
, the difference between the current market value and the exercise value of the warrants), and, in the case the warrants were “out-of-the-money,” in a total loss of the purchase price of the
warrants.
Warrants are
generally unsecured obligations of their issuers and are not standardized foreign currency options issued by the Options Clearing Corporation (“OCC”). Unlike foreign currency options issued by OCC, the terms of foreign exchange warrants
generally will not be amended in the event of governmental or regulatory actions affecting exchange rates or in the event of the imposition of other regulatory controls affecting the international currency markets. The initial public offering price
of foreign currency warrants is generally considerably in excess of the price that a commercial user of foreign currencies might pay in the interbank market for a comparable option involving significantly larger amounts of foreign currencies.
Foreign currency warrants are subject to significant foreign exchange risk, including risks arising from complex political or economic factors.
Principal Exchange Rate Linked Securities
. Principal exchange rate linked securities (“PERLs
SM
”) are debt obligations the principal on which is payable at maturity in an amount that may vary based on the exchange rate between the U.S. Dollar
and a particular foreign currency at or about that time. The return on “standard” principal exchange rate linked securities is enhanced if the foreign currency to which the security is linked appreciates against the U.S. Dollar, and is
adversely affected by increases in the foreign exchange value of the U.S. Dollar; “reverse” principal exchange rate linked securities are like the “standard” securities, except that their return is enhanced by increases in
the value of the U.S. Dollar and adversely impacted by increases in the value of foreign currency. Interest payments on the securities are generally made in U.S. Dollars at rates that reflect the degree of foreign currency risk assumed or given up
by the purchaser of the notes (
i.e.
, at relatively higher interest rates if the purchaser has assumed some of the foreign exchange risk, or relatively lower interest rates if the issuer has assumed some of the
foreign exchange risk, based on the expectations of the current market). Principal exchange rate linked securities may in limited cases be subject to acceleration of maturity (generally, not without the consent of the holders of the securities),
which may have an adverse impact on the value of the principal payment to be made at maturity.
Performance Indexed Paper
. Performance indexed paper
(“PIPs
SM
”)
is U.S.
Dollar-denominated commercial paper the yield of which is
linked to certain foreign exchange rate movements.
The yield
to
the investor on performance indexed paper is
established at maturity as a function of spot exchange rates between the U.S. Dollar
and a designated currency as
of
or about that time
(generally, the index maturity two days prior to maturity).
The yield to the
investor will be within a range stipulated at the time of purchase of the obligation, generally with a guaranteed minimum rate of return that is below, and a potential maximum rate of return that is above,
market yields on U.S. Dollar-denominated commercial paper, with both the minimum and
maximum rates
of return
on the investment
corresponding to the minimum and maximum values of the spot exchange rate two business days prior to maturity.
The Fund may invest in hybrid
instruments. A hybrid instrument is a type of potentially high-risk derivative that combines a traditional stock, bond, or commodity with an option or forward contract. Generally, the principal amount, amount payable upon maturity or redemption, or
interest rate of a hybrid is tied (positively or negatively) to the price of some commodity, currency or securities index or another interest rate or some other economic factor (each a “benchmark”). The interest rate or (unlike most
fixed income securities) the principal amount payable at maturity of a hybrid security may be increased or decreased, depending on changes in the value of the benchmark. A hybrid could be, for example, a bond issued by an oil company that pays a
small base level of interest, in addition to interest that accrues when oil prices exceed a certain predetermined level. Such a hybrid instrument would be a combination of a bond and a call option on oil.
Hybrids can be used as an efficient
means of pursuing a variety of investment goals, including currency hedging, and increased total return. Hybrids may not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a result,
may be leveraged and move (up or down) more steeply and rapidly than the benchmark.
These benchmarks may be sensitive to economic and
political events, such as commodity shortages and currency devaluations, which cannot be readily foreseen by the purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero. Thus, an investment in a hybrid may
entail significant market risks that are not associated with a similar investment in a traditional, U.S. Dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest. The purchase of hybrids also
exposes the Fund to the credit risk of the issuer of the hybrids. These risks may cause significant fluctuations in the NAV of the Fund.
Certain issuers of structured
products such as hybrid instruments may be deemed to be investment companies as defined in the 1940 Act. As a result, the Fund’s investment in these products may be subject to limits applicable to investments in investment companies and may be
subject to restrictions contained in the 1940 Act.
Illiquid Investments and Restricted
Securities
The Fund
may purchase and hold illiquid investments. The Fund or Subsidiary will not purchase or otherwise acquire any security if, as a result, more than 15% of its net assets (taken at current value) would be invested in investments that are
illiquid.
The term “illiquid
investments” for this purpose means any investment that the Fund reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market
value of the investment. The Fund will not acquire illiquid securities if, as a result, such securities would comprise more than 15% of the value of the Fund’s net assets. Rafferty, subject to oversight by the Board of Trustees, has the
ultimate authority to determine, to the extent permissible under the federal securities laws, which securities are liquid or illiquid for purposes of this 15% limitation under the Fund’s liquidity risk management program, adopted pursuant to
Rule 22e-4 under the 1940 Act. Illiquid securities will be priced at fair value as determined in good faith under procedures adopted by the Board of Trustees. If, through the appreciation of illiquid securities or the depreciation of liquid
securities, the Fund should be in a position where more than 15% of the value of its net assets are invested in illiquid securities, including restricted securities which are not readily marketable, Rafferty will report such occurrence to the Board
of Trustees and take such steps as are deemed advisable to protect liquidity in accordance with the Fund’s liquidity risk management program.
The Fund may not be able to sell
illiquid investments when Rafferty considers it desirable to do so or may have to sell such investments at a price that is lower than the price that could be obtained if the investments were liquid. In addition, the sale of illiquid investments may
require more time and result in higher dealer discounts and other selling expenses than does the sale of investments that are not illiquid. Illiquid investments also may be more difficult to value due to the unavailability of reliable market
quotations for such investments, and investment in illiquid investments may have an adverse impact on NAV.
Rule 144A
establishes a “safe harbor” from the registration requirements of the 1933 Act for resales of certain securities to qualified institutional buyers. Institutional markets for restricted securities that have developed as a result of Rule
144A provide both readily ascertainable values for certain restricted securities and the ability to liquidate an investment to satisfy share redemption orders. This policy does not include restricted securities eligible for resale pursuant to Rule
144A under the Securities Act of 1933, as amended (“1933 Act”), which the Trust’s Board of Trustees (“Board” or “Trustees”), or Rafferty, under Board-approved guidelines, has determined are liquid. The Fund
or Subsidiary currently does not anticipate investing in such restricted securities. However, to the extent that the Fund does invest in such restricted securities, an insufficient number of qualified institutional buyers interested in purchasing
Rule 144A-eligible securities held by the Fund could adversely affect the marketability of such portfolio securities, and the Fund may be unable to dispose of such securities promptly or at reasonable prices.
The Fund may purchase indexed
securities, which are securities, the value of which varies positively or negatively in relation to the value of other securities, securities indices or other financial indicators, consistent with its investment objective. Indexed securities may be
debt securities or deposits whose value at maturity or coupon rate is determined by reference to a specific instrument or statistic. Recent issuers of indexed securities have included banks, corporations and certain U.S. government agencies.
The performance of indexed securities
depends to a great extent on the performance of the security or other instrument to which they are indexed and also may be influenced by interest rate changes in the United States and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values may decline substantially if the issuer’s creditworthiness deteriorates. Indexed securities may be more volatile than the underlying instruments. Certain indexed
securities that are not traded on an established market may be deemed illiquid. See “Illiquid Investments and Restricted Securities” above.
Inflation Protected Securities
Inflation protected securities
are fixed income securities whose value is periodically adjusted according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers utilize a structure that accrues inflation into the principal value of the bond.
Other issuers pay out the Consumer Price Index (“CPI”) accruals as part of a semiannual coupon. Inflation protected securities issued by the U.S. Treasury have maturities of approximately five, ten or thirty years, although it is
possible that securities with other maturities will be issued in the future. The U.S. Treasury securities pay interest on a semi-annual basis equal to a fixed percentage of the inflation adjusted principal amount.
If the periodic adjustment rate
measuring inflation falls, the principal value of inflation protected bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of
the original bond principal upon maturity (as adjusted for inflation) is guaranteed by the U.S. Treasury in the case of U.S. Treasury inflation indexed bonds, even during a period of deflation. However, the current market value of the bonds is not
guaranteed and will fluctuate. The Fund may also invest in other inflation related bonds which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond to be repaid at maturity
may be less than the original principal amount and, therefore, is subject to credit risk.
The value of inflation protected
bonds is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate
than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation protected bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to
a decrease in value of inflation protected bonds. While these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other
than inflation, investors in these securities may not be protected to the extent that the increase is not reflected in the bond’s inflation measure.
The periodic adjustment of U.S.
inflation protected bonds is tied to the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (“CPI-U”), published monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of
changes in the cost of living, made up of components such as housing, food, transportation and energy.
Any increase in principal for an
inflation protected security resulting from inflation adjustments is considered by the IRS to be taxable income in the year it occurs. The Fund’s distributions to shareholders include interest income and the income attributable to principal
adjustments, both of which will be taxable to shareholders. The tax treatment of the income attributable to principal adjustments may result in the situation where the Fund needs to make its required annual distributions to shareholders in amounts
that exceed the cash received. As a result, the Fund may need to liquidate certain investments when it is not advantageous to do so. Also, if the principal value of an inflation protected security is adjusted downward due to deflation, amounts
previously distributed in the taxable year may be characterized in some circumstances as a return of capital.
Investment in the Subsidiary
The Fund will invest in a
wholly-owned subsidiary organized under the laws of the Cayman Islands, the Subsidiary, the registered offices of which is located at Walkers SPV Limited, Walker House, 87 Mary Street, George Town, Grand Cayman KY1-9002, Cayman Islands. The Fund
will be the sole shareholder of the Subsidiary, and does not expect shares of the Subsidiary to be offered or sold to other investors. The Fund’s investment in the Subsidiary may not exceed 25% of the value of its total assets (ignoring any
subsequent market appreciation in the Subsidiary’s value), which limitation is imposed by the Code and is measured at the end of each quarter of its taxable year.
The Fund will invest in the
Subsidiary in order to gain exposure to the investment returns of the commodities markets within the limitations of the federal tax law requirements applicable to RICs. The Subsidiary will invest principally in commodity and financial futures,
options and swap contracts, as well as certain fixed-income investments intended to serve as margin or collateral for the Subsidiary’s derivatives positions. Unlike the Fund, the Subsidiary may invest without limitation in commodity-linked
derivatives, though the Subsidiary will comply with the same 1940 Act asset coverage requirements with respect to its investments in commodity-linked derivatives that apply to the Fund’s transactions in those instruments. To the extent
applicable, the Subsidiary otherwise is subject to the same fundamental and non-fundamental investment restrictions as the Fund and, in particular, to the same requirements relating to portfolio leverage, liquidity, and the timing and method of
valuation of portfolio investments and Fund shares. (Accordingly, references in this SAI to the Fund may also include the Subsidiary.) By investing in the Subsidiary, the Fund may be considered to be investing indirectly in the same investments as
the subsidiary and is indirectly exposed to the risks associated with those investments.
The Subsidiary is not registered with
the SEC as an investment company under the 1940 Act and is not subject to the investor protections of the 1940 Act. As an investor in the Subsidiary, the Fund will not have the same protections offered to shareholders
of registered investment companies. However, because
the Subsidiary is wholly owned and controlled by the Fund and the Fund is managed by Rafferty, it is unlikely that the Subsidiary will take action in any manner contrary to the interest of the Fund or its shareholders. Because the Subsidiary has the
same investment objective and, to the extent applicable, will comply with the same investment policies as the Fund, Rafferty manages the Subsidiary’s portfolio in a manner similar to that of the Fund.
The Subsidiary has a board of
directors that oversees its activities. The Subsidiary has entered into a separate investment advisory agreement with Rafferty and pays Rafferty a fee for its services. The Subsidiary also has entered into agreements with the Fund’s service
providers for the provision of administrative, accounting, transfer agency and custody services.
The Fund and the Subsidiary may not
be able to operate as described in this SAI in the event of changes to the laws of the United States or the Cayman Islands. If the laws of the Cayman Islands required the Subsidiary to pay taxes to a governmental authority, the Fund would be likely
to suffer decreased returns.
The Fund may invest in lower-rated
debt securities, including securities in the lowest credit rating category, of any maturity, otherwise known as “junk bonds.”
Junk bonds generally offer a higher
current yield than that available for higher-grade issues. However, lower-rated securities involve higher risks, in that they are especially subject to adverse changes in general economic conditions and in the industries in which the issuers are
engaged, to changes in the financial condition of the issuers and to price fluctuations in response to changes in interest rates. During periods of economic downturn or rising interest rates, highly leveraged issuers may experience financial stress
that could adversely affect their ability to make payments of interest and principal and increase the possibility of default. In addition, the market for lower-rated debt securities has expanded rapidly in recent years, and its growth paralleled a
long economic expansion. At times in recent years, the prices of many lower-rated debt securities declined substantially, reflecting an expectation that many issuers of such securities might experience financial difficulties. As a result, the yields
on lower-rated debt securities rose dramatically, but such higher yields did not reflect the value of the income stream that holders of such securities expected, but rather, the risk that holders of such securities could lose a substantial portion
of their value as a result of the issuers’ financial restructuring or default. There can be no assurance that such declines will not recur.
The market for lower-rated debt
issues generally is thinner and less active than that for higher quality securities, which may limit the Fund’s ability to sell such securities at fair value in response to changes in the economy or financial markets. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may also decrease the values and liquidity of lower-rated securities, especially in a thinly traded market. Changes by recognized rating services in their rating of a fixed-income
security may affect the value of these investments. The Fund will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase. However, Rafferty will monitor the investment to determine whether continued
investment in the security will assist in meeting the Fund’s investment objective.
Mortgage-Backed Securities
The Fund may invest in
mortgage-backed securities. A mortgage-backed security is a type of pass-through security, which is a security representing pooled debt obligations repackaged as interests that pass income through an intermediary to investors. In the case of
mortgage-backed securities, the ownership interest is in a pool of mortgage loans.
Mortgage-backed securities are most
commonly issued or guaranteed by the Government National Mortgage Association (“Ginnie Mae
®
” or “GNMA”), Federal National
Mortgage Association (“Fannie Mae
®
” or “FNMA”) or Federal Home Loan Mortgage Corporation (“Freddie Mac
®
” or “FHLMC”), but may also be issued or guaranteed by other private issuers. GNMA is a government-owned corporation that is an
agency of the U.S. Department of Housing and Urban Development. It guarantees, with the full faith and credit of the United States, full and timely payment of all monthly principal and interest on its mortgage-backed securities. FNMA is a publicly
owned, government-sponsored corporation that mostly packages mortgages backed by the Federal Housing Administration, but also sells some non-governmentally backed mortgages. Pass-through securities issued by FNMA are guaranteed as to timely payment
of principal and interest only by FNMA. FHLMC is a publicly chartered agency that buys qualifying residential mortgages from lenders, re-packages them and provides certain guarantees. Pass-through securities issued by FHLMC are guaranteed as to
timely payment of principal and interest only by FHLMC.
The Federal
Housing Finance Agency (“FHFA”) is mandating that Fannie Mae
®
and Freddie Mac
®
cease issuing their own mortgage-backed securities and begin issuing "Uniform Mortgage-Backed Securities" or "UMBS" in 2019. Each UMBS will have a
55-day remittance cycle and can be used as collateral in either a Fannie Mae
®
or Freddie Mac
®
security or held for investment. Investors may be approached to convert existing mortgage-backed securities into UMBS, possibly with an inducement fee
being offered to holders of Freddie Mac
®
mortgage-backed securities. Mortgage-backed securities issued by private issuers, whether or not such
obligations are subject to guarantees by the private issuer, may entail greater risk than obligations directly guaranteed by the U.S. government. The average life of a mortgage-backed security is likely to be substantially less than the original
maturity of the mortgage pools underlying the securities. Prepayments of principal by mortgagors
and mortgage foreclosures will usually result in the
return of the greater part of principal invested far in advance of the maturity of the mortgages in the pool.
Collateralized mortgage obligations
(“CMOs”) are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collateral collectively hereinafter referred to as “Mortgage Assets”). Multi-class pass-through securities are interests in a
trust composed of Mortgage Assets and all references in this section to CMOs include multi-class pass-through securities. Principal prepayments on the Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated
maturities or final distribution dates, resulting in a loss of all or part of the premium if any has been paid. Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly or semi-annual basis. The principal and interest payments
on the Mortgage Assets may be allocated among the various classes of CMOs in several ways. Typically, payments of principal, including any prepayments, on the underlying mortgages are applied to the classes in the order of their respective stated
maturities or final distribution dates, so that no payment of principal is made on CMOs of a class until all CMOs of other classes having earlier stated maturities or final distribution dates have been paid in full.
Stripped
mortgage-backed securities (“SMBS”) are derivative multi-class mortgage securities. The Fund will only invest in SMBS issued by Ginnie
Mae
®
, which are obligations backed by the full faith and credit of the U.S. government. SMBS are usually structured with two or more classes that
receive different proportions of the interest and principal distributions from a pool of Mortgage Assets. The Fund will only invest in SMBS whose Mortgage Assets are U.S. government obligations. A common type of SMBS will be structured so that one
class receives some of the interest and most of the principal from the Mortgage Assets, while the other class receives most of the interest and the remainder of the principal. If the underlying Mortgage Assets experience greater than anticipated
prepayments of principal, the Fund may fail to fully recoup its initial investment in these securities. The market value of any class which consists primarily, or entirely, of principal payments generally is unusually volatile in response to changes
in interest rates.
Investment in mortgage-backed
securities poses several risks, including among others, prepayment, market and credit risk. Prepayment risk reflects the risk that borrowers may prepay their mortgages faster than expected, thereby affecting the investment’s average life and
perhaps its yield. Whether or not a mortgage loan is prepaid is almost entirely controlled by the borrower. Borrowers are most likely to exercise prepayment options at the time when it is least advantageous to investors, generally prepaying
mortgages as interest rates fall, and slowing payments as interest rates rise. Besides the effect of prevailing interest rates, the rate of prepayment and refinancing of mortgages may also be affected by home value appreciation, ease of the
refinancing process and local economic conditions. Market risk reflects the risk that the price of a security may fluctuate over time. The price of mortgage-backed securities may be particularly sensitive to prevailing interest rates, the length of
time the security is expected to be outstanding, and the liquidity of the issue. In a period of unstable interest rates, there may be decreased demand for certain types of mortgage-backed securities, and the Fund invested in such securities wishing
to sell them may find it difficult to find a buyer, which may in turn decrease the price at which they may be sold. Credit risk reflects the risk that the Fund may not receive all or part of its principal because the issuer or credit enhancer has
defaulted on its obligations. Obligations issued by U.S. government-sponsored entities are guaranteed as to the payment of principal and interest, but are not backed by the full faith and credit of the U.S. government. The performance of private
label mortgage-backed securities, issued by private institutions, is based on the financial health of those institutions. With respect to GNMA certificates, although GNMA guarantees timely payment even if homeowners delay or default, tracking the
“pass-through” payments may, at times, be difficult.
The Fund may invest in municipal
obligations. Municipal securities are fixed-income securities issued by states, counties, cities and other political subdivisions and authorities. Although most municipal securities are exempt from federal income tax, municipalities also may issue
taxable securities. Tax exempt securities are generally classified by their source of payment. In addition to the usual risks associated with investing for income, the value of municipal obligations can be affected by changes in the actual or
perceived credit quality of the issuers. The credit quality of a municipal obligation can be affected by, among other factors: a) the financial condition of the issuer or guarantor; b) the issuer’s future borrowing plans and sources of
revenue; c) the economic feasibility of the revenue bond project or general borrowing purpose; d) political or economic developments in the region or jurisdiction where the security is issued; and e) the liquidity of the security. Because municipal
obligations are generally traded OTC, the liquidity of a particular issue often depends on the willingness of dealers to make a market in the security. The liquidity of some municipal issues can be enhanced by demand features, which enable the Fund
to demand payment from the issuer or a financial intermediary on short notice.
Futures Contracts, Options, and
Other Derivative Strategies
Generally, derivatives are
financial instruments whose value depends on, or is derived from, the value of one or more underlying assets, reference rates, or indices or other market factors (“reference assets”) and may relate to stocks bonds, interest rates, credit
currencies, commodities or related indices. Derivative instruments can provide an efficient means to gain long or short exposure to the value of a reference asset without actually owning or selling the instrument. Examples of derivative instruments
include futures contracts, swap agreements, options, options on futures contracts and forward currently contracts.
The Fund may enter
into derivatives instruments which may include futures contracts, forward contracts, options on currencies, commodities, indices, or futures contracts and swaps which provide long and short exposure to reference assets. Derivatives may be more
sensitive to changes in interest rates or to sudden fluctuations in market prices and thus the Fund’s losses may be greater if it invests in derivatives than if it invests in non-derivative instruments. Derivatives are also subject to
counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligations.
The use of derivative instruments is
subject to applicable regulations of the SEC, the several exchanges upon which they are traded and the CFTC. In addition, the Fund’s ability to use derivative instruments will be limited by tax considerations. See “Dividends, Other
Distributions and Taxes.”
Under current CFTC regulations, if
the Fund uses commodity interests (such as futures contracts, options on futures contracts and swaps) other than for bona fide hedging purposes (as defined by the CFTC) the aggregate initial margin and premiums required to establish these positions
(after taking into account unrealized profits and unrealized losses on any such positions and excluding the amount by which options that are “in-the-money” at the time of purchase) may not exceed 5% of the Fund’s NAV, or
alternatively, the aggregate net notional value of those positions, as determined at the time the most recent position was established, may not exceed 100% of the fund’s NAV (after taking into account unrealized profits and unrealized losses
on any such positions). Accordingly, the Fund has registered as a commodity pool, and the Adviser has registered as a CPO with the National Futures Association.
The Fund is subject to the risk that
a change in U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Fund’s operation and/or change the competitive landscape. In this regard, any further amendment to the Commodity Exchange
Act or its related regulations that subject the Fund to additional regulation may have adverse impacts on the Fund’s operations and expenses.
In addition to the
instruments, strategies and risks described below and in the Prospectus, Rafferty may discover additional opportunities in connection with derivative instruments and other similar or related techniques. These new opportunities may become available
as Rafferty develops new techniques, as regulatory authorities broaden the range of permitted transactions and as new derivative instruments or other techniques are developed. Rafferty may utilize these opportunities to the extent that they are
consistent with the Fund’s investment objective and permitted by the Fund’s investment limitations and applicable regulatory authorities. The Fund’s Prospectus or this SAI will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or in the Prospectus.
Special Risks
. The use of derivative instruments involves special considerations and risks, certain of which are described below. Risks pertaining to particular derivative instruments are described in the sections that
follow.
(1) Options and
futures prices can diverge from the prices of their underlying instruments. Options and futures prices are affected by such factors as current and anticipated short-term interest rates, changes in volatility of the underlying instrument and the time
remaining until expiration of the contract, which may not affect security prices the same way. Imperfect or no correlation also may result from differing levels of demand in the options and futures markets and the securities markets, from structural
differences in how options and futures and securities are traded, and from imposition of daily price fluctuation limits or trading halts.
(2) As described below, the Fund
might be required to maintain assets as “cover,” maintain segregated accounts or make margin payments when it takes positions in Financial Instruments involving obligations to third parties (
e.g.
,
Financial Instruments other than purchased options). If the Fund were unable to close out its positions in such Financial Instruments, it might be required to continue to maintain such assets or accounts or make such payments until the position
expired or matured. These requirements might impair the Fund’s ability to sell a portfolio security or make an investment when it would otherwise be favorable to do so or require that the Fund sell a portfolio security at a disadvantageous
time. The Fund’s ability to close out a position in a Financial Instrument prior to expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of the other
party to the transaction (the “counterparty”) to enter into a transaction closing out the position. Therefore, there is no assurance that any position can be closed out at a time and price that is favorable to the Fund.
(3) Losses may arise due to
unanticipated market price movements, lack of a liquid secondary market for any particular instrument at a particular time or due to losses from premiums paid by the Fund on options transactions.
Cover
. Transactions using derivative instruments, other than purchased options, expose the Fund to an obligation to another party. The Fund will not enter into any such
transactions unless it owns either (1) an offsetting (“covered”) position in securities or other options or futures contracts or (2) cash and liquid assets with a value, marked-to-market daily, sufficient to cover its potential
obligations to the extent not covered as provided in (1) above. The Fund will comply with SEC guidelines regarding cover for these instruments and will, if the guidelines so require, set aside cash or liquid assets in an account with its custodian,
the Bank of New York Mellon ("BNYM"), in the prescribed amount as determined daily.
The Subsidiary will comply with SEC
guidelines regarding cover for Financial Instruments to the same extent as the Fund.
Assets used as cover or held in an
account cannot be sold while the position in the corresponding derivative instrument is open, unless they are replaced with other appropriate assets. As a result, the commitment of a large portion of the Fund’s
assets to cover or accounts could impede portfolio
management or the Fund’s ability to meet redemption requests or other current obligations.
Futures Contracts
. The Fund may use certain options (traded on an exchange or OTC, or otherwise), futures contracts (sometimes referred to as “futures”) and
options on futures contracts as a substitute for a comparable market position in the underlying security or index, to attempt to hedge or limit the exposure of the Fund’s position, to create a synthetic money market position, for certain
tax-related purposes or to effect closing transactions.
Generally, a futures contract is a
standard binding agreement to buy or sell a specified quantity of an underlying reference instrument, such as a specific security, currency or commodity, at a specified price at a specified later date. A “sale” of a futures contract
means the acquisition of a contractual obligation to deliver the underlying reference instrument called for by the contract at a specified price on a specified date. A “purchase” of a futures contract means the acquisition of a
contractual obligation to acquire the underlying reference instrument called for by the contract at a specified price on a specified date. The purchase or sale of a futures contract will allow the Fund to increase or decrease its exposure to the
underlying reference instrument without having to buy the actual instrument.
The underlying reference instruments
to which futures contracts may relate include non-U.S. currencies, interest rates, stock and bond indices and debt securities, including U.S. government debt obligations. In most cases the contractual obligation under a futures contract may be
offset, or “closed out,” before the settlement date so that the parties do not have to make or take delivery. The closing out of a contractual obligation is usually accomplished by buying or selling, as the case may be, an identical,
offsetting futures contract. This transaction, which is effected through a member of an exchange, cancels the obligation to make or take delivery of the underlying instrument or asset. If the original position entered into is a long position
(futures contract purchased), there will be a gain (loss) if the offsetting sell transaction is carried out at a higher (lower) price, inclusive of commissions. If the original position entered into is a short position (futures contract sold) there
will be a gain (loss) if the offsetting buy transaction is carried out at a lower (higher) price, inclusive of commissions.
Certain futures contracts are
cash-settled, meaning the futures contract obligates the seller to deliver (and purchaser to accept) an amount of cash equal to a specific dollar amount multiplied by the difference between the final settlement price of a specific futures contract
and the price at which the agreement is made. No physical delivery of the underlying asset is made.
Whether the Fund realizes a gain/loss
from futures activities depends generally upon the movements in the underlying reference asset (generally a commodity, currency, security or index). The extent of the Fund’s loss from an unhedged short position in a futures contract is
potentially unlimited, and investors may lose the amount that they invest plus any profits recognized on their investment.
Futures contracts may be bought and
sold on U.S. and non-U.S. exchanges. Futures contracts in the U.S. have been designed by exchanges that have been designated “contract markets” by the CFTC and must be executed through a futures commission merchant (“FCM”),
which is a brokerage firm that is a member of the relevant contract market. Each exchange guarantees performance of the contracts as between the clearing members of the exchange, thereby reducing the risk of counterparty default. Because all
transactions in the futures market are made, offset, or fulfilled by an FCM through a clearinghouse associated with the exchange on which the contracts are traded, the Fund will incur brokerage fees when it buys or sells futures contracts. The Fund
generally buys and sells futures contracts only on contract markets (including exchanges or boards of trade) where there appears to be an active market for the futures contracts, but there is no assurance that an active market will exist for any
particular contract or at any particular time. An active market makes it more likely that futures contracts will be liquid and bought and sold at competitive market prices. In addition, many of the futures contracts available may be relatively new
instruments without a significant trading history. As a result, there can be no assurance that an active market will develop or continue to exist.
When the Fund enters into a futures
contract, it must deliver to an account controlled by the FCM (that has been selected by the Fund), an amount referred to as “initial margin” that is typically calculated as an amount equal to the volatility in market value of a contract
over a fixed period. Initial margin requirements are determined by the respective exchanges on which the futures contracts are traded and the FCM. Thereafter, a “variation margin” amount may be required to be paid by the Fund or received
by the Fund in accordance with margin controls set for such accounts, depending upon changes in the marked-to-market value of the futures contract. The account is marked-to-market daily and the variation margin is monitored by the Fund’s
investment manager and custodian on a daily basis. When the futures contract is closed out, if the Fund has a loss equal to, or greater than, the margin amount, the margin amount is paid to the FCM along with any loss in excess of the margin amount.
If the Fund has a loss of less than the margin amount, the excess margin is returned to the Fund. If the Fund has a gain, the full margin amount and the amount of the gain is paid to the Fund. Some futures contracts provide for the delivery of
securities that are different than those that are specified in the contract. For a futures contract for delivery of debt securities, on the settlement date of the contract, adjustments to the contract can be made to recognize differences in value
arising from the delivery of debt securities with a different interest rate from that of the particular debt securities that were specified in the contract. In some cases, securities called for by a futures contract may not have been issued when the
contract was written.
Risks of futures
contracts.
The Fund’s use of futures contracts is subject to the risks associated with derivative instruments generally. The Fund may not be able to properly effect its strategy when a liquid market is
unavailable for the futures contract the Fund wishes to close, which may at times occur. If the Fund were unable to liquidate a futures position due to the absence of a liquid secondary market or the imposition of price limits, it could incur
substantial losses. The Fund would continue to be subject to market risk with respect to the position. In addition, the Fund would continue to be required to make daily variation margin payments and might be required to maintain cash or liquid
assets in an account.
A
purchase or sale of a futures contract may result in losses to the Fund in excess of the amount that the Fund delivered as initial margin. Because of the relatively low margin deposits required, futures trading involves a high degree of leverage; as
a result, a relatively small price movement in a futures contract may result in immediate and substantial loss, or gain, to the Fund. In addition, if the Fund has insufficient cash to meet daily variation margin requirements or close out a futures
position, it may have to sell securities from its portfolio at a time when it may be disadvantageous to do so. Adverse market movements could cause the Fund to experience substantial losses on an investment in a futures contract. There is a risk of
loss by the Fund of the initial and variation margin deposits in the event of bankruptcy of the FCM with which the Fund has an open position in a futures contract. The assets of the Fund may not be fully protected in the event of the bankruptcy of
the FCM or central counterparty because the Fund might be limited to recovering only a pro rata share of all available funds and margin segregated on behalf of an FCM’s customers. If the FCM does not provide accurate reporting, the Fund is
also subject to the risk that the FCM could use the Fund’s assets, which are held in an omnibus account with assets belonging to the FCM’s other customers, to satisfy its own financial obligations or the payment obligations of another
customer to the central counterparty.
The difference (called the
“spread”) between prices in the cash market for the purchase and sale of the underlying reference instrument and the prices in the futures market is subject to fluctuations and distortions due to differences in the nature of those two
markets. First, all participants in the futures market are subject to initial deposit and variation margin requirements. Rather than meeting additional variation margin requirements, investors may close futures contracts through offsetting
transactions that could distort the normal pricing spread between the cash and futures markets. Second, the liquidity of the futures markets depends on participants entering into offsetting transactions rather than making or taking delivery of the
underlying instrument. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, resulting in pricing distortion. Third, from the point of view of speculators, the margin deposit requirements that
apply in the futures market are less onerous than similar margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions. When such distortions occur, a
correct forecast of general trends in the price of an underlying reference instrument by the investment manager may still not necessarily result in a profitable transaction.
Futures contracts that are traded on
non-U.S. exchanges may not be as liquid as those purchased on CFTC-designated contract markets. In addition, non-U.S. futures contracts may be subject to varied regulatory oversight. The price of any non-U.S. futures contract and, therefore, the
potential profit and loss thereon, may be affected by any change in the non-U.S. exchange rate between the time a particular order is placed and the time it is liquidated, offset or exercised.
The CFTC and the various exchanges
have established limits referred to as “speculative position limits” on the maximum net long or net short position that any person, such as the Fund, may hold or control in a particular futures contract. Trading limits are also imposed
on the maximum number of contracts that any person may trade on a particular trading day. An exchange may order the liquidation of positions found to be in violation of these limits and it may impose other sanctions or restrictions. The regulation
of futures, as well as other derivatives, is a rapidly changing area of law.
Futures exchanges may also limit the
amount of fluctuation permitted in certain futures contract prices during a single trading day. This daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day’s settlement
price. Once the daily limit has been reached in a futures contract subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and does not
limit potential losses because the limit may prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of positions and subjecting some holders of futures contracts to substantial losses.
Risks Associated with Commodity Futures
Contracts
. There are several additional risks associated with transactions in commodity futures contracts.
Unlike the financial futures markets,
in the commodity futures markets there are costs of physical storage associated with purchasing the underlying commodity. The price of the commodity futures contract will reflect the storage costs of purchasing the physical commodity, including the
time value of money invested in the physical commodity. To the extent that the storage costs for an underlying commodity change while the Fund is invested in futures contracts on that commodity, the value of the futures contract may change
proportionately.
In the
commodity futures markets, producers of the underlying commodity may decide to hedge the price risk of selling the commodity by selling futures contracts today to lock in the price of the commodity at delivery tomorrow. In order to induce
speculators to purchase the other side of the same futures contract, the commodity producer generally must sell
the futures contract at a lower price than the
expected future spot price. Conversely, if most hedgers in the futures market are purchasing futures contracts to hedge against a rise in prices, then speculators will only sell the other side of the futures contract at a higher futures price than
the expected future spot price of the commodity. The changing nature of the hedgers and speculators in the commodity markets will influence whether futures prices are above or below the expected future spot price, which can have significant
implications for the Fund. If the nature of hedgers and speculators in futures markets has shifted when it is time for the Fund to reinvest the proceeds of a maturing contract in a new futures contract, the Fund might reinvest at higher or lower
futures prices, or choose to pursue other investments.
The commodities which underlie
commodity futures contracts may be subject to additional economic and non-economic variables, such as drought, floods, weather, livestock disease, embargoes, tariffs, and international economic, political and regulatory developments. These factors
may have a larger impact on commodity prices and commodity-linked instruments, including futures contracts, than on traditional securities. Certain commodities are also subject to limited pricing flexibility because of supply and demand factors.
Others are subject to broad price fluctuations as a result of the volatility of the prices for certain raw materials and the instability of supplies of other materials. These additional variables may create additional investment risks which subject
the Fund’s investments to greater volatility than investments in traditional securities.
Forward Contracts
. The Fund may enter into equity, equity index or interest rate forward contracts for purposes of attempting to gain exposure to an index or group of
securities without actually purchasing these securities, or to hedge a position. Forward contracts are two-party contracts pursuant to which one party agrees to pay the counterparty a fixed price for an agreed upon amount of commodities, securities,
or the cash value of the commodities, securities or the securities index, at an agreed upon date. Because they are two-party contracts and may have terms greater than seven days, forward contracts may be considered to be illiquid for the
Fund’s illiquid investment limitations. The Fund will not enter into any forward contract unless Rafferty believes that the other party to the transaction is creditworthy. The Fund bears the risk of loss of the amount expected to be received
under a forward contract in the event of the default or bankruptcy of a counterparty. If such a default occurs, the Fund will have contractual remedies pursuant to the forward contract, but such remedies may be subject to bankruptcy and insolvency
laws which could affect the Fund’s rights as a creditor.
Options
. The value of an option position will reflect, among other things, the current market value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying investment and general market conditions. Options that expire unexercised have no value. Options currently are traded on the Chicago Board Options Exchange
®
and other exchanges, as well as the OTC markets.
By buying a call option on a
security, the Fund has the right, in return for the premium paid, to buy the security underlying the option at the exercise price. By writing (selling) a call option and receiving a premium, the Fund becomes obligated during the term of the option
to deliver securities underlying the option at the exercise price if the option is exercised. By buying a put option, the Fund has the right, in return for the premium, to sell the security underlying the option at the exercise price. By writing a
put option, the Fund becomes obligated during the term of the option to purchase the securities underlying the option at the exercise price.
Because options premiums paid or
received by the Fund are small in relation to the market value of the investments underlying the options, buying and selling put and call options can be more speculative than investing directly in securities.
The Fund may effectively terminate
its right or obligation under an option by entering into a closing transaction. For example, the Fund may terminate its obligation under a call or put option that it had written by purchasing an identical call or put option; this is known as a
closing purchase transaction. Conversely, the Fund may terminate a position in a put or call option it had purchased by writing an identical put or call option; this is known as a closing sale transaction. Closing transactions permit the Fund to
realize profits or limit losses on an option position prior to its exercise or expiration.
Risks of Options on Currencies and
Securities
. Exchange-traded options in the United States are issued by a clearing organization affiliated with the exchange on which the option is listed that, in effect, guarantees completion of every
exchange-traded option transaction. In contrast, OTC options are contracts between the Fund and its counterparty (usually a securities dealer or a bank) with no clearing organization guarantee. Thus, when the Fund purchases an OTC option, it relies
on the counterparty from which it purchased the option to make or take delivery of the underlying investment upon exercise of the option. Failure by the counterparty to do so would result in the loss of any premium paid by the Fund as well as the
loss of any expected benefit of the transaction.
The Fund’s ability to establish
and close out positions in exchange-traded options depends on the existence of a liquid market. However, there can be no assurance that such a market will exist at any particular time. Closing transactions can be made for OTC options only by
negotiating directly with the counterparty, or by a transaction in the secondary market if any such market exists. There can be no assurance that the Fund will in fact be able to close out an OTC option position at a favorable price prior to
expiration. In the event of insolvency of the counterparty, the Fund might be unable to close out an OTC option position at any time prior to its expiration.
If the Fund were unable to effect a
closing transaction for an option it had purchased, it would have to exercise the option to realize any profit. The inability to enter into a closing purchase transaction for a covered call option written by the Fund could cause material losses
because the Fund would be unable to sell the investment used as cover for the written option until the option expires or is exercised.
Options on Indices
. An index fluctuates with changes in the market values of the securities included in the index. Options on indices give the holder the right to receive an
amount of cash upon exercise of the option. Receipt of this cash amount will depend upon the closing level of the index upon which the option is based being greater than (in the case of a call) or less than (in the case of put) the exercise price of
the option. Some stock index options are based on a broad market index such as the S&P 500
®
Composite Stock Index, the NYSE Composite Index or
the NYSE Arca Major Market Index or on a narrower index such as the Philadelphia Stock Exchange Over-the-Counter Index.
Each of the exchanges has established
limitations governing the maximum number of call or put options on the same index that may be bought or written by a single investor, whether acting alone or in concert with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through one or more brokers). Under these limitations, option positions of all investment companies advised by Rafferty are combined for purposes of these limits. Pursuant to
these limitations, an exchange may order the liquidation of positions and may impose other sanctions or restrictions. These position limits may restrict the number of listed options that the Fund may buy or sell.
Puts and calls on indices are similar
to puts and calls on securities or futures contracts except that all settlements are in cash and gain or loss depends on changes in the index in question rather than on price movements in individual securities or futures contracts. When the Fund
writes a call on an index, it receives a premium and agrees that, prior to the expiration date, the purchaser of the call, upon exercise of the call, will receive from the Fund an amount of cash if the closing level of the index upon which the call
is based is greater than the exercise price of the call. The amount of cash is equal to the difference between the closing price of the index and the exercise price of the call multiplied by a specific factor (“multiplier”), which
determines the total value for each point of such difference. When the Fund buys a call on an index, it pays a premium and has the same rights to such call as are indicated above. When the Fund buys a put on an index, it pays a premium and has the
right, prior to the expiration date, to require the seller of the put, upon the Fund’s exercise of the put, to deliver to the Fund an amount of cash if the closing level of the index upon which the put is based is less than the exercise price
of the put, which amount of cash is determined by the multiplier, as described above for calls. When the Fund writes a put on an index, it receives a premium and the purchaser of the put has the right, prior to the expiration date, to require the
Fund to deliver to it an amount of cash equal to the difference between the closing level of the index and the exercise price times the multiplier if the closing level is less than the exercise price.
Risks of Options on Indices
. If the Fund has purchased an index option and exercises it before the closing index value for that day is available, it runs the risk that the level of the index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the difference between the closing index value and the exercise price of the option (times the applicable multiplier) to the assigned writer.
OTC Options
. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size and strike price, the terms of
OTC options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract. While this type of arrangement allows the Fund great flexibility to tailor the option to its needs, OTC options
generally involve greater risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded.
Options on Futures Contracts
. When the Fund writes an option on a futures contract, it becomes obligated, in return for the premium paid, to assume a position in the futures
contract at a specified exercise price at any time during the term of the option. If the Fund writes a call, it assumes a short futures position. If it writes a put, it assumes a long futures position. When the Fund purchases an option on a futures
contract, it acquires the right in return for the premium it pays to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put).
Whether the Fund realizes a gain or
loss from futures activities depends upon movements in the underlying security or index. The extent of the Fund’s loss from an unhedged short position from writing unhedged call options on futures contracts is potentially unlimited. The Fund
only purchases and sells options on futures contracts that are traded on a U.S. exchange or board of trade.
Purchasers and sellers of options on
futures can enter into offsetting closing transactions, similar to closing transactions in options, by selling or purchasing, respectively, an instrument identical to the instrument purchased or sold. Positions in options on futures contracts may be
closed only on an exchange or board of trade that provides a secondary market. However, there can be no assurance that a liquid secondary market will exist for a particular contract at a particular time. In such event, it may not be possible to
close a futures contract or options position.
Under certain circumstances, futures
exchanges may establish daily limits on the amount that the price of an option on a futures contract can vary from the previous day’s settlement price; once that limit is reached, no trades may be made that day at a price beyond the limit.
Daily price limits do not limit potential losses because prices could move to the daily limit for several consecutive days with little or no trading, thereby preventing liquidation of unfavorable positions.
If the Fund were unable to liquidate
an option on a futures position due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial losses. The Fund would continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required to make daily variation margin payments and might be required to maintain cash or liquid assets in an account.
Risks of Options
on Futures Contracts
. The ordinary spreads between prices in the cash and futures markets (including the options on futures markets), due to differences in the natures of those markets, are subject to the following
factors, which may create distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts
through offsetting transactions, which could distort the normal relationships between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing distortion. Third, from the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions.
Combined Positions
. The Fund may purchase and write options in combination with each other. For example, the Fund may purchase a put option and write a call option on the
same underlying instrument, in order to construct a combined position whose risk and return characteristics are similar to selling a futures contract. Another possible combined position would involve writing a call option at one strike price and
buying a call option at a lower price, in order to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher transaction costs and may
be more difficult to open and close out.
The Fund may enter into
caps, floors and collars relating to securities, interest rates or currencies. In a cap or floor, the buyer pays a premium (which is generally, but not always, a single up-front amount) for the right to receive payments from the other party if, on
specified payment dates, the applicable rate, index or asset is greater than (in the case of a cap) or less than (in the case of a floor) an agreed level, for the period involved and the applicable notional amount. A collar is a combination
instrument in which the same party buys a cap and sells a floor. Depending upon the terms of the cap and floor comprising the collar, the premiums will partially, or entirely, offset each other. The notional amount of a cap, collar or floor is used
to calculate payments, but is not itself exchanged. The Fund may be both a buyer and seller of these instruments. In addition, the Fund may engage in combinations of put and call options on securities (also commonly known as collars), which may
involve physical delivery of securities. Like swaps, caps, floors and collars are very flexible products. The terms of the transactions entered by the Fund may vary from the typical examples described here.
Other Investment Companies
The Fund may invest in the securities
of other investment companies, including open- and closed-end funds and ETFs. Investments in the securities of other investment companies may involve duplication of advisory fees and certain other expenses. By investing in another investment
company, the Fund becomes a shareholder of that investment company. As a result, Fund shareholders indirectly will bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and
expenses Fund shareholders bear in connection with the Fund’s own operations.
The Fund intends
to limit its investments in securities issued by other investment companies in accordance with the 1940 Act. Section 12(d)(1) of the 1940 Act precludes the Fund from acquiring (i) more than 3% of the total outstanding shares of another investment
company; (ii) shares of another investment company having an aggregate value in excess of 5% of the value of the total assets of the Fund; or (iii) shares of another registered investment company and all other investment companies having an
aggregate value in excess of 10% of the value of the total assets of the Fund. In addition, the Fund is subject to Section 12(d)(1)(C), which provides that the Fund may not acquire shares of a closed-end fund if, immediately after such acquisition,
the Fund and other investment companies having the same adviser as the Fund would hold more than 10% of the closed-end fund’s total outstanding voting stock.
Section 12(d)(1)(F) of the 1940 Act
provides that the provisions of paragraph 12(d)(1)(A) and (B) shall not apply to securities purchased or otherwise acquired by the Fund if (i) immediately after such purchase or acquisition not more than 3% of the total outstanding shares of such
investment company is owned by the Fund and all affiliated persons of the Fund; and (ii) the Fund has not offered or sold, and is not proposing to offer or sell its shares through a principal underwriter or otherwise at a public or offering price
that includes a sales load of more than 1 1/2%. If the Fund invests in investment companies pursuant to Section 12(d)(1)(F), it must comply with the following voting restrictions: when the Fund exercises voting rights, by proxy or otherwise, with
respect to investment companies owned by the Fund, the Fund will either seek instruction from the Fund's shareholders with regard to the voting of all proxies and vote in accordance with such instructions, or vote the shares held by the Fund in the
same proportion as the vote of all other holders of such security. In addition, an investment company purchased by the Fund pursuant to Section 12(d)(1)(F) shall not be required to redeem its shares in an amount exceeding 1% of such investment
company’s total outstanding shares in any period of less than thirty days. Also, to the extent that an ETF has exemptive relief under Section 12(d)(1)(J), the Fund may rely on that exemptive relief to exceed the limits imposed by Section
12(d)(1)(A).
Shares of another investment company
or ETF that has received exemptive relief from the SEC to permit other funds to invest in its shares without these limitations are excluded from such restrictions to the extent that the Fund has complied with the requirements of such orders. To the
extent that the Fund invests in open-end or closed-end investment companies that invest primarily in the securities of companies located outside the United States, see the risks related to foreign securities set forth above.
Exchange-Traded Products
. The Fund may invest in Exchange Traded Products (“ETPs”), which include ETFs, partnerships, commodity pools or trusts that are bought
and sold on a securities exchange. The Fund may also invest in exchange-traded notes (“ETNs”), which are structured debt securities, whereby the issuer of the ETN promises to pay ETN holders the return on an index or market segment over
a certain period of time and then return the principal of the investment at maturity. Whereas ETPs’ liabilities are secured by their portfolio securities, ETNs’ liabilities are unsecured general obligations of the issuer. Therefore, ETNs
are subject to the credit risk of the issuer of the ETN, which is different than other ETPs. The value of an ETN security should also be expected to fluctuate with the credit rating of the issuer. Most ETPs and ETNs are designed to track a
particular market segment or index, although an ETP or ETN may be actively managed. ETPs and ETNs share expenses associated with their operation, typically including advisory fees and other management expenses. When the Fund invests in an ETP or
ETN, in addition to directly bearing expenses associated with its own operations, it will bear its pro rata portion of the ETP’s or ETN’s expenses. ETPs and ETNs trade like stocks on a securities exchange at market prices rather than NAV
and as a result ETP or ETN shares may trade at a price greater than NAV (premium) or less than NAV (discount). The risks of owning an ETP or ETN generally reflect the risks of owning the underlying securities the ETP or ETN is designed to track,
although lack of liquidity in an ETP or ETN could result in it being more volatile than the underlying portfolio of securities. In addition, because of ETP or ETN expenses, compared to owning the underlying securities directly, it may be more costly
to own an ETP or ETN.
Additionally, the Fund may invest in
swap agreements referencing ETFs. If the Fund invests in ETFs or swap agreements referencing ETFs, the underlying ETFs may not necessarily track the Index.
Money Market Funds
. Money market funds are open-end registered investment companies which have historically traded at a stable $1.00 per share price. In October 2016, the
SEC implemented amendments to money market fund regulations (“Amendments”) intended to address perceived systemic risks associated with money market funds and to improve transparency for money market fund investors. In general, the
Amendments require money market funds that do not meet the definitions of a retail money market fund or government money market fund to transact at a floating NAV per share (similar to all other non-money market mutual funds), instead of at a $1
stable share price, as has traditionally been the case. The Amendments also permit all money market funds to impose liquidity fees and redemption gates for use in times of market stress. The SEC also implemented additional diversification, stress
testing, and disclosure measures. The Amendments represented significant departures from the traditional operation of money market funds. Any impact on the trading and value of money market instruments may negatively affect the Fund’s yield
and return potential.
The Fund may enter into
repurchase agreements with banks that are members of the Federal Reserve System or securities dealers who are members of a national securities exchange or are primary dealers in U.S. government securities. Repurchase agreements generally are for a
short period of time, usually less than a week. Under a repurchase agreement, the Fund purchases a U.S. government security and simultaneously agrees to sell the security back to the seller at a mutually agreed-upon future price and date, normally
one day or a few days later. The resale price is greater than the purchase price, reflecting an agreed-upon market interest rate during the Fund’s holding period. While the maturities of the underlying securities in repurchase agreement
transactions may be more than one year, the term of each repurchase agreement always will be less than one year. Repurchase agreements with a maturity of more than seven days are considered to be illiquid investments. The Fund may not enter into
such a repurchase agreement if, as a result, more than 15% of the value of its net assets would then be invested in such repurchase agreements and other illiquid investments. See “Illiquid Investments and Restricted Securities”
above.
The Fund will always
receive, as collateral, securities whose market value, including accrued interest, at all times will be at least equal to 100% of the dollar amount invested by the Fund in each repurchase agreement. In the event of default or bankruptcy by the
seller, the Fund will liquidate those securities (whose market value, including accrued interest, must be at least 100% of the amount invested by the Fund) held under the applicable repurchase agreement, which securities constitute collateral for
the seller’s obligation to repurchase the security. If the seller defaults, the Fund might incur a loss if the value of the collateral securing the repurchase agreement declines and might incur disposition costs in connection with liquidating
the collateral. In addition, if bankruptcy or similar proceedings are commenced with respect to the seller of the security, realization upon the collateral by the Fund may be delayed or limited.
Reverse Repurchase Agreements
The Fund may borrow by entering
into reverse repurchase agreements with the same parties with whom it may enter into repurchase agreements. Under a reverse repurchase agreement, the Fund sells securities and agrees to repurchase them at a mutually agreed to price. At the time the
Fund enters into a reverse repurchase agreement, it will establish and maintain a segregated account with an approved custodian containing liquid high-grade securities, marked-to-market daily, having a value not less than the repurchase price
(including accrued interest). Reverse repurchase agreements involve the risk that the market value of securities retained in lieu of sale by the Fund may decline below the price of the securities the Fund has sold but is obliged to repurchase. If
the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Fund’s obligation to repurchase
the securities. During that time, the Fund’s use of the proceeds of the reverse repurchase agreement effectively may be restricted. Reverse repurchase agreements create leverage, a speculative factor, and are considered borrowings for the
purpose of the Fund’s limitation on borrowing.
The Fund may lend portfolio
securities to certain borrowers that Rafferty determines to be creditworthy. The borrowers provide collateral that is maintained in an amount at least equal to the current market value of the securities loaned, marked to market daily. Borrowers
continuously secure their obligations to return securities on loan from the Fund by depositing any combination of short-term U.S. government securities and cash as collateral with the Fund. No securities loan will be made on behalf of the Fund if,
as a result, the aggregate value of all securities loaned by the Fund exceeds one-third of the value of the Fund's total assets (including the value of the collateral received) or such lower limit as set by Rafferty or the Board. The Fund may
terminate a loan at any time and obtain the return of the securities loaned. The Fund receives, by way of substitute payment, the value of any interest or cash or non-cash distributions paid on the loaned securities that it would have received if
the securities were not on loan. Any gain or loss in the market price of the borrowed securities that occurs during the term of the loan inures to the lending Fund and that Fund’s shareholders.
With respect to loans that are
collateralized by cash, the borrower may be entitled to receive a fee based on the amount of cash collateral. The Fund is typically compensated by the difference between the amount earned on the reinvestment of cash collateral and the fee paid to
the borrower. In the case of collateral other than cash, the Fund is typically compensated by a fee paid by the borrower equal to a percentage of the market value of the loaned securities. A Fund may also receive such fees on “special”
loans that are cash-collateralized. Any cash collateral may be reinvested in money market funds. Such money market fund shares will not be subject to a sales load, redemption fee, distribution fee or service fee. However, such investments are
subject to investment risk.
Securities lending involves exposure
to certain risks, including operational risk (
i.e.
, the risk of losses resulting from problems in the settlement and accounting process), “gap” risk (
i.e.
,
the risk of a mismatch between the return of cash collateral reinvestments and the fees the Fund has agreed to pay a borrower), and credit, legal, counterparty and market risk. If a securities lending counterparty were to default, the Fund would be
subject to the risk of a possible delay in receiving collateral or in recovering the loaned securities, or to a possible loss of rights in the collateral. In the event a borrower does not return the Fund’s securities as agreed, the Fund could
experience losses if the proceeds received from liquidating the collateral do not at least equal the value of the loaned security at the time the collateral is liquidated, plus the transaction costs incurred in purchasing replacement securities.
This event could trigger adverse tax consequences for the Fund. The Fund could lose money if its investment of cash collateral declines in value over the period of the loan. Substitute payments for dividends received by the Fund while its securities
are loaned out will not be considered qualified dividend income.
The Fund may
engage in short sale transactions under which the Fund sells a security it does not own. To complete such a transaction, the Fund must borrow the security to make delivery to the buyer. The Fund then is obligated to replace the security borrowed by
purchasing the security at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Fund. Until the security is replaced, the Fund is required to pay to the lender
amounts equal to any dividends that accrue during the period of the loan. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet the margin requirements, until the short position is closed out. The Fund will
also incur transactions costs when conducting short sales.
Until the Fund closes its short
position or replaces the borrowed stock, the Fund will: (1) maintain an account containing cash or liquid assets at such a level that (a) the amount deposited in the account plus the amount deposited with the broker as collateral will equal the
current value of the stock sold short and (b) the amount deposited in the account plus the amount deposited with the broker as collateral will not be less than the market value of the stock at the time the stock was sold short; or (2) otherwise
cover the Fund’s short position.
The Fund will
incur a loss as a result of a short sales or short exposure to reference assets utilizing derivatives if the price of the security or reference asset increases between the date of the short sale or exposure and the date on which the Fund replaces
the borrowed security or terminates the derivatives providing short exposure. The Fund will realize a gain if the price of a security or reference asset declines in price between those dates. The amount of any gain will be decreased, and the amount
of any loss will be increased, by the amount of the premium, dividends or interest the Fund may be required to pay, if any, in connection with a short sale or derivatives that provide short exposure.
The Fund may enter
into swap and other derivatives to obtain exposure to an underlying asset without actually purchasing such asset. Swap agreements are generally two-party contracts entered into primarily by institutional investors for periods ranging from a day to
more than one year. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be
exchanged or “swapped” between the parties are calculated with respect to a “notional amount,”
i.e.
, the return on, or increase/decrease, in value of a particular dollar amount invested
in a “basket” of securities representing a particular index or an ETF representing a particular index or group of securities.
The Fund may enter into swaps to
invest in a market without owning or taking physical custody of securities. For example, in one common type of total return swap, the Fund’s counterparty will agree to pay the Fund the rate at which the specified asset or indicator (
e.g.
, an ETF, or securities comprising a benchmark index, plus the dividends or interest that would have been received on those assets) increased in value multiplied by the relevant notional amount of the swap. The
Fund will agree to pay to the counterparty an interest fee (based on the notional amount) and the rate at which, the specified asset or indicator would decreased in value multiplied by the notional amount of the swap, plus, in certain instances,
commissions or trading spreads on the notional amount.
As a result, the swap has a similar
economic effect as if the Fund were to invest in the assets underlying the swap in an amount equal to the notional amount of the swap. The return to the Fund on such swap should be the gain or loss on the notional amount plus dividends or interest
on the assets less the interest paid by the Fund on the notional amount. However, unlike cash investments in the underlying assets, the Fund will not be an owner of the underlying assets and will not have voting or similar rights in respect of such
assets.
As a trading technique,
Rafferty may substitute physical securities with a swap having investment characteristics substantially similar to the underlying securities.
The use of swaps is a highly
specialized activity which involves investment techniques and risks in addition to, and in some cases different from, those associated with ordinary portfolio securities transactions. The primary risks associated with the use of swaps are mispricing
or improper valuation, imperfect correlation between movements in the notional amount and the price of the underlying investments, and the inability of the counterparties or clearing organization to perform. If a counterparty’s
creditworthiness for an over-the-counter swap declines, the value of the swap would likely decline. Moreover, there is no guarantee that the Fund could eliminate its exposure under an outstanding swap by entering into an offsetting swap with the
same or another party. In addition, the Fund may use a combination of swaps on an underlying index and swaps on an ETF that is designed to track the performance of that index. The performance of an ETF may deviate from the performance of its
underlying index due to embedded costs and other factors. Thus, to the extent the Fund invests in swaps that use an ETF as the reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of correlation
with the Index as it would if the Fund used only swaps on the underlying index. Rafferty, under the supervision of the Board of Trustees, is responsible for determining and monitoring the liquidity of the Fund’s transactions in swaps.
Common
Types of Swaps
The Fund
may enter into any of several types of swaps, including:
Total Return Swaps.
Total return swaps may be used either as economically similar substitutes for owning the reference asset specified in the swap, such as the securities that comprise a given market index, particular securities or
commodities, or other assets or indicators. They also may be used as a means of obtaining exposure in markets where the reference asset is unavailable or it may otherwise be impossible or impracticable for the Fund to own that asset. “Total
return” refers to the payment (or receipt) of the total return on the underlying reference asset, which is then exchanged for the receipt (or payment) of an interest rate. Total return swaps provide the Fund with the additional flexibility of
gaining exposure to a market or sector index by using the most cost-effective vehicle available.
Interest Rate Swaps.
Interest rate swaps, in their most basic form, involve the exchange by the Fund with another party of their respective commitments to pay or receive interest. For example, the Fund might exchange its right to receive
certain floating rate payments in exchange for another party’s right to receive fixed rate payments. Interest rate swaps can take a variety of other forms, such as agreements to pay the net differences between two different interest indexes or
rates. Despite their differences in form, the function of interest rate swaps is generally the same: to increase or decrease the Fund’s exposure to long- or short-term interest rates. For example, the Fund may enter into an interest rate swap
to preserve
a return or spread on a particular investment or a
portion of its portfolio or to protect against any increase in the price of securities the Fund anticipates purchasing at a later date.
Other Financial Instruments
. Other forms
of swaps that the Fund may enter into include: interest rate caps,
under which,
in
return for a premium,
one party agrees to make payments to the other to the extent that interest rates exceed
a specified rate, or “cap”;
interest rate floors, under which, in return
for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified level, or
“floor,”
and interest rate
collars,
under which a party sells a cap and
purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels.
Mechanics
of Swaps
Payments
. Most swaps entered into by the Fund calculate and settle the obligations of the parties to the agreement on a “net basis” with a single payment. Consequently, a Fund’s current obligations (or rights)
under a swap will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the “net amount”). Other swaps may require initial
premium (discount) payments as well as periodic payments (receipts) related to the interest leg of the swap or to the default of the reference entity. The Fund’s current obligations under most swaps
(
e.g.
, total return swaps, equity/index swaps, interest rate swaps) will be accrued daily (offset against any amounts owed to the Fund by the counterparty to the swap)
and any accrued but unpaid net amounts owed to a swap counterparty will be covered by segregating or earmarking cash or other assets determined to be liquid. However, typically no payments will be made until the settlement date. The net amount of
the excess, if any, of the Fund’s obligations over its entitlements with respect to a swap agreement entered into on a net basis will be accrued daily and an amount of cash or liquid asset having an aggregate NAV at least equal to the accrued
excess will be maintained in an account with the Custodian that satisfies the 1940 Act. The Fund also will establish and maintain such accounts with respect to its total obligations under any swaps that are not entered into on a net basis.
Obligations under swap agreements so covered will not be construed to be “senior securities” for purposes of the Fund’s investment restriction concerning senior securities.
Counterparty Credit Risk
. The Fund will not enter into any uncleared swap (
i.e.
,
not cleared by a central counterparty) unless Rafferty believes that the other party
to the transaction is creditworthy. The counterparty to an uncleared swap will typically be a major global financial institution. The Fund bears the risk of loss of the amount expected to be received under a swap in the event of the default or
bankruptcy of a swap counterparty. If such a default occurs, the Fund will have contractual remedies pursuant to the swaps, but such remedies may be subject to bankruptcy and insolvency laws that could affect the Fund’s rights as a creditor.
The counterparty risk for cleared swaps is generally lower than for uncleared over-the-counter swaps because, in a cleared swap, a clearing organization becomes substituted for each counterparty to a cleared swap. The clearing organization takes on
the obligations of each side of the swap and the Fund would only to the clearing organization for performance of financial obligations. However, there can be no assurance that the clearing organization, or its members, will satisfy its obligations
to the Fund. Upon entering into a cleared swap, the Fund may be required to deposit with its futures commission merchant an amount of cash or cash equivalents equal to a small percentage of the notional amount (this amount is subject to change by
the clearing organization that clears the trade). This amount, known as “initial margin,” is in the nature of a performance bond or good faith deposit on the cleared swap and is returned to the Fund upon termination of the swap, assuming
all contractual obligations have been satisfied. Subsequent payments, known as “variation margin” to and from the broker will be made daily as the price of the swap fluctuates, making the long and short position in the swap contract more
or less valuable, a process known as “marking-to-market.” The premium (discount) payments are built into the daily price of the swap and thus are amortized through the variation margin. The variation margin payment also includes the
daily portion of the periodic payment stream.
Termination and Default Risk
. Swap agreements do not involve the delivery of securities or other underlying assets. Accordingly, if a swap is entered into on a net basis, if the other party to a swap agreement defaults, the Fund’s risk of loss
consists of the net amount of payments that the Fund is contractually entitled to receive, if any.
Regulatory
Margin
In recent years,
regulators across the globe, including the CFTC and the U.S. banking regulators, have adopted margin requirements applicable to uncleared swaps. While the Fund is not directly subject to these requirements, where the Fund’s counterparty is
subject to the requirements, uncleared swaps between the Fund and that counterparty are required to be marked-to-market on a daily basis, and collateral is required to be exchanged to account for any changes in the value of such swaps. The rules
impose a number of requirements as to these exchanges of margin, including as to the timing of transfers, the type of collateral (and valuations for such collateral) and other matters that may be different than what the Fund would agree with its
counterparty in the absence of such regulation. In all events, where the Fund is required to post collateral to its swap counterparty, such collateral will be posted to an independent bank custodian, where access to the collateral by the swap
counterparty will generally not be permitted unless the Fund is in default on its obligations to the swap counterparty.
In addition to the variation margin
requirements, regulators have adopted “initial” margin requirements applicable to uncleared swaps. Where applicable, these rules require parties to an uncleared swap to post, to a custodian that is independent
from the parties to the swap, collateral (in
addition to any “variation margin” collateral noted above) in an amount that is either (i) specified in a schedule in the rules or (ii) calculated by the regulated party in accordance with a model that has been approved by that
party’s regulator(s). At this time, the initial margin rules do not apply to the Fund’s swap trading relationships. However, the rules are being implemented on a phased basis, and it is possible that in the future, the rules could apply
to the Fund. In the event that the rules apply, they would impose significant costs on the Fund’s ability to engage in uncleared swaps and, as such, could adversely affect Rafferty’s ability to manage the Fund, may impair the
Fund’s ability to achieve its investment objective and/or may result in reduced returns to the Fund’s investors.
Comprehensive swaps regulation.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and related regulatory developments have imposed comprehensive new regulatory requirements on swaps and swap market
participants. The regulatory framework includes: (1) registration and regulation of swap dealers and major swap participants; (2) requiring central clearing and execution of standardized swaps; (3) imposing margin requirements on swap transactions;
(4) regulating and monitoring swap transactions through position limits and large trader reporting requirements; and (5) imposing record keeping and centralized and public reporting requirements, on an anonymous basis, for most swaps. The CFTC is
responsible for the regulation of most swaps. The SEC has jurisdiction over a small segment of the market referred to as “security-based swaps,” which includes swaps on single securities or credits, or narrow-based indices of securities
or credits.
Uncleared
swaps.
In an uncleared swap, the swap counterparty is typically a brokerage firm, bank or other financial institution.
The Fund customarily enters into uncleared
swaps based on the standard terms and conditions of an International Swaps and Derivatives Association
(“ISDA”) Master
Agreement.
ISDA is a voluntary industry association of participants in the OTC derivatives markets that has developed standardized contracts used by such participants that have agreed to be bound by such
standardized contracts. In the event that one party to a swap transaction defaults and the transaction is terminated prior to its scheduled termination date, one of the parties may be required to make an early termination payment to the other. An
early termination payment may be payable by either the defaulting or non-defaulting party, depending upon which of them is “in-the-money” with respect to the swap at the time of its termination. Early termination payments may be
calculated in various ways, but are intended to approximate the amount the “in-the-money” party would have to pay to replace the swap as of the date of its termination. During the term of an uncleared swap, the Fund will be required to
pledge to the swap counterparty,
from time to time,
an amount of cash and/or other assets equal to the total net amount (if any) that would be payable by the Fund to the
counterparty if all outstanding swaps between the parties were terminated on the date in question, including any early termination payments (variation margin). Periodically, changes in the amount pledged are made to recognize changes in value of the
contract resulting from, among other things, interest on the notional value of the contract,
market value changes in the underlying investment, and/or dividends paid by the issuer of the underlying instrument.
Likewise, the counterparty will be required to pledge cash or other assets to cover its obligations to the Fund. However, the amount pledged may not always be equal to or more than the amount due to the other party. Therefore, if a counterparty
defaults in its obligations to the Fund,
the amount pledged by the counterparty and available to the Fund may not be sufficient to cover all the amounts due to the Fund and the Fund may sustain a loss.
Currently, the Fund does not typically provide initial margin in connection with uncleared swaps. However,
rules requiring initial margin to be posted by certain market
participants for uncleared swaps have been adopted and are being phased in over time. When these rules take effect with respect to the Fund,
if the Fund is deemed to have material swaps exposure under
applicable swap regulations, it will be required to post initial margin in addition to variation margin.
Cleared swaps.
Certain standardized swaps are subject to mandatory central clearing and exchange-trading. The Dodd-Frank Act and implementing rules will ultimately require the clearing and exchange-trading of many swaps. Mandatory
exchange-trading and clearing will occur on a phased-in basis based on the type of market participant, CFTC approval of contracts for central clearing and public trading facilities making such cleared swaps available to trade. To date, the CFTC has
designated only certain of the most common types of credit default index swaps and interest rate swaps as subject to mandatory clearing and certain public trading facilities have made certain of those cleared swaps available to trade, but it is
expected that additional categories of swaps will in the future be designated as subject to mandatory clearing and trade execution requirements. Central clearing is intended to reduce counterparty credit risk and increase liquidity, but central
clearing does not eliminate these risks and may involve additional costs and risks not involved with uncleared swaps. For more information, see “Risks of cleared swaps” below.
In a cleared swap, the Fund’s
ultimate counterparty is a central clearinghouse rather than a brokerage firm, bank or other financial institution. Cleared swaps are submitted for clearing through each party’s FCM, which must be a member of the clearinghouse that serves as
the central counterparty. Transactions executed on a swap execution facility may increase market transparency and liquidity but may require the Fund to incur increased expenses to access the same types of swaps that it has used in the past. When the
Fund enters into a cleared swap, it must deliver to the central counterparty (via the FCM) an amount referred to as “initial margin.” Initial margin requirements are determined by the central counterparty, and are typically calculated as
an amount equal to the volatility in market value of the cleared swap over a fixed period, but an FCM may require additional initial margin above the amount required by the central counterparty. During the term of the swap agreement, a
“variation margin” amount may also be required to be paid by the Fund or may be received by the Fund in accordance with margin controls set for such accounts. If the value of the Fund’s cleared swap declines, the Fund
will be required to make additional “variation
margin” payments to the FCM to settle the change in value. Conversely, if the market value of the Fund’s position increases, the FCM will post additional “variation margin” to the Fund’s account. At the conclusion of
the term of the swap agreement, if the Fund has a loss equal to or greater than the margin amount, the margin amount is paid to the FCM along with any loss in excess of the margin amount. If the Fund has a loss of less than the margin amount, the
excess margin is returned to the Fund. If the Fund has a gain, the full margin amount and the amount of the gain is paid to the Fund.
Risks of swaps generally.
The use of swap transactions is a highly specialized activity, which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. Whether the Fund will be
successful in using swap agreements to achieve its investment goal depends on the ability of the Adviser to correctly predict which types of investments are likely to produce greater returns. If the Adviser, in using swap agreements, is incorrect in
its forecasts of market values, interest rates, inflation, currency exchange rates or other applicable factors, the investment performance of the Fund will be less than its performance would have been if it had not used the swap agreements. The risk
of loss to the Fund for swap transactions that are entered into on a net basis depends on which party is obligated to pay the net amount to the other party. If the counterparty is obligated to pay the net amount to the Fund, the risk of loss to the
Fund is loss of the entire amount that the Fund is entitled to receive. If the Fund is obligated to pay the net amount, the Fund’s risk of loss is generally limited to that net amount. If the swap agreement involves the exchange of the entire
principal value of a security, the entire principal value of that security is subject to the risk that the other party to the swap will default on its contractual delivery obligations. In addition, the Fund’s risk of loss also includes any
margin at risk in the event of default by the counterparty (in an uncleared swap) or the central counterparty or FCM (in a cleared swap), plus any transaction costs.
Because bilateral swap agreements are
structured as two-party contracts and may have terms of greater than seven days, these swaps may be considered to be illiquid and, therefore, subject to the Fund’s limitation on investments in illiquid securities. If a swap transaction is
particularly large or if the relevant market is illiquid, the Fund may not be able to establish or liquidate a position at an advantageous time or price, which may result in significant losses. Participants in the swap markets are not required to
make continuous markets in the swap contracts they trade. Participants could refuse to quote prices for swap contracts or quote prices with an unusually wide spread between the price at which they are prepared to buy and the price at which they are
prepared to sell. Some swap agreements entail complex terms and may require a greater degree of subjectivity in their valuation. However, the swap markets have grown substantially in recent years, with a large number of financial institutions acting
both as principals and agents, utilizing standardized swap documentation. As a result, the swap markets have become increasingly liquid. In addition, central clearing and the trading of cleared swaps on public facilities are intended to increase
liquidity.
Rafferty, under the
supervision of the Board of Trustees, is responsible for determining and monitoring the liquidity of the Fund’s swap transactions. Rules adopted under the Dodd-Frank Act require centralized reporting of detailed information about many swaps,
whether cleared or uncleared. This information is available to regulators and also, to a more limited extent and on an anonymous basis, to the public. Reporting of swap data is intended to result in greater market transparency. This may be
beneficial to funds that use swaps in their trading strategies. However, public reporting imposes additional recordkeeping burdens on these funds, and the safeguards established to protect anonymity are not yet tested and may not provide protection
of the Fund’s identity as intended. Certain IRS positions may limit the Fund’s ability to use swap agreements in a desired tax strategy. It is possible that developments in the swap markets and/or the laws relating to swap agreements,
including potential government regulation, could adversely affect the Fund’s ability to benefit from using swap agreements, or could have adverse tax consequences. For more information about potentially changing regulation, see
“Developing government regulation of derivatives” below.
Risks of uncleared swaps.
Uncleared swaps are typically executed bilaterally with a swap dealer rather than traded on exchanges. As a result, swap participants may not be as protected as participants on organized exchanges. Performance of a swap
agreement is the responsibility only of the swap counterparty and not of any exchange or clearinghouse. As a result, the Fund is subject to the risk that a counterparty will be unable or will refuse to perform under such agreement, including because
of the counterparty’s bankruptcy or insolvency. The Fund risks the loss of the accrued but unpaid amounts under a swap agreement, which could be substantial, in the event of a default, insolvency or bankruptcy by a swap counterparty. In such
an event, the Fund will have contractual remedies pursuant to the swap agreements, but bankruptcy and insolvency laws could affect the Fund’s rights as a creditor. If the counterparty’s creditworthiness declines, the value of a swap
agreement would likely decline, potentially resulting in losses. The Adviser will only approve a swap agreement counterparty for the Fund if the Adviser deems the counterparty to be creditworthy. However, in unusual or extreme market conditions, a
counterparty’s creditworthiness and ability to perform may deteriorate rapidly, and the availability of suitable replacement counterparties may become limited.
Risks of cleared swaps.
As noted above, under recent financial reforms, certain types of swaps are, and others eventually are expected to be, required to be cleared through a central counterparty, which may affect counterparty risk and other
risks faced by the Fund.
Central clearing is designed to
reduce counterparty credit risk and increase liquidity compared to uncleared swaps because central clearing interposes the central clearinghouse as the counterparty to each participant’s swap, but it does not eliminate
those risks completely and may involve additional
costs and risks not involved with uncleared swaps. There is also a risk of loss by the Fund of the initial and variation margin deposits in the event of bankruptcy of the FCM with which the Fund has an open position, or the central counterparty in a
swap contract. The assets of the Fund may not be fully protected in the event of the bankruptcy of the FCM or central counterparty because the Fund might be limited to recovering only a pro rata share of all available funds and margin segregated on
behalf of an FCM’s customers. If the FCM does not provide accurate reporting, the Fund is also subject to the risk that the FCM could use the Fund’s assets, which are held in an omnibus account with assets belonging to the FCM’s
other customers, to satisfy its own financial obligations or the payment obligations of another customer to the central counterparty. Credit risk of cleared swap participants is concentrated in a few clearinghouses, and the consequences of
insolvency of a clearinghouse are not clear.
With cleared swaps, the Fund may not
be able to obtain terms as favorable as it would be able to negotiate for a bilateral, uncleared swap. In addition, an FCM may unilaterally amend the terms of its agreement with the Fund, which may include the imposition of position limits or
additional margin requirements with respect to the Fund’s investment in certain types of swaps. Central counterparties and FCMs can require termination of existing cleared swap transactions upon the occurrence of certain events, and can also
require increases in margin above the margin that is required at the initiation of the swap agreement. Currently, depending on a number of factors, the margin required under the rules of the clearinghouse and FCM may be in excess of the collateral
required to be posted by the Fund to support its obligations under a similar uncleared swap. However, regulators have proposed and are expected to adopt rules imposing certain margin requirements on uncleared swaps in the near future, which are
likely to impose higher margin requirements on uncleared swaps.
Finally, the Fund is subject to the
risk that, after entering into a cleared swap with an executing broker, no FCM or central counterparty is willing or able to clear the transaction. In such an event, the Fund may be required to break the trade and make an early termination payment
to the executing broker.
Developing government regulation of
derivatives.
The regulation of cleared and uncleared swaps, as well as other derivatives, is a rapidly changing area of law and is subject to modification by government and judicial action. In addition, the SEC, CFTC
and the exchanges are authorized to take extraordinary actions in the event of a market emergency, including, for example, the implementation or reduction of speculative position limits, the implementation of higher margin requirements, the
establishment of daily price limits and the suspension of trading. It is not possible to predict fully the effects of current or future regulation. However, it is possible that developments in government regulation of various types of derivative
instruments, such as speculative position limits on certain types of derivatives, or limits or restrictions on the counterparties with which the Fund engages in derivative transactions, may limit or prevent the Fund from using or limit the
Fund’s use of these instruments effectively as a part of its investment strategy, and could adversely affect the Fund’s ability to achieve its investment goal(s). The Adviser will continue to monitor developments in the area,
particularly to the extent regulatory changes affect the Fund’s ability to enter into desired swap agreements. New requirements, even if not directly applicable to the Fund, may increase the cost of the Fund’s investments and cost of
doing business.
The Fund may also invest in
unrated debt securities. Unrated debt, while not necessarily lower in quality than rated securities, may not have as broad a market. Because of the size and perceived demand for the issue, among other factors, certain issuers may decide not to pay
the cost of getting a rating for their bonds. The creditworthiness of the issuer, as well as any financial institution or other party responsible for payments on the security, will be analyzed to determine whether to purchase unrated bonds.
U.S. Government Securities
The Fund may invest in securities
issued or guaranteed by the U.S. government or its agencies or instrumentalities (“U.S. government securities”) in pursuit of its investment objective, in order to deposit such securities as initial or variation margin, as
“cover” for the investment techniques it employs, as part of a cash reserve or for liquidity purposes.
U.S. government securities are
high-quality instruments issued or guaranteed as to principal or interest by the U.S. Treasury Department (“U.S. Treasury”) or by an agency or instrumentality of the U.S. government. Not all U.S. government securities are backed by the
full faith and credit of the United States. Some are backed by the right of the issuer to borrow from the U.S. Treasury; others are backed by discretionary authority of the U.S. government to purchase the agencies’ obligations; while others
are supported only by the credit of the instrumentality. In the case of securities not backed by the full faith and credit of the United States, the investor must look principally to the agency issuing or guaranteeing the obligation for ultimate
repayment.
Yields on short-,
intermediate- and long-term U.S. government securities are dependent on a variety of factors, including the general conditions of the money and bond markets, the size of a particular offering and the maturity of the obligation. Debt securities with
longer maturities tend to produce higher capital appreciation and depreciation than obligations with shorter maturities and lower yields. The market value of U.S. government securities generally varies inversely with changes in the market interest
rates. An increase in interest rates, therefore, generally would reduce the market value of the Fund’s
portfolio investments in U.S. government securities,
while a decline in interest rates generally would increase the market value of the Fund’s portfolio investments in these securities. U.S. government securities include U.S. Treasury obligations, which includes U.S. Treasury Bills (which mature
within one year of the date they are issued), U.S. Treasury Notes (which have maturities of one to ten years) and U.S. Treasury Bonds (which generally have maturities of more than 10 years). All such U.S. Treasury obligations are backed by the full
faith and credit of the United States.
U.S. government securities also
include obligations issued by U.S. government agencies and instrumentalities (“GSEs”) that are backed by the full faith and credit of the U.S. government (such as securities issued or guaranteed by the Federal Housing Administration,
Ginnie Mae
®
, the Export-Import Bank of the United States, the General Services Administration and the Maritime Administration and certain securities
issued by the Small Business Administration).
Also, U.S.
government securities include securities that are guaranteed by U.S. government-sponsored entities that are not backed by the full faith and credit of the U.S. government (such as Fannie Mae
®
, Freddie Mac
®
, or the Federal Home Loan Banks).
These U.S. government-sponsored entities, although chartered and sponsored by the U.S. Congress, are not guaranteed, nor insured, by the U.S. government. They are supported only by the credit of the issuing agency, instrumentality or
corporation.
Since 2008, Fannie
Mae
®
and Freddie Mac
®
have been in
conservatorship and have received significant capital support through U.S. Treasury preferred stock purchases, as well as U.S. Treasury and Federal Reserve purchases of their mortgage backed securities (“MBS”). The FHFA and the U.S.
Treasury (through its agreement to purchase Fannie Mae
®
and Freddie Mac
®
preferred stock) have imposed strict limits on the size of their mortgage portfolios. The MBS purchase programs technically ended in 2010 but the U.S.
Treasury has continued its support for the entities’ capital as necessary to prevent a negative net worth through at least 2012 and other governmental entities have provided significant support to Fannie Mae
®
and Freddie Mac
®
. There is no guarantee, however,
that they will continue to do so. An FHFA stress test suggested that in a “severely adverse scenario” additional Treasury support of between $42.1 billion and $77.6 billion (depending on the treatment of deferred tax assets) might be
required. Since then Congress has permanently reduced the corporate income tax rate from 35% to 21% starting January 1, 2018. This reduction could cause a substantial net loss and net worth deficit for the year in which the legislation is enacted.
Should they experience such a net worth deficit, they could be required to draw additional funds from the U.S. Treasury to avoid being placed in receivership. Accordingly, no assurance can be given that Fannie Mae
®
and Freddie Mac
®
will remain successful in
meeting their obligations with respect to the debt and MBSs that they issue.
In addition, the problems faced by
Fannie Mae
®
and Freddie Mac
®
, resulting in
their being placed into federal conservatorship and receiving significant U.S. government support, have sparked serious debate among federal policy makers regarding the continued role of the U.S. government in providing liquidity for mortgage loans.
In December 2011, Congress enacted the Temporary Payroll Tax Cut Continuation Act (“TCCA”) of 2011 which, among other provisions, requires that Fannie Mae
®
and Freddie Mac
®
increase their single-family
guaranty fees by at least 10 basis points and remit this increase to Treasury with respect to all loans acquired by Fannie Mae
®
or Freddie Mac
®
on or after April 1, 2012 and before January 1, 2022. Nevertheless, discussions among policymakers have continued as to whether Fannie Mae
®
and Freddie Mac
®
should be nationalized,
privatized, restructured, or eliminated altogether. Fannie Mae reported in the third quarter of 2018 that there was “significant uncertainty regarding the future of our company.” Freddie Mac faces similar uncertainty about its future
role. Fannie Mae
®
and Freddie Mac
®
also are the
subject of several continuing legal actions and investigations related to certain accounting, disclosure, or corporate governance matters, which (along with any resulting financial restatements) may continue to have an adverse effect on the
guaranteeing entities. Congress is currently considering several pieces of legislation that would reform GSEs, proposing to address their structure, mission, portfolio limits, and guarantee fees, among other issues.
U.S. Government Sponsored Enterprises
(“GSEs”)
GSE securities are securities
issued by the U.S. government or its agencies or instrumentalities. Some obligations issued by GSEs are supported by the discretionary authority of the U.S. government to purchase certain obligations of the agency or instrumentality and others only
by the credit of the agency or instrumentality. Those securities bear fixed, floating or variable rates of interest. Interest may fluctuate based on generally recognized reference rates or the relationship of rates. While the U.S. government
currently provides financial support to such GSEs or instrumentalities, no assurance can be given that it will always do so, since it is not so obligated by law.
Certain U.S. government debt
securities, such as securities of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury. Others, such as securities issued by Fannie Mae
®
and Freddie Mac
®
, are supported only by the
credit of the corporation. In the case of securities not backed by the full faith and credit of the United States, a fund must look principally to the agency issuing or guaranteeing the obligation in the event the agency or instrumentality does not
meet its commitments. The U.S. government may choose not to provide financial support to GSEs or instrumentalities if it is not legally obligated to do so. A fund will invest in securities of such instrumentalities only when Rafferty is satisfied
that the credit risk with respect to any such instrumentality is comparatively minimal.
The Fund may enter into firm
commitment agreements for the purchase of securities on a specified future date. The Fund may purchase, for example, new issues of fixed-income instruments on a when-issued basis, whereby the payment obligation, or yield to maturity, or coupon rate
on the instruments may not be fixed at the time of transaction. The Fund will not purchase securities on a when-issued basis if, as a result, more than 15% of its net assets would be so invested. If the Fund enters into a firm commitment agreement,
liability for the purchase price and the rights and risks of ownership of the security accrue to the Fund at the time it becomes obligated to purchase such security, although delivery and payment occur at a later date. Accordingly, if the market
price of the security should decline, the effect of such an agreement would be to obligate the Fund to purchase the security at a price above the current market price on the date of delivery and payment. During the time the Fund is obligated to
purchase such a security, it will be required to segregate assets with an approved custodian in an amount sufficient to settle the transaction.
Zero-Coupon, Payment-In-Kind and Strip
Securities
The Fund
may invest in zero-coupon, payment-in-kind and strip securities of any rating or maturity. Zero-coupon securities make no periodic interest payment but are sold at a deep discount from their face value, otherwise known as “original issue
discount” or “OID.” The buyer earns a rate of return determined by the gradual appreciation of the security, which is redeemed at face value on a specified maturity date. The OID varies depending on the time remaining until
maturity, as well as market interest rates, liquidity of the security, and the issuer’s perceived credit quality. If the issuer defaults, the Fund may not receive any return on its investment. Because zero-coupon securities bear no interest
and compound semi-annually at the rate fixed at the time of issuance, their value generally is more volatile than the value of other fixed-income securities. Since zero-coupon security holders do not receive interest payments, when interest rates
rise, zero-coupon securities fall more dramatically in value than securities paying interest on a current basis. When interest rates fall, zero-coupon securities rise more rapidly in value because the securities reflect a fixed rate of return.
Payment-in-kind securities allow the issuer, at its option, to make current interest payments either in cash or in additional debt obligations of the issuer. Both zero-coupon securities and payment-in-kind securities allow an issuer to avoid the
need to generate cash to meet current interest payments.
An investment in zero-coupon
securities and delayed interest securities (which do not make interest payments until after a specified time) may cause the Fund to recognize income and be required to make distributions thereof to shareholders before it receives any cash payments
on its investment. Moreover, even though payment-in-kind securities do not pay current interest in cash, the Fund nonetheless is required to accrue interest income on these investments and to distribute the interest income at least annually to
shareholders. See “Dividends, Other Distributions and Taxes
–
Income from Zero Coupon and Payment-in-Kind Securities.” Thus, the Fund could be required at
times to liquidate other investments to satisfy distribution requirements.
The Fund may also invest in strips,
which are debt securities whose interest coupons are taken out and traded separately after the securities are issued but otherwise are comparable to zero-coupon securities. Like zero-coupon securities and payment-in-kind securities, strips are
generally more sensitive to interest rate fluctuations than interest paying securities of comparable term and quality.
Other Investment Risks and Practices
Borrowing
. The Fund may borrow money for investment purposes, which is a form of leveraging. Leveraging investments, by purchasing securities with borrowed money, is a
speculative technique that increases investment risk while increasing investment opportunity. Leverage will magnify changes in the Fund’s NAV and on the Fund’s investments. Although the principal of such borrowings will be fixed, the
Fund’s assets may change in value during the time the borrowing is outstanding. Leverage also creates interest expenses for the Fund. To the extent the income derived from securities purchased with borrowed funds exceeds the interest the Fund
will have to pay, that Fund’s net income will be greater than it would be if leverage were not used. Conversely, if the income from the assets obtained with borrowed funds is not sufficient to cover the cost of leveraging, the net income of
the Fund will be less than it would be if leverage were not used, and therefore the amount available for shareholders will be reduced.
The Fund may borrow money to
facilitate management of the Fund’s portfolio by enabling the Fund to meet redemption requests when the liquidation of portfolio instruments would be inconvenient or disadvantageous. Such borrowing is not for investment purposes and will be
repaid by the borrowing Fund promptly.
As required by the 1940 Act, the Fund
must maintain continuous asset coverage (total assets, including assets acquired with borrowed funds, less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If at any time the value of the required asset coverage declines as a
result of market fluctuations or other reasons, the Fund may be required to sell some of its portfolio investments within three days to reduce the amount of its borrowings and restore the 300% asset coverage, even though it may be disadvantageous
from an investment standpoint to sell portfolio instruments at that time.
Under current
pronouncements, certain obligations under futures contracts, forward contracts and swap agreements to the extent that the “covers” its obligations as discussed in the “Futures Contracts, Options, and Other Derivatives
Strategies” section will not be considered a “senior security” and, therefore, will not be subject to the 300% asset coverage requirements otherwise applicable to borrowings.
Portfolio Turnover
. The Trust anticipates that the Fund’s annual portfolio turnover will vary. The Fund’s portfolio turnover rate is calculated by the value of
the securities purchased or securities sold, excluding all securities whose terms-to-maturity at the time of acquisition were less than 397 days, divided by the average monthly value of such securities owned during the year. Based on this
calculation, instruments with remaining terms-to-maturity of less than 397 days are excluded from the portfolio turnover rate. Such instruments generally would include futures contracts and options, since such contracts generally have remaining
terms-to-maturity of less than 397 days. In any given period, all of the Fund’s investments may have remaining terms-to-maturity of less than 397 days; in that case, the portfolio turnover rate for that period would be equal to zero. However,
the Fund’s portfolio turnover rate calculated with all securities whose terms-to-maturity were less than 397 days is anticipated to be unusually high.
High portfolio turnover involves
correspondingly greater expenses to the Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities. Such sales also may result in adverse tax consequences to
the Fund’s shareholders resulting from its distributions of increased net capital gains, if any, recognized as a result of the sales. The trading costs and tax effects associated with portfolio turnover may adversely affect the Fund’s
performance.
Since the use of technology has
become more prevalent in the course of business, the Fund may be more susceptible to operational risks through breaches in cybersecurity. A cybersecurity incident may refer to either intentional or unintentional events that allow an unauthorized
party to gain access to fund assets, customer data, or proprietary information, or cause the Fund or a Fund service provider to suffer data corruption or lose operational functionality. A cybersecurity incident could, among other things, result in
the loss or theft of customer data or funds, customers or employees being unable to access electronic systems (“denial of services”), loss or theft of proprietary information or corporate data, physical damage to a computer or network
system, or remediation costs associated with system repairs. Any of these results could have a substantial impact on the Fund. For example, if a cybersecurity incident results in a denial of service, Fund shareholders could lose access to their
electronic accounts for an unknown period of time, and employees could be unable to access electronic systems to perform critical duties for the Fund, such as trading, NAV calculation, shareholder accounting or fulfillment of Fund share purchases
and redemptions. Cybersecurity incidents could cause the Fund or the Fund's Adviser or distributor to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures, or financial loss of a
significant magnitude. They may also cause the Fund to violate applicable privacy and other laws. The Fund's service providers have established risk management systems that seek to reduce the risks associated with cybersecurity, and business
continuity plans in the event there is a cybersecurity breach. However, there is no guarantee that such efforts will succeed, especially since the Fund does not directly control the cybersecurity systems of the issuers of securities in which the
Fund invests or the Fund's third party service providers (including the Fund's transfer agent and custodian).
The Trust, on behalf of the Fund,
has adopted the following investment policies which are fundamental policies that may not be changed without the affirmative vote of a majority of the outstanding voting securities of the Fund. As defined by the 1940 Act, a “vote of a majority
of the outstanding voting securities of the Fund” means the affirmative vote of the lesser of (1) more than 50% of the outstanding shares of the Fund or (2) 67% or more of the shares present at a shareholders’ meeting, if more than 50%
of the outstanding shares are represented at the meeting in person or by proxy.
For purposes of the following
limitations, all percentage limitations apply immediately after a purchase or initial investment. Except with respect to borrowing money, if a percentage limitation is adhered to at the time of the investment, a later increase or decrease in the
percentage resulting from any change in value or net assets will not result in a violation of such restrictions. If at any time the Fund’s borrowings exceed its limitations due to a decline in net assets, such borrowings will be reduced within
three days (not including Sundays and holidays), or such longer period as may be permitted by the 1940 Act, to the extent necessary to comply with the one-third limitation.
The Fund may not:
1.
|
Borrow money, except to
the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
2.
|
Issue
senior securities, except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
3.
|
Make loans, except to the
extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
4.
|
Except for any Fund
that is “concentrated” in an industry or group of industries within the meaning of the 1940 Act, purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, 25% or more of the Fund’s total assets would be invested in the securities of companies whose principal business activities are in the same industry. However, the Fund may concentrate its investment in a
particular industry or group of industries to approximately the same extent as the Index is so concentrated.
|
5.
|
Purchase or sell real
estate, except that, to the extent permitted by applicable law, the Fund may (a) invest in securities or other instruments directly secured by real estate, and (b) invest in securities or other instruments issued by issuers that invest in real
estate.
|
6.
|
Purchase or sell
commodities or commodity contracts unless acquired as a result of ownership of securities or other instruments issued by persons that purchase or sell commodities or commodities contracts; but this shall not prevent the Fund from purchasing, selling
and entering into financial futures contracts (including futures contracts on indices of securities, interest rates and currencies), and options on financial futures contracts (including futures contracts on indices of securities, interest rates and
currencies), warrants, swaps, forward contracts, foreign currency spot and forward contracts and other financial instruments.
|
7.
|
Underwrite
securities issued by others, except to the extent that the Fund may be considered an underwriter within the meaning of the 1933 Act in the disposition of restricted securities or other investment company securities.
|
Portfolio Transactions and Brokerage
Subject to the general
supervision by the Trustees, Rafferty is responsible for decisions to buy and sell securities for the Fund, the selection of broker-dealers to effect the transactions, and the negotiation of brokerage commissions, if any. Rafferty expects that the
Fund may execute brokerage or other agency transactions through registered broker-dealers, for a commission, in conformity with the 1940 Act, the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.
When selecting a broker or dealer to
execute portfolio transactions, Rafferty considers many factors, including the rate of commission or the size of the broker-dealer’s “spread,” the size and difficulty of the order, the nature of the market for the security,
operational capabilities of the broker-dealer and the research, statistical and economic data furnished by the broker-dealer to Rafferty.
In effecting portfolio transactions
for the Fund, Rafferty seeks to receive the closing prices of securities that are in line with those of the securities included in the Index and seeks to execute trades of such securities at the lowest commission rate reasonably available. With
respect to agency transactions, Rafferty may execute trades at a higher rate of commission if reasonable in relation to brokerage and research services provided to the Fund or Rafferty. Such services may include the following: information as to the
availability of securities for purchase or sale; statistical or factual information or opinions pertaining to investment; wire services; and appraisals or evaluations of portfolio securities. The Fund believes that the requirement to always seek the
lowest possible commission cost could impede effective portfolio management and preclude the Fund and Rafferty from obtaining a high quality of brokerage and research services. In seeking to determine the reasonableness of brokerage commissions paid
in any transaction, Rafferty relies upon its experience and knowledge regarding commissions generally charged by various brokers and on its judgment in evaluating the brokerage and research services received from the broker effecting the
transaction.
Rafferty may use
research and services provided to it by brokers in servicing the Fund; however, not all such services may be used by Rafferty in connection with the Fund. While the receipt of such information and services is useful in varying degrees and may reduce
the amount of research or services otherwise provided to the Fund by Rafferty, the receipt of such information and these services does not reduce the investment advisory fee paid by the Fund.
Purchases and sales of U.S.
government securities normally are transacted through issuers, underwriters or major dealers in U.S. government securities acting as principals. Such transactions are made on a net basis and do not involve payment of brokerage commissions. The cost
of securities purchased from an underwriter usually includes a commission paid by the issuer to the underwriters; transactions with dealers normally reflect the spread between bid and asked prices.
Aggregate brokerage commissions paid by
the Fund for the fiscal periods shown are set forth in the table below:
Direxion
Auspice Broad Commodity Strategy ETF
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$21,641
|
March
30, 2017* - October 31, 2017
|
$7,560
|
*
|
Commencement of Operations
|
For the fiscal year
ended October 31, 2018, the brokerage commissions for the Fund increased significantly from the brokerage commissions from the fiscal year ended October 31, 2017 as a result of an increase in assets.
Portfolio Holdings Information
The Fund’s
portfolio holdings are disclosed on the Fund's website at www.direxioninvestments.com each day the Fund is open for business. In addition, disclosure of the Fund’s complete holdings is required to be made quarterly within 60 days of the end of
each fiscal quarter in the Annual Report and Semi-Annual Report to Fund shareholders and in the quarterly holdings report on Form N-Q. These reports are available, free of charge, on the EDGAR database on the SEC’s website at
www.sec.gov.
The
portfolio composition file (“PCF”), which contains portfolio holdings information and the IOPV, which contains certain pricing information related to the Fund’s portfolio holdings, are also made available daily, including to the
Fund's service providers to facilitate the provision of services to the Fund and to certain other entities as necessary for transactions in Creation Units. Such entities include: (i) National Securities Clearing Corporation (“NSCC”)
members; (ii) subscribers to various fee-based services, including entities that publish and/or analyze such information in connection with the process of purchasing or redeeming Creation Units or trading shares of Fund in the secondary market;
(iii) investors that have entered into an “Authorized Participant Agreement” with the Distributor and the transfer agent or purchase Creation Units through a dealer that has entered into such an agreement (“Authorized
Participants”); and (iv) certain personnel of service providers that are involved in portfolio management and providing administrative, operational, or other support to portfolio management including personnel of the Adviser and the Fund's
distributor, administrator, custodian and fund accountant who are involved in functions which may require such information to conduct business in the ordinary course.
In addition, the Fund's Chief
Compliance Officer (“CCO”) may grant exceptions to permit additional disclosure of the complete portfolio holdings information at differing times and with differing lag times to rating agencies and to the parties noted above, provided
that (1) the Fund has a legitimate business purpose for doing so; (2) it is in the best interests of shareholders; (3) the recipient is subject to a confidentiality agreement; and (4) the recipient is subject to a duty not to trade on the nonpublic
information. In this regard, from time to time, rating and ranking organizations such as Standard & Poor’s
®
and Morningstar
®
, Inc. may request such information. The CCO shall report any disclosures made pursuant to this exception to the Board.
The Board of Trustees
The Trust is governed by its Board
of Trustees (the “Board”). The Board is responsible for and oversees the overall management and operations of the Trust and the Fund, which includes the general oversight and review of the Fund's investment activities, in accordance with
federal law and the law of the State of Delaware, as well as the stated policies of the Fund. The Board oversees the Trust’s officers and service providers, including Rafferty, which is responsible for the management of the day-to-day
operations of the Fund based on policies and agreements reviewed and approved by the Board. In carrying out these responsibilities, the Board regularly interacts with and receives reports from senior personnel of service providers, including
personnel from Rafferty and U.S. Bancorp Fund Services, LLC (“USBFS”). The Board also is assisted by the Trust’s independent auditor (who reports directly to the Trust’s Audit Committee), independent counsel and other
professionals as appropriate.
Risk
Oversight
Consistent with
its responsibility for oversight of the Trust and the Fund, the Board oversees the management of risks relating to the administration and operation of the Trust and the Fund. Rafferty, as part of its responsibilities for the day-to-day operations of
the Fund, is responsible for day-to-day risk management for the Fund. The Board, in the exercise of its reasonable business judgment performs its risk management oversight directly and, as to certain matters, through its committees (described below)
and through the Board members who are not “interested persons” of the Fund as defined in Section 2(a)(19) of the 1940 Act (“Independent Trustees.”) The following provides an overview of the principal, but not all, aspects of
the Board’s oversight of risk management for the Trust and the Fund.
The Board has adopted, and
periodically reviews, policies and procedures designed to address risks to the Trust and the Fund. In addition, under the general oversight of the Board, Rafferty and other service providers to the Fund have themselves adopted a variety of policies,
procedures and controls designed to address particular risks to the Fund. Different processes, procedures and controls are employed with respect to different types of risks.
The Board also oversees risk
management for the Trust and the Fund through review of regular reports, presentations and other information from officers of the Trust and other persons. The Trust’s CCO and senior officers of Rafferty regularly report to the Board on a range
of matters, including those relating to risk management. The Board also regularly receives reports from Rafferty and USBFS with respect to the Fund's investments. In addition to regular reports from these parties,
the Board also receives reports regarding other
service providers to the Trust, either directly or through Rafferty, USBFS or the CCO, on a periodic or regular basis. At least annually, the Board receives a report from the CCO regarding the effectiveness of the Fund's compliance program. Also, on
an annual basis, the Board receives reports, presentations and other information from Rafferty in connection with the Board’s consideration of the renewal of each of the Trust’s agreements with Rafferty and the Trust’s distribution
plan under Rule 12b-1 under the 1940 Act.
The CCO reports regularly to the
Board on Fund valuation matters. The Audit Committee receives regular reports from the Trust’s independent registered public accounting firm on internal control and financial reporting matters. On at least a quarterly basis, the Independent
Trustees meet with the CCO to discuss matters relating to the Fund's compliance program.
Board Structure and Related Matters
Independent Trustees constitute
two-thirds of the Board. The Trustees discharge their responsibilities collectively as a Board, as well as through Board committees, each of which operates pursuant to a charter approved by the Board that delineates the specific responsibilities of
that committee. The Board has established three standing committees: the Audit Committee, the Nominating and Governance Committee and the Qualified Legal Compliance Committee. For example, the Audit Committee is responsible for specific matters
related to oversight of the Fund's independent auditors, subject to approval of the Audit Committee’s recommendations by the Board. The members and responsibilities of each Board committee are summarized below.
The Board
periodically evaluates its structure and composition as well as various aspects of its operations. The Chairman of the Board is not an Independent Trustee and the Board has chosen not to have a lead Independent Trustee. However, the Board believes
that its leadership structure, including its Independent Trustees and Board committees, is appropriate for the Trust in light of, among other factors, the asset size and nature of the Fund, the number of series overseen by the Board, the
arrangements for the conduct of the Fund's operations, the number of Trustees, and the Board’s responsibilities. On an annual basis, the Board conducts a self-evaluation that considers, among other matters, whether the Board and its committees
are functioning effectively and whether, given the size and composition of the Board and each of its committees, the Trustees are able to oversee effectively the number of series in the complex.
The Trust is part of the Direxion
Family of Investment Companies, which is comprised of the 120 portfolios within the Trust, 15 portfolios within the Direxion Funds and no portfolios within the Direxion Insurance Trust. The same persons who constitute the Board also constitute the
Board of Trustees of the Direxion Funds and the Direxion Insurance Trust.
The Board holds four regularly
scheduled in-person meetings each year. The Board may hold special meetings, as needed, either in person or by telephone, to address matters arising between regular meetings. During a portion of each in-person meeting, the Independent Trustees meet
outside of management’s presence. The Independent Trustees may hold special meetings, as needed, either in person or by telephone.
The Trustees of
the Trust are identified in the tables below, which provide information regarding their age, business address and principal occupation during the past five years including any affiliation with Rafferty, the length of service to the Trust, and the
position, if any, that they hold on the board of directors of companies other than the Trust as of the date of this SAI. Each of the Trustees of the Trust also serve on the Board of the Direxion Funds and Direxion Insurance Trust, the other
registered investment companies in the Direxion mutual fund complex. Rafferty is also the sole owner of Direxion Advisors, LLC ("Direxion"), investment adviser to certain series of the Trust. Unless otherwise noted, an individual’s business
address is 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019.
Interested Trustee
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(2)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
Daniel
D. O’Neill
(1)
Age: 50
|
Chairman
of the Board of Trustees
|
Lifetime
of Trust until removal or resignation;
Since 2008
|
Managing
Director of Rafferty Asset Management, LLC, January 1999 –
January 2019 and Direxion Advisors, LLC, November 2017
–
January 2019.
|
135
|
None.
|
Independent Trustees
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(3)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
Gerald
E. Shanley III
Age: 75
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2008
|
Retired,
since 2002; Business Consultant, 1985-present; Trustee of Trust Under Will of Charles S. Payson, 1987-present; C.P.A., 1979-present.
|
135
|
None.
|
John
A. Weisser
Age: 77
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2008
|
Retired,
since 1995; Salomon Brothers, Inc., 1971-1995, most recently as Managing Director.
|
135
|
Director
until December 2016: The MainStay Funds Trust, The MainStay Funds, MainStay VP Fund Series, Mainstay Defined Term Municipal Opportunities Fund; Private Advisors Alternative Strategy Fund; Private Advisors Alternative Strategies Master Fund.
|
David
L. Driscoll
Age: 49
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2014
|
Partner,
King Associates, LLP, since 2004; Board Advisor, University Common Real Estate, since 2012; Principal, Grey Oaks LLP since 2003; Member, Kendrick LLC, since 2006.
|
135
|
None.
|
Jacob
C. Gaffey
Age: 71
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2014
|
Managing
Director of Loomis & Co. since 2012; Partner, Bay Capital Advisors, LLC
2008
–
2012.
|
135
|
None.
|
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(3)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
Henry
W. Mulholland
Age: 55
|
Trustee
|
Lifetime
of Trust until removal or resignation; Since 2017
|
Grove
Hill Partners LLC, since 2016 as Managing Partner; Bank of America Merrill Lynch, 1990-2015, most recently as Managing Director and Head of Equities for Americas.
|
135
|
None.
|
(1)
|
Mr. O’Neill is
affiliated with Rafferty and Direxion. Mr. O’Neill owns a beneficial interest in Rafferty.
|
(2)
|
The Direxion Family of
Investment Companies consists of the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 93 of the 120 funds registered with the SEC, the Direxion Funds which, as of the date of this SAI, offers for sale to the
public 15 funds registered with the SEC and the Direxion Insurance Trust which, as of the date of this SAI, does not have any funds registered with the SEC.
|
In addition to the information set
forth in the tables above and other relevant qualifications, experience, attributes or skills applicable to a particular Trustee, the following provides further information about the qualifications and experience of each Trustee.
Daniel D.
O’Neill: Mr. O’Neill has extensive experience in the investment management business, including as managing director of Rafferty and Direxion. Mr. O’Neill was the Managing Director of Rafferty from 1999 through January 2019 and
Managing Director of Direxion from its inception in November 2017 through January 2019.
Gerald E. Shanley III: Mr. Shanley
has extensive audit experience and spent ten years in the tax practice of an international public accounting firm. He is a certified public accountant and has a JD degree. He has extensive business experience as the president of a closely held
manufacturing company, a director of several closely held companies, a business and tax consultant and a trustee of a private investment trust. He has served on the boards of several charitable and not for profit organizations. He also has multiple
years of service as a Trustee.
John A. Weisser: Mr. Weisser has
extensive experience in the investment management business, including as managing director of an investment bank and a director of other registered investment companies. He also has multiple years of service as a Trustee.
David L. Driscoll: Mr. Driscoll has
extensive experience with risk assessment and strategic planning as a partner and manager of various real estate partnerships and companies.
Jacob C. Gaffey: Mr. Gaffey has
extensive experience with providing investment banking and valuation services to various companies. Mr. Gaffey has been a director and a member of an audit committee of a public company since 2011.
Henry W. Mulholland: Mr. Mulholland has
extensive experience with equity trading, risk management, equity market structure as well as managing regulatory and compliance matters.
Board Committees
The Trust has an
Audit Committee, consisting of Messrs. Weisser, Shanley, Driscoll, Gaffey and Mulholland. The members of the Audit Committee are Independent Trustees. The primary responsibilities of the Trust’s Audit Committee are, as set forth in its
charter, to make recommendations to the Board Members as to: the engagement or discharge of the Trust’s independent registered public accounting firm (including the audit fees charged by the auditors); the supervision of investigations into
matters relating to audit matters; the review with the independent registered public accounting firm of the results of audits; and addressing any other matters regarding audits. The Audit Committee met three times during the Trust’s most
recent fiscal year.
The Trust also has a Nominating and
Governance Committee, consisting of Messrs. Weisser, Shanley, Driscoll, Gaffey and Mulholland each of whom is an Independent Trustee. The primary responsibilities of the Nominating and Governance Committee are to make recommendations to the Board on
issues related to the composition and operation of the Board, and communicate with management on those issues. The Nominating and Governance Committee also evaluates and nominates Board member candidates. The Nominating and Governance Committee will
consider nominees recommended by shareholders. Such recommendations should be in writing and addressed to the Fund with attention to the Nominating and Governance Committee Chair. The recommendations must include the following Preliminary
Information regarding the nominee: (1) name; (2) date of birth; (3) education; (4) business professional or other relevant experience and areas of expertise; (5) current business and home addresses and contact information; (6) other board positions
or prior experience; and (7) any knowledge and
experience relating to investment companies and
investment company governance. The Nominating and Governance Committee met three times during the Trust’s most recent fiscal year.
The Trust has a Qualified Legal
Compliance Committee, consisting of Messrs. Weisser, Shanley, Driscoll, Gaffey and Mulholland. The members of the Qualified Legal Compliance Committee are Independent Trustees of the Trust. The primary responsibility of the Trust’s Qualified
Legal Compliance Committee is to receive, review and take appropriate action with respect to any report (“Report”) made or referred to the Committee by an attorney of evidence of a material violation of applicable U.S. federal or state
securities law, material breach of a fiduciary duty under U.S. federal or state law or a similar material violation by the Trust or by any officer, director, employee or agent of the Trust. The Qualified Legal Compliance Committee did not meet
during the Trust’s most recent fiscal year.
Principal Officers of the Trust
The officers of the Trust conduct
and supervise its daily business. Unless otherwise noted, an individual’s business address is 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019. As of the date of this SAI, the officers of the Trust, their ages,
their business address and their principal occupations during the past five years are as follows:
Name,
Address
and Age
|
Position(s)
Held with
Fund
|
Term
of
Office and
Length of
Time Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in the
Direxion
Family of
Investment
Companies
Overseen
by Trustee
(1)
|
Other
Trusteeships/
Directorships Held
by Trustee During
Past Five Years
|
Robert
D. Nestor
Age: 50
|
President
|
One
Year;
Since 2018
|
President,
Rafferty Asset Management, LLC and Direxion Advisors, LLC, since April 2018; Blackrock, Inc. (May 2007-April 2018), most recently as Managing Director.
|
N/A
|
N/A
|
Patrick
J. Rudnick
Age: 45
|
Principal
Executive
Officer
Principal Financial
Officer
|
One
Year;
Since 2018
One Year;
Since 2010
|
Senior
Vice President, since March 2013, Rafferty Asset Management, LLC; Senior Vice President, since November 2017, Direxion Advisors, LLC.
|
N/A
|
N/A
|
Angela
Brickl
Age: 42
|
Chief
Compliance
Officer
Secretary
|
One
Year;
Since 2018
One Year;
Since 2011
|
General
Counsel, Rafferty Asset Management LLC, since October 2010 and Direxion Advisors, LLC, since November 2017; Chief Compliance Officer, Rafferty Asset Management, LLC, since September 2012 and Direxion Advisors, LLC, since November 2017.
|
N/A
|
N/A
|
(1)
|
The Direxion Family of
Investment Companies consists of the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 93 of the 120 funds registered with the SEC, the Direxion Funds which, as of the date of this SAI, offers for sale to the
public 15 funds registered with the SEC and the Direxion Insurance Trust which, as of the date of this SAI, does not have any funds registered with the SEC.
|
The following table shows the amount of
equity securities owned in the Fund and the Direxion Family of Investment Companies by the Trustees as of the calendar year ended December 31, 2018:
Dollar
Range of Equity Securities Owned:
|
Interested
Trustee:
|
Independent
Trustees:
|
|
Daniel
D.
O’Neill
|
Gerald
E.
Shanley III
|
John
Weisser
|
David
L.
Driscoll
|
Jacob
C.
Gaffey
|
Henry
W. Mulholland
|
Direxion
Auspice Broad Commodity Strategy ETF
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Aggregate
Dollar Range of Equity Securities in the Direxion Family of Investment Companies
(1)
|
Over
$100,000
|
$0
|
$1-$10,000
|
$0
|
$0
|
$0
|
(1)
|
The Direxion Family of
Investment Companies consists of the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 93 of the 120 funds registered with the SEC, the Direxion Funds which, as of the date of this SAI, offers for sale to the
public 15 funds registered with the SEC and the Direxion Insurance Trust which, as of the date of this SAI, does not have any funds registered with the SEC.
|
The Trust’s Trust Instrument
provides that the Trustees will not be liable for errors of judgment or mistakes of fact or law. However, they are not protected against any liability to which they would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of their office.
No officer,
director or employee of Rafferty receives any compensation from the Fund for acting as a Trustee or officer of the Trust. The following table shows the compensation earned by each Trustee for the Trust’s fiscal year ended October 31,
2018:
Name
of Person,
Position
|
Aggregate
Compensation
From the
Trust
(1)
|
Pension
or
Retirement Benefits
Accrued As Part of
the Trust’s
Expenses
|
Estimated
Annual Benefits
Upon Retirement
|
Aggregate
Compensation
From the Direxion
Family of
Investment
Companies Paid
to the Trustees
(2)
|
Interested
Trustee
|
Daniel
D. O’Neill
|
$0
|
$0
|
$0
|
$0
|
Independent
Trustees
|
Gerald
E. Shanley III
|
$93,438
|
$0
|
$0
|
$124,583
|
John
A. Weisser
|
$93,438
|
$0
|
$0
|
$124,583
|
David
L. Driscoll
|
$92,188
|
$0
|
$0
|
$122,917
|
Jacob
C. Gaffey
|
$92,188
|
$0
|
$0
|
$122,917
|
Henry
W. Mulholland
(3)
|
$85,938
|
$0
|
$0
|
$114,583
|
(1)
Trustee compensation is
allocated across the operational Funds of the Trust based on the proportion of the Fund’s net assets to the total net assets of the operational Funds of the Trust.
(2)
For the fiscal year ended
October 31, 2018, Trustees’ fees and expenses in the amount of $457,190 were incurred by the Trust.
(3)
Mr. Mulholland was
elected as a Trustee December 1, 2017.
Principal Shareholders, Control Persons and
Management Ownership
A principal shareholder is any
person who owns of record or beneficially 5% or more of the outstanding shares of the Fund. A control person is a shareholder that owns beneficially or through controlled companies more than 25% of the voting securities of a company or acknowledges
the existence of control. Shareholders owning voting securities in excess of 25% may determine the outcome of any matter affecting and voted on by shareholders of the Fund.
As of February 1,
2019, the following shareholders were considered to be either a principal shareholder or control person of the Fund:
Direxion Auspice Broad Commodity Strategy
ETF
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
Fidelity
Global Brokerage Group, Inc.
|
DE
|
78.80%
|
Record
|
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
14.02%
|
Record
|
In addition,
as of February 1, 2019, the Trustees and Officers as a group owned less than 1% of the outstanding shares of the Fund.
Rafferty, 1301 Avenue of the
Americas (6th Avenue), 28th Floor, New York, New York 10019, provides investment advice to the Fund. Rafferty was organized as a New York limited liability company in June 1997. Lawrence C. Rafferty controls Rafferty through his ownership in
Rafferty Holdings, LLC and Daniel D. O'Neill controls Rafferty through his ownership in Minakian Partners, LLC.
Under an Investment Advisory
Agreement (“Advisory Agreement”) between Rafferty and the Trust, on behalf of the Fund dated August 13, 2008, Rafferty provides a continuous investment program for the Fund’s assets in accordance with its investment objectives,
policies and limitations, and oversees the day-to-day operations of the Fund, subject to the supervision of the Trustees. Rafferty bears all costs associated with providing these advisory services and the expenses of the Trustees who are affiliated
with or interested persons of Rafferty. The Trust bears all other expenses that are not assumed by Rafferty as described in the Prospectus. The Trust also is liable for nonrecurring expenses as may arise, including litigation to which the Fund may
be a party. The Trust also may have an obligation to indemnify its Trustees and officers with respect to any such litigation.
The Advisory
Agreement was initially approved by the Trustees (including all Independent Trustees) and Rafferty, as sole shareholder of the Fund in compliance with the 1940 Act. After an initial approval period of two years, the Advisory Agreement is renewable
at least annually with respect to the Fund, so long as its continuance is approved (1) by the vote, cast in person at a meeting called for that purpose, of a majority of the Independent Trustees of the Trust; and (2) by the majority vote of either
the full Board or the vote of a majority of the outstanding shares of the Fund. The Advisory Agreement automatically terminates on assignment and is terminable upon a 60-day written notice either by the Trust or Rafferty.
Pursuant to the Advisory Agreement, the
Fund pays Rafferty a fee at an annualized rate based on a percentage of its average daily net assets of 0.50%.
The table below shows the advisory fees
incurred by the Fund and the amount of fees waived and/or reimbursed by Rafferty for the fiscal periods ended October 31.
Direxion
Auspice Broad Commodity Strategy ETF
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
|
$221,777
|
$60,552
|
$161,225
|
March
30, 2017
(1)
- October 31, 2017
|
$39,680
|
$51,480
|
$(11,800)
|
(1)
|
Commencement of Operations
|
Pursuant to a
separate Management Services Agreement, Rafferty performs certain administrative services on behalf of the Fund, such as negotiating, coordinating and implementing the Trust’s contractual obligations with the Fund's service providers;
monitoring, overseeing and reviewing the performance of such service providers to ensure adherence to applicable contractual obligations; and preparing or coordinating reports and presentations to the Board of Trustees with respect to such service
providers as requested or as deemed necessary; and other services that are described in the Management Services Agreement. For these services, the Trust pays to Rafferty a fee at the annual rate of 0.026% on the first $10 billion of the aggregate
average daily net assets of the Funds in the Trust and 0.024% on the aggregate net assets above $10 billion. This Management Services Fee may be waived under the Operating Expense Limitation Agreement that Rafferty has entered into with the Fund.
This arrangement may be terminated at any time by the Board.
The Fund is responsible for its
own operating expenses. Rafferty has entered into an Operating Expense Limitation Agreement with the Fund. Under this Operating Expense Limitation Agreement, Rafferty has contractually agreed to cap all or a portion of its advisory and management
services fees and/or reimburse the Fund for Other Expenses (excluding, as applicable, among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses,
brokerage commissions and extraordinary expenses) through September 1, 2020 to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.70% of the Fund’s average daily net assets. Any expense waiver or reimbursement is
subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This agreement may be
terminated or revised at any time at the discretion of the Board upon notice to the Adviser and without the approval of Fund shareholders.
Rafferty shall not
be liable to the Trust or any Fund for anything done or omitted by it, except acts or omissions involving willful misfeasance, bad faith, negligence or reckless disregard of the duties imposed upon it by its agreement with the Trust or for any
losses that may be sustained in the purchase, holding or sale of any security.
Pursuant to Section 17(j) of the 1940
Act and Rule 17j-1 thereunder, the Trust, Rafferty and the Fund's distributor have adopted Codes of Ethics. These codes permit portfolio managers and other access persons of the Fund to invest in securities that may be owned by the Fund, subject to
certain restrictions.
Paul Brigandi and
Tony Ng are jointly and primarily responsible for the day-to-day management of the Fund. An investment trading team of Rafferty employees assists Mr. Brigandi and Mr. Ng in the day-to-day management of the Fund subject to their primary
responsibility and oversight. The Portfolio Managers work with the investment trading team to decide the target allocation of the Fund’s investments and on a day-to-day basis, an individual portfolio trader executes transactions for the Fund
consistent with the target allocation. The members of the investment trading team rotate periodically among the various series of the Trust, including the Fund, so that no single individual is assigned to a specific Fund for extended periods of
time.
In addition to the Fund, Mr.
Brigandi and Mr. Ng manage the following other accounts as of October 31, 2018:
Accounts
|
Total
Number
of Accounts
|
Total
Assets
(In Billions)
|
Total
Number of
Accounts with
Performance
Based Fees
|
Total
Assets
of Accounts
with Performance
Based Fees
|
Registered
Investment Companies
|
90
|
$12.7
|
0
|
$0
|
Other
Pooled Investment Vehicles
|
0
|
$
0
|
0
|
$0
|
Other
Accounts
|
0
|
$
0
|
0
|
$0
|
Rafferty
manages no other accounts with investment objectives similar to those of the Fund. In addition, two or more funds advised by Rafferty may invest in the same securities but the nature of each investment (long or short) may be opposite and in
different proportions. Generally, due to the nature of the various Funds advised by Rafferty, if the Fund with a leveraged investment objective increases in value, the performance of the Fund with an inverse or an inverse leveraged investment
objective will decrease in value and vice versa. Rafferty ordinarily executes transactions for the Fund “market-on-close,” in which funds purchasing or selling the same security receive the same closing price.
Rafferty has not identified any
additional material conflicts between the Fund and other accounts managed by the investment team. However, other actual or apparent conflicts of interest may arise in connection with the day-to-day management of the Fund and other accounts. The
management of the Fund and other accounts may result in unequal time and attention being devoted to the Fund and other accounts. Rafferty’s management fees for the services it provides to other accounts varies and may be higher or lower than
the advisory fees it receives from the Fund. This could create potential conflicts of interest in which the portfolio manager may appear to favor one investment vehicle over another resulting in an account paying higher fees or one investment
vehicle out performing another.
The investment team’s
compensation is paid by Rafferty. Their compensation primarily consists of a fixed base salary and a bonus. The investment team’s salary is reviewed annually and increases are determined by factors such as performance and seniority. Bonuses
are determined by the individual performance of an employee including factors such as attention to detail, process, and efficiency, and are impacted by the overall performance of the firm. The investment team’s salary and bonus are not based
on the Fund’s performance and as a result, no benchmarks are used. Along with all other employees of Rafferty, the investment team may participate in the firm’s 401(k) retirement plan where Rafferty may make matching contributions up to
a defined percentage of their salary.
Mr. Brigandi and Mr.
Ng did not own any shares of the Fund as of October 31, 2018.
Proxy Voting Policies and Procedures
The Board has
adopted policies and procedures with respect to voting proxies (the “Proxy Policy”) related to portfolio securities of the Fund. Pursuant to these policies and procedures the Board of the Trust has delegated responsibility for voting
such proxies to the Adviser, subject to the Board’s continuing oversight.
The Proxy Policy is intended to
protect shareholder interests and comply with applicable state and federal corporate and securities laws. It applies to any voting rights with respect to securities held in accounts of the Fund. To assist the Adviser in its responsibility for voting
proxies and administering the overall proxy voting process, the Adviser has retained Institutional Shareholder Services (“ISS”) as an expert in the proxy voting and corporate governance area. ISS is a subsidiary of Vestar Capital
Partners VI, L.P.; a leading U.S. middle market private equity firm. The services provided by ISS include in-depth research, global issuer analysis, and voting recommendations as well as vote execution, reporting and record keeping. ISS
issues monthly reports which are reviewed by the
Adviser to assure proxies are being voted properly. The Adviser and ISS also perform checks on a quarterly basis to match the voting activity with available shareholder meeting information. ISS’ management meets on a regular basis to discuss
its approach to new developments and amendments to existing proxy voting guidelines (the “Guidelines”). Information on such developments and amendments are then provided to the Adviser.
The Guidelines are maintained and
implemented by ISS and are an extensive list of common proxy voting issues with recommended voting actions based on the overall goal of achieving maximum shareholder value and protection of shareholder interests and rights. Generally, proxies are
voted in accordance with the voting recommendations contained in the Guidelines. If necessary, the Adviser will be consulted by ISS on non-routine issues. Proxy issues and factors considered when resolving proxy issues in the Guidelines include, but
are not limited to:
•
|
Election of Directors
–
considering all factors such as director qualifications, term of office and age limits.
|
•
|
Proxy Contests
–
considering factors such as voting nominees in contested elections and reimbursement of expenses.
|
•
|
Election of Auditors
–
considering factors such as independence and reputation of the auditing firm.
|
•
|
Proxy Contest Defenses
–
considering factors such as board structure and cumulative voting.
|
•
|
Tender Offer Defenses
–
considering factors such as poison pills (stock purchase rights plans) and fair price provisions.
|
•
|
Miscellaneous Governance
Issues
–
considering factors such as confidential voting and equal access.
|
•
|
Capital Structure
–
considering factors such as common stock authorization and stock distributions.
|
•
|
Executive and Director
Compensation
–
considering factors such as performance goals and employee stock purchase plans.
|
•
|
State of Incorporation
–
considering factors such as state takeover statutes and voting on reincorporation proposals.
|
•
|
Mergers and Corporate
Restructuring
–
considering factors such as spin-offs and asset sales.
|
•
|
Mutual Fund Proxy Voting
–
considering factors such as election of directors and proxy contests.
|
•
|
Social
and Corporate Responsibility Issues
–
considering factors such as social, environmental, and labor issues.
|
A full description of the Guidelines and
voting policy is maintain by the Adviser, and a complete copy of the Guidelines is available without charge, upon request by calling the Adviser at 866-476-7523.
Conflicts
of Interest
From time
to time, proxy issues may pose a material conflict of interest between the Fund's shareholders and the Adviser, the Distributor or any affiliates thereof. Due to the limited nature of the Adviser’s activities
(
e.g.
, no underwriting business, no publicly-traded affiliates, no investment banking activities, and no research recommendations), conflicts of interest are likely to be infrequent. Nevertheless, it shall be
the duty of the Adviser to monitor potential conflicts of interest. In the event a conflict of interest arises, the Adviser will direct ISS to use its independent judgment to vote affected proxies in accordance with approved guidelines.
Proxy
Voting Recordkeeping
The Adviser, with the assistance of
ISS, maintains for a period of at least five years, a record of each proxy statement received and materials that were considered when the proxy was voted during the calendar year. Information on how the Fund voted proxies relating to portfolio
securities for the 12-month (or shorter) period ended June 30 is available without charge, upon request, by calling the Adviser at 866-476-7523 or on the SEC’s website at
http://www.sec.gov
.
Fund Administrator, Fund Accounting Agent, Transfer
Agent and Custodian
U.S. Bancorp Fund Services, LLC,
615 East Michigan Street, Milwaukee, Wisconsin 53202, serves as the Fund's administrator. The Bank of New York Mellon, 101 Barclay Street, New York, New York 10286, serves as the Fund's transfer agent, and custodian. Rafferty also performs certain
administrative services for the Fund.
Pursuant to a Fund
Administration Servicing Agreement between the Trust and USBFS, USBFS provides the Trust with administrative and management services (other than investment advisory services). As compensation for these services, the Trust pays USBFS a fee based on
the Trust’s total average daily net assets. USBFS also is entitled to certain out-of-pocket expenses. The amount of fees paid by the Trust to USBFS pursuant to the Fund Administration Servicing Agreement for the fiscal years indicated are set
forth in the table below.
|
Fees
paid to the Administrator
|
Year
Ended October 31, 2018
|
$2,046,515
|
Year
Ended October 31, 2017
|
$2,402,024
|
Pursuant to a Fund Accounting
Agreement between the Trust and BNYM, BNYM provides the Trust with accounting services, including portfolio accounting services, tax accounting services and furnishing financial reports. As compensation for these accounting services, the Trust pays
BNYM a fee based on the Trust’s total average daily net assets and a minimum annual per fund fee, subject to certain negotiated fee waivers. BNYM also is entitled to certain out-of-pocket expenses for the
services mentioned
above, including pricing expenses. The amount of fees paid by the Trust pursuant to the Fund Accounting Agreement for the fiscal years indicated are set forth in the table below.
|
Fees
paid to the Fund Accounting Agent
|
Year
Ended October 31, 2018
|
$1,876,840
|
Year
Ended October 31, 2017
|
$1,629,992
|
Pursuant
to a Custody Agreement, BNYM serves as the custodian of the Fund’s assets. The custodian holds and administers the assets in the Fund’s portfolios. Pursuant to the Custody Agreement, the custodian receives an annual fee based on the
Trust’s total average daily net assets and certain settlement charges. The custodian also is entitled to certain out-of-pocket expenses. The amount of fees paid by the Trust pursuant to the Custody Agreement for the fiscal years indicated are
set forth in the table below.
|
Fees
paid to the Custodian
|
Year
Ended October 31, 2018
|
$1,132,612
|
Year
Ended October 31, 2017
|
$1,016,661
|
Pursuant
to a Transfer Agency and Service Agreement between the Trust and BNYM, BNYM provides the Trust with transfer agency services, which includes Creation and Redemption Unit order processing. As compensation for these transfer agency services, the Trust
pays BNYM a fee based on the Trust’s total average daily net assets and a minimum annual complex fee. BNYM also is entitled to certain out-of-pocket expenses for the services mentioned above. The amount of fees paid by the Trust pursuant to
the Transfer Agency and Service Agreement for the fiscal years indicated are set forth in the table below.
|
Fees
paid to the Transfer Agent
|
Year
Ended October 31, 2018
|
$1,171,567
|
Year
Ended October 31, 2017
|
$1,116,750
|
Effective August 25, 2017, the Fund
has entered into a Securities Lending Authorization Agreement with BNYM (the “Securities Lending Agreement”) whereby BNYM will be the Lending Agent for the Fund. The Fund retains a portion of the securities lending income and remits the
remaining portion to BNYM as compensation for its services as securities lending agent. Securities lending income is generally equal to the net income earned from the reinvestment of cash collateral after payment of cash collateral fees, and any
fees or other payments from borrowers of securities.
BNYM acts as agent to the Trust to
lend available securities with any person on its list of approved borrowers. BNYM determines whether a loan shall be made and negotiates and establishes the terms and conditions of the loan with the borrower. BNYM ensures that all substitute
interest, dividends, and other distributions paid with respect to loan securities is credited to the Fund’s relevant account on the date such amounts are delivered by the borrower to BNYM. BNYM receives and holds, on the Fund’s behalf,
collateral from borrowers to secure obligations of borrowers with respect to any loan of available securities. BNYM marks loaned securities and collateral to their market value each business day based upon the market value of the collateral and
loaned securities at the close of business employing the most recently available pricing information and receives and delivers collateral in order to maintain the value of the collateral at no less than 102% of the market value of the loaned
securities. At the termination of the loan, BNYM returns the collateral to the borrower upon the return of the loaned securities to BNYM. BNYM invests cash collateral in accordance with the Securities Lending Agreement. BNYM maintains such records
as are reasonably necessary to account for loans that are made and the income derived therefrom and makes available to the Fund a monthly statement describing the loans made, and the income derived from the loans, during the period. The Fund shall
receive the net securities lending revenue based on the securities lent from its holdings. The Fund may also pay custodial fees and other expenses associated with a loan.
As of October 31, 2018, the Fund had no
securities lending transactions.
Foreside Fund
Services, LLC, located at 3 Canal Plaza, Suite 100, Portland, Maine 04101, serves as the distributor (“Distributor”) in connection with the continuous offering of the Fund’s shares. The Distributor is a broker-dealer registered
with the SEC under the Securities Exchange Act of 1934 and a member of the Financial Industry Regulatory Authority. The Trust offers Shares of the Fund for sale through the Distributor in Creation Units, as described below. The Distributor will not
sell or redeem Shares in quantities less than Creation Units. The Distributor will deliver a Prospectus to persons purchasing Creation Units and will maintain records of Creation Unit orders placed and confirmations furnished by it. Pursuant to a
written agreement, the Adviser pays the Distributor for distribution-related services. For the fiscal year ended October 31, 2018, the Distributor received $1,046,468 as compensation from Rafferty for distribution services provided to the Trust,
including
the Fund. For the
fiscal year ended October 31, 2018, Foreside did not receive any underwriting commission or discounts, compensation on redemptions and repurchases, or brokerage commissions from the Fund.
The Adviser may pay certain
broker-dealers, banks and other financial intermediaries for participating in activities that are designed to make registered representatives and other professionals more knowledgeable about exchange traded products, including the Fund, or for other
activities such as participating in marketing activities and presentations, educational training programs, conferences, the development of technology platforms and reporting systems. The Adviser had arrangements to make payments based on an annual
fee for its services, as well as based on the average daily assets held by Schwab customers in certain funds managed by the Adviser, for services other than for the educational programs and marketing activities described above, only to Charles
Schwab & Co., Inc. (“Schwab”). Pursuant to the arrangement with Schwab, Schwab has agreed to promote select funds managed by the Adviser, to Schwab’s customers and not to charge certain of its customers any commissions when
those customers purchase or sell shares of those funds. Payments to a broker-dealer or intermediary may create potential conflicts of interest between the broker-dealer or intermediary and its clients. These amounts, which may be significant, are
paid by the Adviser from its own resources and not from the assets of funds managed by the Adviser. Although a portion of the Adviser’s revenue comes directly or indirectly in part from fees paid by the Fund, other ETFs advised by the Adviser
or other exchange-traded products, these payments do not increase the price paid by investors for the purchase of shares of, or the cost of owning, the Fund or other funds managed by the Adviser.
Rule 12b-1 under the 1940 Act, as
amended, (the “Rule”) provides that an investment company may bear expenses of distributing its shares only pursuant to a plan adopted in accordance with the Rule. The Trustees have adopted a Rule 12b-1 Distribution Plan (“Rule
12b-1 Plan”) pursuant to which the Fund may pay certain expenses incurred in the distribution of its shares and the servicing and maintenance of existing shareholder accounts. The Distributor, as the Fund's principal underwriter, and Rafferty
may have a direct or indirect financial interest in the Rule 12b-1 Plan or any related agreement. Pursuant to the Rule 12b-1 Plan, the Fund may pay a fee of up to 0.25% of the Fund’s average daily net assets. No Rule 12b-1 fee is currently
being charged to the Fund.
The
Rule 12b-1 Plan was approved by the Board, including a majority of the Independent Trustees of the Fund. In approving the Rule 12b-1 Plan, the Trustees determined that there is a reasonable likelihood that the Rule 12b-1 Plan will benefit the Fund
and its shareholders. The Trustees will review quarterly and annually a written report provided by the Treasurer of the amounts expended under the Rule 12b-1 Plan and the purpose for which such expenditures were made.
The Rule 12b-1 Plan permits payments
to be made by the Fund to the Distributor or other third parties for expenditures incurred in connection with the distribution of Fund shares to investors and the provision of certain shareholder services. The Distributor or other third parties are
authorized to engage in advertising, the preparation and distribution of sales literature and other promotional activities on behalf of the Fund. In addition, the Rule 12b-1 Plan authorizes payments by the Fund to the Distributor or other third
parties for the cost related to selling or servicing efforts, preparing, printing and distributing Fund prospectuses, statements of additional information, and shareholder reports to investors.
Independent Registered Public Accounting Firm
Ernst & Young
LLP (“EY”), 220 South Sixth Street, Suite 1400, Minneapolis, Minnesota 55402, is the independent registered public accounting firm for the Trust. The Financial Statements of the Fund for the fiscal year ended October 31, 2018, audited by
EY, have been included in reliance on their report given on their authority as experts in accounting and auditing.
The Trust has selected K&L Gates
LLP, 1601 K Street, N.W., Washington, DC 20006, as its legal counsel.
Determination of Net Asset Value
A fund’s share price is
known as its NAV. The Fund’s share price is calculated as of 2:30 p.m. Eastern Time (“Valuation Time”), each day the NYSE is open for business (“Business Day”). The NYSE is open for business Monday through Friday,
except in observation of the following holidays: New Year’s Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The NYSE may close early on the
business day before each of these holidays and on the day after Thanksgiving Day. NYSE holiday schedules are subject to change without notice.
If the exchange or market on which
the Fund’s investments are primarily traded closes early, the NAV may be calculated prior to its normal calculation time. Creation/redemption transaction order time cutoffs would also be accelerated. The
value of the Fund’s assets that trade in markets
outside the United States or in currencies other than the U.S. Dollar may fluctuate when foreign markets are open but the Fund is not open for business.
A security listed
or traded on an exchange, domestic or foreign, is valued at its last sales price or settlement price on the principal exchange on which it is traded prior to the time when assets are valued. If no sale is reported at that time, the mean of the last
bid and asked prices is used. Securities primarily traded on the NASDAQ Global Market
®
(“NASDAQ
®
”) for which market quotations are readily available shall be valued using the NASDAQ
®
Official Closing Price (“NOCP”) provided by NASDAQ
®
each Business Day. The NOCP is the most recently reported price as of 4:00:02 p.m. Eastern Time, unless that price is outside the range of the
“inside” bid and asked prices’ in that case, NASDAQ
®
will adjust the price to equal the inside bid or asked price, whichever is
closer. If the NOCP is not available, such securities shall be valued at the last sale price on the day of valuation, or if there has been no sale on such day, at the mean between the bid and asked prices.
For purposes of determining NAV per
share of the Fund, options and futures contracts are valued based on market quotations, the last sales or settlement price of the exchange on which an asset trades. The value of a futures contract equals the unrealized gain or loss on the contract
that is determined by marking the contract to the last sale price for a like contract acquired on the day on which the futures contract is being valued. The value of options on futures contracts is determined based upon the last sale price for a
like option acquired on the day on which the option is being valued. A last sale price may not be used for the foregoing purposes if the market makes a limited move with respect to a particular instrument.
With respect to the Fund’s assets
that are invested in one or more open-end management investment company (other than ETFs), or the Subsidiary, the Fund’s NAV will be calculated based upon the NAVs of such investments.
For valuation purposes, quotations of
foreign securities or other assets denominated in foreign currencies are translated to U.S. Dollar equivalents using the net foreign exchange rate in effect at the close of the stock exchange in the country where the security is issued. Short-term
debt instruments having a maturity of 60 days or less are valued at amortized cost, which approximates market value. If the Board determines that the amortized cost method does not represent the fair value of the short-term debt instrument, the
investment will be valued at fair value as determined by procedures as adopted by the Board. U.S. government securities are valued at the mean between the closing bid and asked price provided by an independent third party pricing service
(“Pricing Service”).
OTC securities held by the Fund will
be valued at the last sales price or, if no sales price is reported, the mean of the last bid and asked price is used. The portfolio securities of the Fund that are listed on national exchanges are valued at the last sales price of such securities;
if no sales price is reported, the mean of the last bid and asked price is used.
Swaps are valued based upon prices from
third party vendor models or quotations from market makers to the extent available.
Dividend income and other distributions
are recorded on the ex-distribution date.
Illiquid securities, securities for
which reliable quotations or pricing services are not readily available, all other assets not valued in accordance with the foregoing principles or for which pricing information is deemed unreliable, or to the Adviser’s knowledge, does not
reflect a significant event occurring in the market, the security or asset will be valued at their respective fair value as determined in good faith by, or under procedures established by, the Trustees, which procedures may include the delegation of
certain responsibilities regarding valuation to Rafferty or the officers of the Trust. The officers of the Trust report, as necessary, to the Trustees regarding portfolio valuation determinations. The Trustees, from time to time, will review these
methods of valuation and will recommend changes that may be necessary to assure that the investments of the Fund are valued at fair value.
Additional Information Concerning Shares
Organization and Description of
Shares of Beneficial Interest
The Trust is a Delaware statutory
trust and registered investment company. The Trust was organized on April 23, 2008, and has authorized capital of unlimited Shares of beneficial interest of no par value which may be issued in more than one class or series. Currently, the Trust
consists of multiple separately managed series. The Board may designate additional series of beneficial interest and classify Shares of a particular series into one or more classes of that series.
All Shares of the Trust are freely
transferable. The Shares do not have preemptive rights or cumulative voting rights, and none of the Shares have any preference to conversion, exchange, dividends, retirements, liquidation, redemption, or any other feature. Shares have equal voting
rights, except that, in a matter affecting a particular series or class of Shares, only Shares of that series of class may be entitled to vote on the matter. Trust shareholders are entitled to require the Trust to redeem Creation Units of their
Shares. The Trust Instrument confers upon the Broad of Trustees the power, by resolution, to alter the number of Shares constituting a Creation Unit or to specify that Shares of the Trust may be individually redeemable. The Trust reserves the right
to adjust the stock prices of Shares of the Trust to maintain convenient trading ranges for investors. Any such adjustments would be accomplished through stock splits or reverse stock splits which would have no effect on the net assets of the
applicable Fund.
Under Delaware law, the Trust is not
required to hold an annual shareholders meeting if the 1940 Act does not require such a meeting. Generally, there will not be annual meetings of Trust shareholders. Trust shareholders may remove Trustees from office by votes cast at a meeting of
Trust shareholders or by written consent. If requested by shareholders of at least 10% of the outstanding Shares of the Trust, the Trust will call a meeting of the Fund’s shareholders for the purpose of voting upon the question of removal of a
Trustee of the Trust and will assist in communications with other Trust shareholders.
The Trust Instrument disclaims
liability of the shareholders of the officers of the Trust for acts or obligations of the Trust which are binding only on the assets and property of the Trust. The Trust Instrument provides for indemnification from the Trust’s property for all
loss and expense of any Fund shareholder held personally liable for the obligations of the Trust. The risk of a Trust shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Fund would not be
able to meet the Trust’s obligations and this risk, thus, should be considered remote.
If the Fund does not grow to a size to
permit it to be economically viable, the Fund may cease operations. In such an event, investors may be required to liquidate or transfer their investments at an inopportune time.
Book Entry Only System
The Depository Trust Company
(“DTC”) acts as securities depositary for the Shares. Shares of the Fund are represented by global securities registered in the name of DTC or its nominee and deposited with, or on behalf of, DTC. Except as provided below, certificates
will not be issued for Shares.
DTC has advised the Trust as follows:
it is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing
agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities of its participants (“DTC Participants”) and to facilitate the clearance and settlement of securities transactions
among the DTC Participants in such securities through electronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the NYSE, the AMEX and the
Financial Industry Regulatory Authority. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or
indirectly (“Indirect Participants”). DTC agrees with and represents to DTC Participants that it will administer its book-entry system in accordance with its rules and by-laws and requirements of law. Beneficial ownership of Shares is
limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in Shares (owners of such beneficial interests are referred to herein as
“Beneficial owners”) is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and
Beneficial owners that are not DTC Participants). Beneficial owners will receive from or through the DTC Participant a written confirmation relating to their purchase of Shares. The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such laws may impair the ability of certain investors to acquire beneficial interests in Shares.
Beneficial owners of Shares are not
entitled to have Shares registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive form and are not considered the registered holder thereof. Accordingly, each Beneficial owner must rely on
the procedures of DTC, the DTC Participant and any Indirect Participant through which such Beneficial owner holds its interests, to exercise any rights of a holder of Shares. The Trust understands that under existing industry practice, in the event
the Trust requests any action of holders of Shares, or a Beneficial owner desires to take any action that DTC, as the record owner of all outstanding Shares, is entitled to take, DTC would authorize the DTC Participants to take such action and that
the DTC Participants would authorize the Indirect Participants and Beneficial owners acting through such DTC Participants to take such action and would otherwise act upon the instructions of Beneficial owners owning through them. As described above,
the Trust recognizes DTC or its nominee as the owner of all Shares for all purposes. Conveyance of all notices, statements and other communications to Beneficial owners is effected as follows. Pursuant to the Depositary Agreement between the Trust
and DTC, DTC is required to make available to the Trust upon request and for a fee to be charged to the Trust a listing of Share holdings of each DTC Participant. The Trust shall inquire of each such DTC Participant as to the number of Beneficial
owners holding Shares, directly or indirectly, through such DTC Participant. The Trust shall provide each such DTC Participant with copies of such notice, statement or other communication, in such form, number and at such place as such DTC
Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or indirectly, to such Beneficial owners. In addition, the Trust shall pay to each such DTC Participant a
fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements.
Distributions of Shares shall be
made to DTC or its nominee, Cede & Co., as the registered holder of all Shares. DTC or its nominee, upon receipt of any such distributions, shall credit immediately DTC Participants’ accounts with payments in amounts proportionate to their
respective beneficial interests in Shares as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial owners of Shares held through such DTC Participants will be governed by standing
instructions and customary practices, as is now the case with securities held for the accounts of customers
in bearer form or registered in a “street
name,” and will be the responsibility of such DTC Participants. The Trust has no responsibility or liability for any aspects of the records relating to or notices to Beneficial owners, or payments made on account of beneficial ownership
interests in such Shares, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC
Participants and the Indirect Participants and Beneficial owners owning through such DTC Participants.
DTC may determine to discontinue
providing its service with respect to Shares at any time by giving reasonable notice to the Trust and discharging its responsibilities with respect thereto under applicable law. Under such circumstances, the Trust shall take action either to find a
replacement for DTC to perform its functions at a comparable cost or, if such a replacement is unavailable, to issue and deliver printed certificates representing ownership of Shares, unless the Trust makes other arrangements with respect thereto
satisfactory to the Exchange. The Trust will not make the DTC book-entry Dividend Reinvestment Service available for use by Beneficial Owners for reinvestment of their cash proceeds but certain brokers may make a dividend reinvestment service
available to their clients. Brokers offering such services may require investors to adhere to specific procedures and timetables in order to participate. Investors interested in such a service should contact their broker for availability and other
necessary details.
Purchases and Redemptions
The Trust issues and redeems
Shares of the Fund only in aggregations of Creation Units. The number of Shares of a Fund that constitute a Creation Unit for the Fund and the value of such Creation Unit as of the Fund’s inception were 50,000 and $1,250,000,
respectively.
See
“Purchase and Issuance of Shares in Creation Units” and “Redemption of Creation Units” below. The Board reserves the right to declare a split or a consolidation in the number of Shares outstanding of any Fund, and may make a
corresponding change in the number of Shares constituting a Creation Unit, in the event that the per Shares price in the secondary market rises (or declines) to an amount that falls outside the range deemed desirable by the Board for any other
reason.
Purchase and Issuance of
Creation Units
The Trust issues
and sells Shares only in Creation Units on a continuous basis through the Distributor, without a sales load, at their NAV next determined after receipt, on any Business Day (as defined above), of an order in proper form.
Creation Units also will be sold only
for cash in an amount equal to the NAV of the Shares being purchased, as next determined after a receipt of a request in proper form plus the transaction fee described below (“Cash Purchase Amount”).
Creation Units of Shares may be
purchased only by or through an Authorized Participant. Such Authorized Participant will agree pursuant to the terms of such Authorized Participant Agreement on behalf of itself or any investor on whose behalf it will act, as the case may be, to
certain conditions, including that an Authorized Participant will make available an amount of cash sufficient to pay the Cash Purchase Amount. Investors who are not Authorized Participants must make appropriate arrangements with an Authorized
Participant, which may require the investor to enter into an agreement with such Authorized Participant. Investors should be aware that their particular broker may not be a DTC Participant or may not have executed an Authorized Participant
Agreement, and that therefore orders to purchase Creation Units of Shares may have to be placed by the investor’s broker through an Authorized Participant. As a result, purchase orders placed through an Authorized Participant may result in
additional charges to such investor.
A purchase order must be received in
good order by the transfer agent by 2:30 p.m. Eastern Time, whether transmitted by mail, through the transfer agent’s automated system, telephone, facsimile or other means permitted under the Authorized Participant Agreement, in order to
receive that day's NAV per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day.
An Authorized Participant may place
an order to purchase (or redeem) Creation Units (i) through the Continuous Net Settlement clearing processes of NSCC as such processes have been enhanced to effect purchases (and redemptions) of Creation Units, such processes being referred to
herein as the “Enhanced Clearing Process,” or (ii) outside the Enhanced Clearing Process, being referred to herein as the “Manual Clearing Process”.
Purchases through the Enhanced Clearing
Process
To purchase or redeem
through the Enhanced Clearing Process, an Authorized Participant must be a member of NSCC that is eligible to use the Continuous Net Settlement system. For purchase orders placed through the Enhanced Clearing Process, in the Authorized Participant
Agreement, the Participant authorizes the transfer agent to transmit to the NSCC, on behalf of an Authorized Participant, such trade instructions as are necessary to effect the Authorized Participant’s purchase order. Pursuant to such trade
instructions to the NSCC, the Authorized Participant agrees to deliver the Cash Purchase Amount and such additional information as may be required by the transfer agent or the Distributor.
Purchases through the Manual Clearing
Process
An Authorized
Participant that wishes to place an order to purchase Creation Units outside the Enhanced Clearing Process must state that it is not using the Enhanced Clearing Process and that the purchase instead will be effected through a transfer of cash either
through the Federal Reserve System or directly through DTC. Purchases (and redemptions) of Creation Units of the Fund settled outside the Enhanced Clearing Process will be subject to a higher Transaction Fee than those settled through the Enhanced
Clearing Process. Purchase orders effected outside the Enhanced Clearing Process are likely to require transmittal by the Authorized Participant earlier on the Transmittal Date than orders effected using the Enhanced Clearing Process. Those persons
placing orders outside the Enhanced Clearing Process should ascertain the deadlines applicable to DTC and the Federal Reserve System by contacting the operations department of the broker or depository institution effectuating such transfer of the
Portfolio Deposit.
Rejection of
Purchase Orders
The Trust
reserves the absolute right to reject a purchase order transmitted to it by the Distributor in respect of the Fund if (a) the purchaser or group of purchasers, upon obtaining the shares ordered, would own 80% or more of the currently outstanding
Shares of the Fund; (b) acceptance of the purchase transaction order would have certain adverse tax consequences to the Fund; (c) the acceptance of the purchase transaction order would, in the opinion of counsel, be unlawful; (d) the acceptance of
the purchase transaction order would otherwise, in the discretion of the Trust or Rafferty, have an adverse effect on the Trust or the rights of beneficial owners; (e) the value of a “Cash Purchase Amount”, or the value of the Balancing
Amount to accompany an in-kind deposit exceed a purchase authorization limit extended to an Authorized Participant by the custodian and the Authorized Participant has not deposited an amount in excess of such purchase authorization with the
custodian by 4:00 p.m. Eastern Time on the Transmittal Date; or (f) in the event that circumstances outside the control of the Trust, the Distributor and Rafferty make it impractical to process purchase orders. The Trust shall notify a prospective
purchaser of its rejection of the order. The Trust and the Distributor are under no duty, however, to give notification of any defects or irregularities in the delivery of purchase transaction orders nor shall either of them incur any liability for
the failure to give any such notification.
Redemption of Creation Units
Shares may be redeemed only in
Creation Units at their NAV next determined after receipt of a redemption request in proper form by the Distributor on any Business Day. The Trust will not redeem Shares in amounts less than Creation Units. Beneficial owners also may sell Shares in
the secondary market, but must accumulate enough Shares to constitute a Creation Unit in order to have such Shares redeemed by the Trust. There can be no assurance, however, that there will be sufficient liquidity in the public trading market at any
time to permit assembly of a Creation Unit of Shares. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of Shares to constitute a redeemable Creation Unit.
Generally, Creation Units of Shares
are redeemed by or through an Authorized Participant. Such Authorized Participant will agree pursuant to the terms of such Authorized Participant Agreement on behalf of itself or any investor on whose behalf it will act, as the case may be, to
certain conditions, including that such Authorized Participant will make available an amount of cash sufficient to pay the Balancing Amount and the Transaction Fee described above. The Authorized Participant may require the investor to enter into an
agreement with such Authorized Participant with respect to certain matters, including payment of the Balancing Amount. Investors who are not Authorized Participants must make appropriate arrangements with an Authorized Participant. Investors should
be aware that their particular broker may not be a DTC Participant or may not have executed an Authorized Participant Agreement, and that therefore orders to purchase Creation Units of Shares may have to be placed by the investor’s broker
through an Authorized Participant. As a result, redemption orders placed through an Authorized Participant may result in additional charges to such investor.
In certain instances, Authorized
Participants may create and redeem Creation Unit aggregations of the same Fund on the same trade date. In this instance, the Trust reserves the right to settle these transactions on a net basis.
The redemption proceeds for a
Creation Unit of a Fund will consist solely of cash in an amount equal to the NAV of the Shares being redeemed, as next determined after a receipt of a request in proper form, less the redemption transaction fee described below (“Cash
Redemption Amount”). You must also pay a Transaction Fee, described in the Prospectus, in cash. The redemption transaction fee is deducted from such redemption proceeds.
A redemption order must be received
in good order by the transfer agent by 2:30 p.m. Eastern Time, whether transmitted by mail, through the transfer agent's automated system, telephone, facsimile or other means permitted under the Authorized Participant Agreement, in order to receive
that day's NAV per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day. The order must be accompanied or preceded by the requisite number of Shares
of Fund specified in such order, which delivery must be made through DTC or the Federal Reserve System to the Custodian by the third Business Day following such Transmittal Date (“DTC Cut-Off Time”); and (iii) all other procedures set
forth in the Authorized Participant Agreement must be properly followed.
The right of redemption may be
suspended or the date of payment postponed with respect to any Fund (1) for any period during which the NYSE is closed (other than customary weekend and holiday closings); (2) for any period during which
trading on the NYSE is suspended or restricted; (3)
for any period during which an emergency exists as a result of which disposal of the shares of the Fund’s portfolio securities or determination of its NAV is not reasonably practicable; or (4) in such other circumstance as is permitted by the
SEC.
An Authorized Participant may
place an order to redeem Creation Units (i) through the Enhanced Clearing Process as such processes have been enhanced to effect redemptions of Creation Units, or (ii) through the Manual Clearing Process.
Placement of Redemption Orders Using
Enhanced Clearing Process
Orders
to redeem Creation Units of the Fund through the Enhanced Clearing Process must be delivered through an Authorized Participant that is a member of NSCC that is eligible to use the Continuous Net Settlement System.
Placement of Redemption Orders outside the
Enhanced Clearing Process
Orders must be delivered through a
DTC Participant that has executed the Authorized Participant Agreement. A DTC Participant who wishes to place an order for redemption of Creation Units of a Fund to be effected need not be an Authorized Participant, but such orders must state that
the DTC Participant is not using a clearing process and that redemption of Creation Units will instead be effected through transfer of Shares directly through DTC or the Federal Reserve System (for cash and U.S. government securities).
After the transfer agent has deemed
an order for redemption of the Fund’s shares outside the Enhanced Clearing Process received, the transfer agent will initiate procedures such that the redeeming party will receive the “Cash Redemption Amount” by the third Business
Day following the Transmittal Date on which such redemption order is deemed received by the Transfer Agent. Due to the schedule of holidays in certain countries, however, the receipt of the Cash Redemption Amount may take longer than three Business
Days following the Transmittal Date
Transaction fees are imposed as
set forth in the table in the Prospectus. Transaction Fees payable to the Trust are imposed to compensate the Trust for the transfer and other transaction costs of the Fund associated with the issuance and redemption of Creation Units of Shares.
There is a fixed and a variable component to the total Transaction Fee. A fixed Transaction Fee is applicable to each creation or redemption transaction, regardless of the number of Creation Units purchased or redeemed. In addition, a variable
Transaction Fee based upon the value of each Creation Unit also is applicable to each redemption transaction. The Transaction Fee applicable to the redemption of Creation Units will not exceed 2% of the value of the redemption proceeds.
The method by which Creation
Units of Shares are created and traded may raise certain issues under applicable securities laws. Because new Creation Units of Shares are issued and sold by the Trust on an ongoing basis, at any point a “distribution,” as such term is
used in the Securities Act, may occur. Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants in a distribution in a manner which could render
them statutory underwriters and subject them to the prospectus delivery and liability provisions of the Securities Act. For example, a broker-dealer firm or its client may be deemed a statutory underwriter if it takes Creation Units after placing an
order with the Distributor, breaks them down into constituent Shares, and sells some or all of the Shares comprising such Creation Units directly to its customers; or if it chooses to couple the creation of a supply of new Shares with an active
selling effort involving solicitation of secondary market demand for Shares. A determination of whether a person is an underwriter for the purposes of the Securities Act depends upon all the facts and circumstances pertaining to that person’s
activities. Thus, the examples mentioned above should not be considered a complete description of all the activities that could lead to a categorization as an underwriter. Broker-dealer firms should also note that dealers who are effecting
transactions in Shares, whether or not participating in the distribution of Shares, are generally required to deliver a prospectus. This is because the prospectus delivery exemption in Section 4(3) of the Securities Act is not available in respect
of such transactions as a result of Section 24(d) of the 1940 Act. Broker-dealer firms should note that dealers who are not “underwriters” but are participating in a distribution (as contrasted to ordinary secondary market transaction),
and thus dealing with Shares that are part of an “unsold allotment” within the meaning of section 4(3)(C) of the Securities Act, would be unable to take advantage of the prospectus delivery exemption provided by section 4(3) of the
Securities Act. Firms that incur a prospectus-delivery obligation with respect to Shares are reminded that under Securities Act Rule 153 a prospectus delivery obligation under Section 5(b)(2) of the Securities Act owed to a national securities
exchange member in connection with a sale on the national securities exchange is satisfied by the fact that the Fund’s prospectus is available at the national securities exchange on which the Shares of such Fund trade upon request. The
prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions on a national securities exchange and not with respect to “upstairs” transactions.
Dividends, Other Distributions and Taxes
The Tax Cuts and
Jobs Act (the “Tax Act”) makes significant changes to the U.S. Federal income tax rules for taxation of individuals and corporations, generally effective for taxable years beginning after December 31, 2017. Many of the changes applicable
to individuals are not permanent and only apply to taxable years beginning after December 31, 2017 and before January 1, 2026. While there are minor changes to the RIC rules, the Tax Act makes changes to the tax rules affecting shareholders and the
Fund, including various investments that the Fund may make. Potential investors are urged to consult their own tax advisors for more detailed information.
Dividends and other Distributions
As stated in the Prospectus, the
Fund declares and distributes dividends to its shareholders from its net investment income at least annually; for these purposes, net investment income includes dividends, accrued interest, and accretion of OID and market discount, less amortization
of market premium and estimated expenses, and is calculated immediately prior to the determination of the Fund’s NAV per share. The Fund also distributes the excess of its net short-term capital gain over net long-term capital loss
(“short-term gain”), if any, annually but may make more frequent distributions thereof if necessary to avoid federal income or excise taxes. The Fund may realize net capital gain (
i.e.
, the excess
of net long-term capital gain over net short-term capital loss) and thus anticipates making annual distributions thereof. The Trustees may revise this distribution policy, or postpone the payment of distributions, if the Fund has or anticipates any
large unexpected expense, loss or fluctuation in net assets that, in the Trustees’ opinion, might have a significant adverse effect on its shareholders.
Investors should be aware that if
shares are purchased shortly before the record date for any dividend or capital gain distribution, the shareholder will pay full price for the shares and receive some portion of the purchase price back as a taxable distribution (with the tax
consequences described in the Prospectus).
Taxes
Regulated Investment Company Status
. The Fund is treated as a separate entity for federal tax purposes and intends to continue to qualify for treatment as a RIC. If the Fund
so qualifies and satisfies the Distribution Requirement (defined below) for a taxable year, it will not be subject to federal income tax on the part of its investment company taxable income (generally consisting of net investment income, short-term
gain, and net gains and losses from certain foreign currency transactions, all determined without regard to any deduction for dividends paid) and net capital gain it distributes to its shareholders for that year.
To qualify for
treatment as a RIC, the Fund must distribute to its shareholders for each taxable year at least the sum of 90% of its investment company taxable income (“Distribution Requirement”) and 90% of its net exempt interest income and must meet
several additional requirements. For the Fund, these requirements include the following: (1) the Fund must derive at least 90% of its gross income each taxable year from the following sources (collectively, “Qualifying Income”): (a)
dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of securities or foreign currencies, or other income (including gains from options, futures, or forward contracts) derived with
respect to its business of investing in securities or those currencies, and (b) net income from an interest in a “qualified publicly traded partnership” (“QPTP”) (“Income Requirement”); and (2) at the close of
each quarter of the Fund’s taxable year, (a) at least 50% of the value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with those other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of the value of the Fund’s total assets and that does not represent more than 10% of the issuer’s outstanding voting securities (equity securities of QPTPs being
considered voting securities for these purposes), and (b) not more than 25% of the value of its total assets may be invested in (i) securities (other than U.S. government securities or the securities of other RICs) of any one issuer, (ii) securities
(other than securities of other RICs) of two or more issuers the Fund controls that are determined to be engaged in the same, similar or related trades or businesses, or (iii) securities of one or more QPTPs (collectively, “Diversification
Requirements”). The Internal Revenue Service (“Service”) has ruled that income from a derivative contract on a commodity index generally is not Qualifying Income.
Although the Fund intends to continue
to satisfy all the foregoing requirements, there is no assurance that the Fund will be able to do so. The investment by the Fund primarily in options and futures positions entails some risk that it might fail to satisfy one or both of the
Diversification Requirements. There is some uncertainty regarding the valuation of such positions for purposes of those requirements; accordingly, it is possible that the method of valuation the Fund uses, pursuant to which each of them would expect
to be treated as satisfying the Diversification Requirements, would not be accepted in an audit by the Service, which might apply a different method resulting in disqualification of one or more funds.
If the Fund failed to qualify for
treatment as a RIC for any taxable year, (1) its taxable income, including net capital gain, would be taxed at corporate income tax rates (up to 21%), (2) it would not receive a deduction for the distributions it makes to its shareholders, and (3)
the shareholders would treat all those distributions, including distributions of net capital gain, as dividends (that is, ordinary income, except for the part of those dividends that is “qualified dividend income” (described in the
Prospectus) (“QDI”)) if certain holding period and other requirements are met) to the extent of the Fund’s earnings and profits; those dividends would be eligible for the dividends-received deduction available to corporations
under
certain circumstances. In addition, the Fund would
be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying for RIC treatment. However, the Regulated Investment Company Modernization Act of 2010 (“RIC Mod Act”)
provides certain savings provisions that enable a RIC to cure a failure to satisfy any of the Income and Diversification Requirements as long as the failure “is due to reasonable cause and not due to willful neglect” and the RIC pays a
deductible tax calculated in accordance with those provisions and meets certain other requirements.
Excise Tax
. The Fund will be subject to a nondeductible 4% excise tax (“Excise Tax”) to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net income for the one-year period ending on October 31 of that year, plus certain other amounts.
Income from Foreign Securities
. Dividends and interest the Fund receives, and gains it realizes, on foreign securities may be subject to income, withholding, or other taxes
imposed by foreign countries and U.S. possessions that would reduce the yield and/or total return on its securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by foreign investors.
Gains or losses (1) from the
disposition of foreign currencies, including forward currency contracts, (2) on the disposition of each foreign-currency-denominated debt security that are attributable to fluctuations in the value of the foreign currency between the dates of
acquisition and disposition of the security, and (3) that are attributable to fluctuations in exchange rates that occur between the time the Fund accrues dividends, interest, or other receivables, or expenses or other liabilities, denominated in a
foreign currency and the time the Fund actually collects the receivables or pays the liabilities, generally will be treated as ordinary income or loss. These gains or losses will increase or decrease the amount of the Fund’s investment company
taxable income to be distributed to its shareholders.
The Fund may invest in the stock of
“passive foreign investment companies” (“PFICs”). A PFIC is any foreign corporation (with certain exceptions) that, in general, meets either of the following tests for a taxable year: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held for the production of, passive income. Under certain circumstances, the Fund will be subject to federal income tax on a portion of any “excess distribution” it
receives on the stock of a PFIC or of any gain on its disposition of the stock (collectively, “PFIC income”), plus interest thereon, even if the Fund distributes the PFIC income as a dividend to its shareholders. The balance of the PFIC
income will be included in the Fund’s investment company taxable income and, accordingly, will not be taxable to it to the extent it distributes that income to its shareholders. Fund distributions thereof will not be eligible for the maximum
federal income tax rates applicable to QDI.
If the Fund invests in a PFIC and
elects to treat the PFIC as a “qualified electing fund” (“QEF”), then, in lieu of the foregoing tax and interest obligation, the Fund would be required to include in income each taxable year its pro rata share of the
QEF’s annual ordinary earnings and net capital gain -- which the Fund probably would have to distribute to satisfy the Distribution Requirement and avoid imposition of the Excise Tax -- even if the Fund did not receive those earnings and gain
from the QEF. In most instances it will be very difficult, if not impossible, to make this election because of certain requirements thereof.
The Fund may elect to “mark to
market” its stock in any PFIC. “Marking-to-market,” in this context, means including in gross income each taxable year (and treating as ordinary income) the excess, if any, of the fair market value of the PFIC’s stock over
the Fund’s adjusted basis therein as of the end of that year. Pursuant to the election, the Fund also would be allowed to deduct (as an ordinary, not a capital, loss) the excess, if any, of its adjusted basis in PFIC stock over the fair market
value thereof as of the taxable year-end, but only to the extent of any net mark-to-market gains with respect to that stock the Fund included in income for prior taxable years under the election. The Fund’s adjusted basis in each PFIC’s
stock with respect to which it makes this election would be adjusted to reflect the amounts of income included and deductions taken thereunder.
Derivatives Strategies
. The use of derivatives strategies, such as writing (selling) and purchasing options and futures contracts and entering into forward contracts,
involves complex rules that will determine for income tax purposes the amount, character, and timing of recognition of the gains and losses the Fund realizes in connection therewith. Gains from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and gains from options, futures, and forward contracts the Fund derives with respect to its business of investing in securities or foreign currencies, will be treated as Qualifying Income.
The Fund will monitor its transactions, make appropriate tax elections, and make appropriate entries in its books and records when it acquires any foreign currency, option, futures contract, forward contract, or hedged investment to mitigate the
effect of these rules, seek to prevent its disqualification as a RIC, and minimize the imposition of federal income and excise taxes.
Some futures contracts, foreign
currency contracts that are traded in the interbank market, and “nonequity” options (
i.e.
, certain listed options, such as those on a “broad-based” securities index)
—
except any “securities futures contract” that is not a “dealer securities futures contract” (both as defined in the Code) and any interest rate
swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement
—
in
which the Fund invests may be subject to Code section 1256 (collectively “section 1256 contracts”). Section
1256 contracts that the Fund holds at the end of its
taxable year must be “marked to market” (that is, treated as having been sold at that time for their fair market value) for federal income tax purposes, with the result that unrealized gains or losses will be treated as though they were
realized. Sixty percent of any net gain or loss recognized on these deemed sales, and 60% of any net realized gain or loss from any actual sales of section 1256 contracts, will be treated as long-term capital gain or loss, and the balance will be
treated as short-term capital gain or loss. These rules may operate to increase the amount that the Fund must distribute to satisfy the Distribution Requirement (
i.e.
, with respect to the portion treated as
short-term capital gain), which will be taxable to its shareholders as ordinary income when distributed to them, and to increase the net capital gain the Fund recognizes, without in either case increasing the cash available to it. The Fund may elect
not to have the foregoing rules apply to any “mixed straddle” (that is, a straddle, which the Fund clearly identifies in accordance with applicable regulations, at least one (but not all) of the positions of which are section 1256
contracts), although doing so may have the effect of increasing the relative proportion of short-term capital gain (taxable as ordinary income) and thus increasing the amount of dividends it must distribute. Section 1256 contracts also may be
marked-to-market for purposes of the Excise Tax.
Code section 1092
(dealing with straddles) also may affect the taxation of options, futures, and forward contracts in which the Fund may invest. That section defines a “straddle” as offsetting positions with respect to actively traded personal property;
for these purposes, options, futures, and forward contracts are positions in personal property. Under that section, any loss from the disposition of a position in a straddle may be deducted only to the extent the loss exceeds the unrecognized gain
on the offsetting position(s) of the straddle. In addition, these rules may postpone the recognition of loss that otherwise would be recognized under the mark-to-market rules discussed above. The regulations under section 1092 also provide certain
“wash sale” rules, which apply to transactions where a position is sold at a loss and a new offsetting position is acquired within a prescribed period, and “short sale” rules applicable to straddles. If the Fund makes certain
elections, the amount, character, and timing of recognition of gains and losses from the affected straddle positions would be determined under rules that vary according to the elections made. Because only a few of the regulations implementing the
straddle rules have been promulgated, the tax consequences to the Fund of straddle transactions are not entirely clear.
If a call option written by the Fund
lapses (
i.e.
, terminates without being exercised), the amount of the premium it received for the option will be short-term capital gain. If the Fund enters into a closing purchase transaction with respect to a
written call option, it will have a short-term capital gain or loss based on the difference between the premium it received for the option it wrote and the premium it pays for the option it buys. If such an option is exercised and the Fund thus
sells the securities or futures contract subject to the option, the premium the Fund received will be added to the exercise price to determine the gain or loss on the sale. If a call option purchased by the Fund lapses, it will realize short-term or
long-term capital loss, depending on its holding period for the option. If the Fund exercises a purchased call option, the premium it paid for the option will be added to the basis in the subject securities or futures contract.
If the Fund has an “appreciated
financial position” - generally, an interest (including an interest through an option, futures, or forward contract or short sale) with respect to any stock, debt instrument (other than “straight debt”), or partnership interest the
fair market value of which exceeds its adjusted basis - and enters into a “constructive sale” of the position, the Fund will be treated as having made an actual sale thereof, with the result that it will recognize gain at that time. A
constructive sale generally consists of a short sale, an offsetting notional principal contract, or a futures or forward contract the Fund or a related person enters into with respect to the same or substantially identical property. In addition, if
the appreciated financial position is itself a short sale or such a contract, acquisition of the underlying property or substantially identical property will be deemed a constructive sale. The foregoing will not apply, however, to the Fund’s
transaction during any taxable year that otherwise would be treated as a constructive sale if the transaction is closed within 30 days after the end of that year and the Fund holds the appreciated financial position unhedged for 60 days after that
closing (
i.e.
, at no time during that 60-day period is the Fund’s risk of loss regarding that position reduced by reason of certain specified transactions with respect to substantially identical or
related property, such as having an option to sell, being contractually obligated to sell, making a short sale, or granting an option to buy substantially identical stock or securities).
Income from Zero-Coupon and Payment-in-Kind Securities
. The Fund may acquire zero-coupon or other securities (such as strips) issued with OID. As a holder of those
securities, the Fund must include in its gross income the OID that accrues on the securities during the taxable year, even if it receives no corresponding payment on them during the year. Similarly, the Fund must include in its gross income
securities it receives as “interest” on payment-in-kind securities. With respect to “market discount bonds” (
i.e.
, bonds purchased at a price less than their issue price plus the
portion of OID previously accrued thereon), the Fund may elect to accrue and include in income each taxable year a portion of the bonds’ market discount. Because the Fund annually must distribute substantially all of its investment company
taxable income, including any accrued OID and other non-cash income, to satisfy the Distribution Requirement and avoid imposition of the Excise Tax, the Fund may be required in a particular year to distribute as a dividend an amount that is greater
than the total amount of cash it actually receives. Those distributions will be made from the Fund’s cash assets or from the proceeds of sales of portfolio securities, if necessary. The Fund may realize capital gains or losses from those
sales, which would increase or decrease its investment company taxable income and/or net capital gain.
Income from REITs
. The Fund may invest in REITs that (1) hold residual interests in real estate mortgage investment conduits (“REMICs”) or (2) engage in mortgage
securitization transactions that cause the REITs to be taxable mortgage pools (“TMPs”)
or have a qualified REIT subsidiary that is a TMP. A
portion of the net income allocable to REMIC residual interest holders may be an “excess inclusion.” The Code authorizes the issuance of regulations dealing with the taxation and reporting of excess inclusion income of REITs and RICs
that hold residual REMIC interests and of REITs, or qualified REIT subsidiaries that are TMPs. Although those regulations have not yet been issued, the U.S. Treasury Department and the Service issued a notice in 2006 (“Notice”)
announcing that, pending the issuance of further guidance, the Service would apply the principles in the following paragraphs to all excess inclusion income, whether from REMIC residual interests or TMPs.
The Notice provides that a REIT must
(1) determine whether it or its qualified REIT subsidiary (or a part of either) is a TMP and, if so, calculate the TMP’s excess inclusion income under a “reasonable method,” (2) allocate its excess inclusion income to its
shareholders generally in proportion to dividends paid, (3) inform shareholders that are not “disqualified organizations” (
i.e.
, governmental units and tax-exempt entities that are not subject to
the unrelated business income tax) of the amount and character of the excess inclusion income allocated thereto, (4) pay tax (at the highest federal income tax rate imposed on corporations) on the excess inclusion income allocable to its
shareholders that are disqualified organizations, and (5) apply the withholding tax provisions with respect to the excess inclusion part of dividends paid to foreign persons without regard to any treaty exception or reduction in tax rate. Excess
inclusion income allocated to certain tax-exempt entities (including qualified retirement plans, individual retirement accounts, and public charities) constitutes unrelated business taxable income to them.
A RIC with excess inclusion income is
subject to rules identical to those in clauses (2) through (5) (substituting “who are nominees” for “that are not ‘disqualified organizations’” in clause (3) and inserting “record” after
“its” in clause (4)). The Notice further provides that a RIC is not required to report the amount and character of the excess inclusion income allocated to its shareholders that are not nominees, except that (1) a RIC with excess
inclusion income from all sources that exceeds 1% of its gross income must do so and (2) any other RIC must do so by taking into account only excess inclusion income allocated to the RIC from a REIT the excess inclusion income of which exceeded 3%
of the REIT’s dividends. The Fund will not invest directly in REMIC residual interests, and does not intend to invest in REITs that, to its knowledge, invest in those interests or are TMPs or have a qualified REIT subsidiary that is a
TMP.
The Fund may
invest in REITs. REIT dividends and capital gain distributions are generally effective for taxable years beginning after December 31, 2017, the Code generally allows individuals and certain other non-corporate entities a deduction for 20% of (1)
qualified REIT dividends and (2) qualified publicly traded partnership income. Recently issued proposed regulations allow a RIC to pass the character of its qualified REIT dividends through to its shareholders provided certain holding period
requirements are met. As a result, an investor who invests directly in REITs will be able to receive the benefit of such deductions, while a shareholder in the Fund that invests in REITs will not.
Taxation
of Shareholders
.
Basis
Election and Reporting
. A shareholder’s basis in Shares of the Fund that he or she acquires after December 31, 2011 (“Covered Shares”), will be determined in accordance with the Fund’s default
method, which is average basis, unless the shareholder affirmatively elects in writing (which may be electronic) to use a different acceptable basis determination method, such as a specific identification method. The basis determination method the
Fund shareholder elects (or the default method) may not be changed with respect to a redemption of Covered Shares after the settlement date of the redemption.
In addition to the requirement to
report the gross proceeds from redemptions of shares, the Fund (or its administrative agent) must report to the Service and furnish to its shareholders the basis information for Covered Shares and indicate whether they had a short-term (one year or
less) or long-term (more than one year) holding period. Fund shareholders should consult with their tax advisers to decide the best Service-accepted basis determination method for their tax situation and to obtain more information about how the
basis reporting law applies to them.
Foreign Account
Tax Compliance Act (“FATCA”)
. As mentioned in the Prospectus, under FATCA “foreign financial institutions” (“FFIs”) or “non-financial foreign entities”
(“NFFEs”) that are Fund shareholders may be subject to a generally nonrefundable 30% withholding tax on income dividends. That withholding tax generally can be avoided, however, as discussed below.
An FFI can avoid FATCA withholding by
becoming a “participating FFI,” which requires the FFI to enter into a tax compliance agreement with the Service. Under such an agreement, a participating FFI agrees to (1) verify and document whether it has U.S. accountholders, (2)
report certain information regarding their accounts to the Service, and (3) meet certain other specified requirements.
The U.S. Treasury has negotiated
intergovernmental agreements (“IGAs”) with certain countries and is in various stages of negotiations with other foreign countries with respect to one or more alternative approaches to implement FATCA; entities in those countries may be
required to comply with the terms of the IGA instead of Treasury regulations. An FFI resident in a country that has entered into a Model I IGA with the United States must report to that country’s government (pursuant to the terms of the
applicable IGA and applicable law), which will, in turn, report to the Service. An FFI resident in a Model II IGA country generally must comply with U.S. regulatory requirements, with certain exceptions, including the treatment of recalcitrant
accountholders. An FFI resident in one of those countries that complies with whichever of the foregoing applies will be exempt from FATCA withholding.
An NFFE that is the beneficial owner
of a payment from the Fund can avoid FATCA withholding generally by certifying its status as such and, in certain circumstances that it does not have any substantial U.S. owners or by providing the name, address, and taxpayer identification number
of each such owner. The NFFE will report to the Fund or other applicable withholding agent, which will, in turn, report information to the Service.
Those non-U.S. shareholders also may
fall into certain exempt, excepted, or deemed compliant categories established by Treasury regulations, IGAs, and other guidance regarding FATCA. An FFI or NFFE that invests in the Fund will need to provide the Fund with documentation properly
certifying the entity’s status under FATCA to avoid FATCA withholding. The requirements imposed by FATCA are different from, and in addition to, the tax certification rules to avoid backup withholding described above. Foreign investors are
urged to consult their tax advisers regarding the application of these requirements to their own situation and the impact thereof on their investment in the Fund.
* * * * *
The foregoing is only a general
summary of some of the important federal tax considerations generally affecting the Fund. No attempt is made to present a complete explanation of the federal tax treatment of the Fund’s activities, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors are urged to consult their own tax advisers for more detailed information and for information regarding any state, local, or foreign taxes applicable to the Fund and to
distributions therefrom.
For
federal income tax purposes, the Fund is generally permitted to carry forward a net capital loss in any year to offset net capital gains, if any, during its taxable years following the year of the loss. The carryforward of capital losses realized in
taxable years beginning prior to December 23, 2010, however, is limited to an eight-year period following the year of realization. Thereafter, capital losses carried forward will retain their character as either short-term or long-term capital
losses rather than being considered all short-term as under previous law. The Fund must use losses that do not expire before it uses losses that do expire and the Fund’s ability to utilize capital losses in a given year or in total may be
limited. To the extent subsequent net capital gains are offset by such losses, they would not result in federal income tax liability to the Fund and as noted above, would not be distributed as such to shareholders.
Capital Loss Carryforwards
. As of October 31, 2018, the Fund did not have capital loss carryforwards. Pursuant to the Regulated Investment Company Modernization Act of 2010,
capital losses sustained in future taxable years will not expire and may be carried over without limitation.
The Fund's financial
statements for the fiscal year ended October 31, 2018, are incorporated herein by reference from the Fund's Annual Report to Shareholders dated October 31, 2018.
To receive a copy of the Prospectus or
Annual or Semi-Annual Report to shareholders, without charge, write to or call the Trust at the contact information listed below:
Write
to:
|
Direxion
Shares ETF Trust
1301 Avenue of the Americas (6th Avenue), 28th Floor
New York, New York 10019
|
Call:
|
866-476-7523
|
By
Internet:
|
www.direxioninvestments.com
|
APPENDIX A
Description of Corporate Bond Ratings
Moody’s
Investors Service and S&P Global Ratings are two prominent independent rating agencies that rate the quality of bonds. Following are expanded explanations of the ratings shown in the Prospectus and this SAI.
Moody’s Investors Service
–
Global Long-Term Ratings
Ratings assigned
on Moody’s global long-term rating scale are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and
public sector entities. Long-term ratings are assigned to issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a default or impairment on contractual financial obligations and the expected
financial loss suffered in the event of default or impairment. Such ratings have been published by Moody’s Investors Service, Inc. and Moody’s Analytics Inc.
Aaa
:
Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
Aa
:
Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A
:
Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
Baa
:
Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.
Ba
:
Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
B
:
Obligations rated B are considered speculative and are subject to high credit risk.
Caa
:
Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
Ca
:
Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C
:
Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody’s appends numerical
modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of that generic rating category. Additionally, a “(hyb)” indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms.*
* By their terms, hybrid securities
allow for the omission of scheduled dividends, interest, or principal payments, which can potentially result in impairment if such an omission occurs. Hybrid securities may also be subject to contractually allowable write-downs of principal that
could result in impairment. Together with the hybrid indicator, the long-term obligation rating assigned to a hybrid security is an expression of the relative credit risk associated with that security.
Moody’s Investors Service
–
National Scale Long-Term Ratings
Moody’ s long-term National
Scale Ratings (NSRs) are opinions of the relative creditworthiness of issuers and financial obligations within a particular country. NSRs are not designed to be compared among countries; rather, they address relative credit risk within a given
country. Moody’s assigns national scale ratings in certain local capital markets in which investors have found the global rating scale provides inadequate differentiation among credits or is inconsistent with a rating scale already in common
use in the country. In each specific country, the last two characters of the rating indicate the country in which the issuer is located (
e.g.
, Aaa.br for Brazil).
Aaa.n
:
Issuers or issues rated Aaa.n demonstrate the strongest creditworthiness relative to other domestic issuers.
Aa.n
:
Issuers or issues rated Aa.n demonstrate very strong creditworthiness relative to other domestic issuers.
A.n
:
Issuers or issues rated A.n present above-average creditworthiness relative to other domestic issuers.
Baa.n
:
Issuers or issues rated Baa.n represent average creditworthiness relative to other domestic issuers.
Ba.n
:
Issuers or issues rated Ba.n demonstrate below-average creditworthiness relative to other domestic issuers.
B.n
:
Issuers or issues rated B.n demonstrate weak creditworthiness relative to other domestic issuers.
Caa.n
:
Issuers or issues rated Caa.n demonstrate very weak creditworthiness relative to other domestic issuers.
Ca.n
:
Issuers or issues rated Ca.n demonstrate extremely weak creditworthiness relative to other domestic issuers.
C.n
:
Issuers or issues rated C.n demonstrate the weakest creditworthiness relative to other domestic issuers.
Note: Moody’s appends numerical
modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of that generic rating category. National scale long-term ratings of D.ar and E.ar may also be applied to Argentine obligations.
S&P Global Ratings
–
Long-Term Issue Credit Ratings*
An S&P Global Ratings issue
credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note
programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The
opinion reflects S&P Global Ratings' view of the obligor's capacity and willingness to meet its financial commitments as they come due, and this opinion may assess terms, such as collateral security and subordination, which could affect ultimate
payment in the event of default. Issue credit ratings can be either long-term or short-term. Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. Short-term ratings are also used to indicate
the creditworthiness of an obligor with respect to put features on long-term obligations. Medium-term notes are assigned long-term ratings.
Issue credit ratings are based, in
varying degrees, on S&P Global Ratings' analysis of the following considerations:
•
|
The likelihood of
payment--the capacity and willingness of the obligor to meet its financial commitments on an obligation in accordance with the terms of the obligation;
|
•
|
The nature and provisions
of the financial obligation, and the promise we impute; and
|
•
|
The
protection afforded by, and relative position of, the financial obligation in the event of a bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
|
Issue ratings are an assessment of
default risk, but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above.
(Such differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)
AAA
: An obligation rated 'AAA' has the highest rating assigned by S&P Global Ratings. The obligor's capacity to meet its financial commitments on the obligation is extremely strong.
AA
: An
obligation rated 'AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitments on the obligation is very strong.
A
: An
obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitments on the
obligation is still strong.
BBB
: An
obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments on the obligation.
BB; B; CCC; CC; and C
: Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposure to adverse conditions.
BB
:
An obligation rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to the obligor's inadequate
capacity to meet its financial commitments on the obligation.
B
: An
obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitments on the obligation. Adverse business, financial, or economic conditions will likely impair
the obligor's capacity or willingness to meet its financial commitments on the obligation.
CCC
:
An obligation rated 'CCC' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation. In the event of adverse business,
financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitments on the obligation.
CC
: An
obligation rated 'CC' is currently highly vulnerable to nonpayment. The 'CC' rating is used when a default has not yet occurred, but S&P Global Ratings expects default to be a virtual certainty, regardless of the anticipated time to
default.
C
: An obligation rated 'C' is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared with obligations that are rated
higher.
D
: An obligation rated 'D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the 'D' rating category is used when payments on an obligation are not made on the date due, unless S&P
Global Ratings believes that such payments will be made within five business days in the absence of a stated grace period or within the earlier of the stated grace period or 30 calendar days. The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligation's rating is lowered to 'D' if it is subject to a distressed exchange
offer.
NR
: This
indicates that no rating has been requested, or that there is insufficient information on which to base a rating, or that S&P Global Ratings does not rate a particular obligation as a matter of policy.
*The ratings from 'AA' to 'CCC' may be
modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
Moody’s Investors Service
–
Short Term Obligation Ratings
The Municipal Investment Grade (MIG)
scale is used to rate US municipal bond anticipation notes of up to three years maturity. Municipal notes rated on the MIG scale may be secured by either pledged revenues or proceeds of a take-out financing received prior to note maturity. MIG
ratings expire at the maturity of the obligation, and the issuer’s long-term rating is only one consideration in assigning the MIG rating. MIG ratings are divided into three levels
—
MIG 1 through MIG 3
—
while speculative grade short-term obligations are designated SG.
MIG 1
:
This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
MIG 2
:
This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
MIG 3
:
This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.
SG
: This
designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
S&P Global Ratings
–
Municipal Short-Term Note Ratings
An S&P Global
Ratings U.S. municipal note rating reflects S&P Global Ratings opinion about the liquidity factors and market access risks unique to the notes. Notes due in three years or less will likely receive a note rating. Notes with an original maturity
of more than three years will most likely receive a long-term debt rating. In determining which type of rating, if any, to assign, S&P Global Ratings analysis will review the following considerations:
•
|
Amortization
schedule--the larger the final maturity relative to other maturities, the more likely it will be treated as a note; and
|
•
|
Source
of payment--the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
|
SP-1
:
Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.
SP-2
:
Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
SP-3
:
Speculative capacity to pay principal and interest.
Moody’s Investors Service
–
Global Short Term Rating Scale
Ratings assigned
on Moody’s global short-term rating scale are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and
public sector entities. Short-term ratings are assigned to obligations with an original maturity of thirteen months or less and reflect both on the likelihood of a default or impairment on contractual financial obligations and the expected financial
loss suffered in the event of default or impairment.
P-1
:
Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
P-2
:
Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
P-3
:
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
NP
:
Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
S&P Global Ratings
–
Short-Term Issue Credit Ratings
A-1
:
A short-term obligation rated 'A-1' is rated in the highest category by S&P Global Ratings. The obligor's capacity to meet its financial commitments on the obligation is strong. Within this category, certain obligations are designated with a
plus sign (+). This indicates that the obligor's capacity to meet its financial commitments on these obligations is extremely strong.
A-2
:
A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial
commitments on the obligation is satisfactory.
A-3
: A
short-term obligation rated 'A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments on the
obligation.
B
: A
short-term obligation rated 'B' is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties that could lead to the
obligor's inadequate capacity to meet its financial commitments.
C
: A
short-term obligation rated 'C' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation.
D
: A
short-term obligation rated 'D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the 'D' rating category is used when payments on an obligation are not made on the date due, unless S&P Global Ratings believes
that such payments will be made within any stated grace period. However, any stated grace period longer than five business days will be treated as five business days. The 'D' rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action and where default on an obligation is a virtual certainty, for example, due to automatic stay provisions. An obligation’s rating is lowered to ‘D’ if it is subject to a distressed exchange
offer.
Dual ratings may
be assigned to debt issues that have a put option or demand feature. The first component of the rating addresses the likelihood of repayment of principal and interest as due, and the second component of the rating addresses only the demand feature.
The first component of the rating can relate to either a short-term or long-term transaction and accordingly use either short-term or long-term rating symbols. The second component of the rating relates to the put option and is assigned a short-term
rating symbol (for example, 'AAA/A-1+' or 'A-1+/A-1'). With U.S. municipal short-term demand debt, the U.S. municipal short-term note rating symbols are used for the first component of the rating (for example, 'SP-1+/A-1+').
Direxion Shares ETF Trust
1301
Avenue of the Americas (6th Avenue), 28th Floor
|
New York,
New York 10019
|
866-476-7523
|
www.direxioninvestments.com
Direxion All Cap Insider Sentiment Shares (KNOW)
Direxion NASDAQ-100
®
Equal Weighted Index Shares (QQQE)
February 28, 2019
The shares offered in this prospectus (each a “Fund”
and collectively the “Funds”) are listed and traded on the NYSE Arca, Inc.
There is no assurance that a Fund will achieve its investment
objective and an investment in a Fund could lose money. No single Fund is a complete investment program.
IMPORTANT NOTE: Beginning on January 1,
2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of each Fund’s annual and semi-annual shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the
shareholder reports from your financial intermediary, such as a broker-dealer or bank. Instead, annual and semi-annual shareholder reports will be available on a website, and you will be notified by mail each time a report is posted and provided
with a website link to access the report.
You may
elect to receive all future annual and semi-annual shareholder reports in paper free of charge. To elect to continue to receive paper copies of shareholder reports through the mail or to otherwise change your delivery method, contact your financial
intermediary or follow the instructions included with this disclosure. Your election to receive shareholder reports in paper will apply to all funds that you hold through the financial intermediary. If you already elected to receive shareholder
reports electronically, you will not be affected by this change and you need not take any action.
These securities have not been approved or disapproved by
the U.S. Securities and Exchange Commission (“SEC”) or the U.S. Commodity Futures Trading Commission (“CFTC”), nor have the SEC or CFTC passed upon the adequacy of this Prospectus. Any representation to the contrary is a
criminal offense.
Direxion All
Cap Insider Sentiment Shares
Investment Objective
The Direxion All Cap Insider
Sentiment Shares (the “Fund”) seeks investment results, before fees and expenses, that track the Sabrient Multi-Cap Insider/Analyst Quant-Weighted Index (the “Index”).
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
(1)
|
0.40%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.28%
|
Total
Annual Fund Operating Expenses
|
0.68%
|
Expense
Cap/Reimbursement
(2)
|
-0.09%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.59%
|
(1)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has approved an additional reduction of the Management Fee by 0.09% to 0.31% of average daily net assets when the net assets of the Fund are equal to or greater than $500 million.
|
(2)
|
Rafferty has entered into
an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its management fees and/or reimburse the Fund for Other Expenses through
September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.59% of the Fund’s daily average net assets (excluding, as applicable, among other expenses, taxes, swap financing and related costs, acquired
fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$60
|
$208
|
$370
|
$838
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 919% of the average
value of its portfolio.
Principal Investment Strategy
The Fund, under normal circumstances,
invests at least 80% of its assets in the securities that comprise the Index.
The Index is
composed of 100 stocks selected from the S&P 1500
®
by Sabrient Systems LLC (the “Index Provider”) using a quantitative methodology.
The Index attempts to reflect positive sentiment among those “insiders” closest to a company’s financials and business prospects, such as top management, directors, large institutional holders, and Wall Street research analysts who
follow the company. Starting with an eligible universe of all 1500 stocks in the S&P 1500
®
, the Index Provider first eliminates stocks of
companies with very aggressive accounting, as identified by the Index Provider’s proprietary forensics accounting methodology. From the remaining stocks, the Index Provider further eliminates all but 100 stocks using a screening methodology
that is based on an analysis of public company filings relating to frequency of trades, purchases of stock and increases in holdings by a company’s insiders, as well as positive earnings analysis. The remaining 100 stocks, which compose the
Index, are then ranked using a defensive methodology that preferences stocks that have historically performed well in weak markets, having strong free cash flow yield and strong dividend yield. The Index is “quant-weighted,” meaning that
when the Index is rebalanced the top 50 stocks are weighted exponentially, with the top stock representing 2.6% of the Index, while the bottom 50 stocks are equal-weighted, with each representing 0.35% of the Index. The bottom 50 stocks thereby
account for 17.61% of the total Index at the rebalance. The Index rebalances monthly.
As of December 31, 2018, the
components of the Index consisted of 100 constituents, which had an average market capitalization of $21 billion, had market capitalizations ranging from $157.1 million to $239.7 billion and were concentrated in the financials and consumer
discretionary sectors.
The S& P 1500
®
is a composite index of the S&P 500
®
, S&P
400
®
and S&P 600
®
, which are composed of
stocks representing the large capitalization, mid-capitalization and small capitalization segments of the U.S. equity market, respectively.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group
1
|
Direxion Shares ETF
Trust Prospectus
|
of industries) to approximately the same extent as the
Index is so concentrated.
The Fund uses a
“passive” or indexing approach to attempt to achieve its investment objective. The Fund does not try to outperform the Index and does not generally take temporary defensive positions. Although the Fund intends to fully replicate the
Index, at times the Fund may gain exposure to only a representative sample of the securities in the Index that have aggregate characteristics similar to those of the Index, including exchange-traded funds (“ETFs”) and other investment
companies. This means the Fund may not hold all of the securities included in the Index. The Fund will rebalance its portfolio when the Index rebalances. Additionally, if the Fund receives a creation unit in cash, the Fund repositions its portfolio
in response to assets flowing into or out of the Fund. To the extent the Fund experiences regular cash purchases or redemptions of its shares, it may reposition its portfolio more frequently. Frequently Index rebalances and Fund creation units
received or redeemed in cash may result in high portfolio turnover.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. It is important that investors closely review all
of the risks listed below and understand them before making an investment in the Fund.
Index Correlation/Tracking Risk
—
There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its
investment objective. The Fund may have difficulty achieving its investment objective due to fees, expenses (including rebalancing expenses), transaction costs, income items, valuation methodology, accounting standards and disruptions or illiquidity
in the markets for the securities held by the Fund, the Fund’s holding of uninvested cash, costs of complying with various new or existing regulatory requirements, and transactions carried out to minimize the distribution of capital gains to
shareholders and other requirements to maintain pass-through tax treatment. These are costs that may be incurred by the Fund that are not incurred by the Index. Market disruptions, regulatory restrictions or extreme volatility will also adversely
affect the Fund’s ability to achieve its investment objective. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the
Index. In addition, the Fund may invest in securities not included in the Index. Activities surrounding Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its investment objective.
Index Tracking Strategy Risk
—
Securities held by the Fund will generally not be bought or sold in response to market fluctuations and may be
concentrated in a particular industry if the Index is so concentrated. The
Fund will generally not sell a security because its issuer is in financial trouble or its value has declined,
unless that holding is removed or is anticipated to be removed from the Index.
The Index relies on various sources
of information to assess the securities included in the Index, including information that may be based on assumptions or estimates. There is no assurance that the Index Provider’s calculation methodology or sources of information will provide
an accurate assessment of the Index’s securities. Errors in Index data, Index computations or the construction of the Index in accordance with its methodology may occur from time to time and may not be identified and corrected by the Index
Provider for a period of time or at all, which may have an adverse impact on the Fund and its shareholders.
Consumer Discretionary Sector Risk
—
Because companies in the consumer discretionary sector manufacture products and provide discretionary services directly
to the consumer, the success of these companies is tied closely to the performance of the overall domestic and international economy, interest rates, competition and consumer confidence. Success depends heavily on disposable household income and
consumer spending. Also, companies in the consumer discretionary sector may be subject to severe competition, which may have an adverse impact on a company’s profitability. Changes in demographics and consumer tastes also can affect the demand
for, and success of, consumer discretionary products in the marketplace.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Micro-Capitalization
Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those
Direxion Shares
ETF Trust Prospectus
|
2
|
of larger companies. In addition, micro-cap
companies often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or
mid-capitalization. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Small- and/or Mid-Capitalization Company
Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial
resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant institutional ownership and
are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure, which could increase
the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches of the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business
operations, potentially resulting in financial losses to the Fund. While the Fund has established business continuity plans and risk management systems seeking to address system breaches or failures, these plans and systems are inherently limited.
Further, cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in publicly issued equity securities, including common stocks, are subject to market risks that may cause
their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- The Fund may engage in active and frequent trading, which may lead to increased portfolio turnover, higher transaction costs, and the possibility of increased short-term capital gains (which will be
taxable to shareholders as ordinary income when distributed to them) and/or long-term capital gains.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. When you sell your Shares, they could be worth less than what you paid for them.
Liquidity Risk
—
Some securities held by the Fund may be difficult to sell or illiquid, particularly during times of market turmoil.
Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the United States. Illiquid
securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the security’s true
market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
There can be no assurance that a security that is deemed liquid when purchased will continue to be liquid.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will fluctuate in
response to changes
3
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Direxion Shares ETF
Trust Prospectus
|
in the value of
the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or less than net asset value (a discount). The Adviser
cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that large discounts or premiums to the net asset value
of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the net asset value of the Fund over a period of time.
Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will
develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads
and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 14.93% for the quarter ended March 31, 2012 and its lowest calendar quarter return was -17.36% for the quarter ended December 31, 2018. The year-to-date return as
of December 31, 2018 was -14.78%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(12/8/2011)
|
Return
Before Taxes
|
-14.78%
|
6.72%
|
11.62%
|
Return
After Taxes on Distributions
|
-16.04%
|
5.35%
|
10.33%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-8.33%
|
4.90%
|
9.04%
|
Sabrient
Multi-Cap Insider/Analyst Quant-Weighted Index
(reflects no deduction for fees, expenses or taxes)
|
-13.89%
|
7.81%
|
13.06%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
12.55%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the one-year period because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in December 2011
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Direxion Shares
ETF Trust Prospectus
|
4
|
Purchase and Sale of Fund Shares
The Fund’s shares are not
individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as creation units, each of which is
comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may
trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
5
|
Direxion Shares ETF
Trust Prospectus
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Direxion
NASDAQ-100
®
Equal Weighted Index Shares
Investment Objective
The Direxion NASDAQ-100
®
Equal Weighted Index Shares (the “Fund”) seeks investment results, before fees and expenses, that track the NASDAQ-100
®
Equal Weighted Index (the “Index”).
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.30%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.19%
|
Total
Annual Fund Operating Expenses
|
0.49%
|
Expense
Cap/Reimbursement
(1)
|
-0.14%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.35%
|
(1)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.35% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$36
|
$143
|
$260
|
$602
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are
held in a taxable
account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 27% of the average value of its
portfolio.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests at least 80% of its assets in the securities that comprise the Index.
The Index is the
equal weighted version of the NASDAQ-100 Index
®
which includes approximately 100 of the largest domestic and international non-financial companies
listed on The NASDAQ
®
Stock Market based on market capitalization selected by NASDAQ, Inc. (the “Index Provider”). Equal weighting is a
method of weighting index stocks whereby the same exposure is provided to both the smallest and largest companies included in the Index. The Index is rebalanced quarterly and reconstituted annually.
As of December 31, 2018, the
components of the Index consisted of 103 constituents, which had an average market capitalization of $80.5 billion, had market capitalizations ranging from $10.2 billion to $785 billion and were concentrated in the technology, consumer services, and
healthcare sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund uses a
“passive” or indexing approach to attempt to achieve its investment objective. The Fund does not try to outperform the Index and does not generally take temporary defensive positions. Although the Fund intends to fully replicate the
Index, at times the Fund may gain exposure to only a representative sample of the securities in the Index that have aggregate characteristics similar to those of the Index, including exchange-traded funds (“ETFs”) and other investment
companies. This means the Fund may not hold all of the securities included in the Index. The Fund will rebalance its portfolio when the Index rebalances. Additionally, if the Fund receives a creation unit in cash, the Fund repositions its portfolio
in response to assets flowing into or out of the Fund. To the extent the Fund experiences regular cash purchases or redemptions of its shares, it may reposition its portfolio more frequently. Frequently Index rebalances and Fund creation units
received or redeemed in cash may result in high portfolio turnover.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. It is important that investors closely review all
of the risks listed below and understand them before making an investment in the Fund.
Index Correlation/Tracking Risk
—
There is no guarantee that the Fund will achieve a high degree of correlation to
Direxion Shares
ETF Trust Prospectus
|
6
|
the Index and
therefore achieve its investment objective. The Fund may have difficulty achieving its investment objective due to fees, expenses (including rebalancing expenses), transaction costs, income items, valuation methodology, accounting standards and
disruptions or illiquidity in the markets for the securities held by the Fund, the Fund’s holding of uninvested cash, costs of complying with various new or existing regulatory requirements, and transactions carried out to minimize the
distribution of capital gains to shareholders and other requirements to maintain pass-through tax treatment. These are costs that may be incurred by the Fund that are not incurred by the Index. Market disruptions, regulatory restrictions or extreme
volatility will also adversely affect the Fund’s ability to achieve its investment objective. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be
different from that of the Index. In addition, the Fund may invest in securities not included in the Index. Activities surrounding Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its investment
objective.
Due to the
Index including instruments that trade on a different market than the Fund, the Fund's return may vary from the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund.
Index Tracking
Strategy Risk
—
Securities held by the Fund will generally not be bought or sold in response to market fluctuations
and may be concentrated in a particular industry if the Index is so concentrated. The
Fund will generally not sell a security because its issuer is in financial trouble or its value has
declined, unless that holding is removed or is anticipated to be removed from the Index.
The Index relies on various sources
of information to assess the securities included in the Index, including information that may be based on assumptions or estimates. There is no assurance that the Index Provider’s calculation methodology or sources of information will provide
an accurate assessment of the Index’s securities. Errors in Index data, Index computations or the construction of the Index in accordance with its methodology may occur from time to time and may not be identified and corrected by the Index
Provider for a period of time or at all, which may have an adverse impact on the Fund and its shareholders.
Consumer Services Industry Risk
-
The success of consumer product manufacturers and retailers
(including food and
drug retailers, general retailers,
media,
and travel and leisure) is tied closely to the performance of the domestic and
international economy, interest rates, exchange rates, competition and consumer confidence. The consumer services industry depends heavily on disposable household income and consumer spending. Companies
in the consumer services industry may be subject to severe competition, which may also have an adverse impact on their profitability. Changes in demographics and consumer preferences may affect the
success of consumer service providers.
Healthcare Sector Risk
—
The profitability of companies in the healthcare sector may be affected by extensive, costly
and uncertain government regulation, restrictions on
government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient services, limited number of products, industry innovation, changes in technologies and other market
developments. Many healthcare companies are heavily dependent on patent protection. The expiration of patents may adversely affect the profitability of these companies. Many healthcare companies are subject to extensive litigation based on product
liability and similar claims. Healthcare companies are subject to competitive forces that may make it difficult to raise prices and, in fact, may result in price discounting. Many new products in the healthcare sector may be subject to regulatory
approvals. The process of obtaining such approvals may be long and costly with no guarantee that any product will come to market.
Technology Sector Risk
—
The market prices of technology-related securities tend to exhibit a greater degree of market risk and sharp
price fluctuations than other types of securities. These securities may fall in and out of favor with investors rapidly, which may cause sudden selling and dramatically lower market prices. Technology securities may be affected by intense
competition,
obsolescence of existing technology, general economic conditions and government regulation and may have limited product lines, markets,
financial resources or personnel. Technology companies may experience dramatic and often unpredictable changes in growth rates and competition for qualified personnel. These companies are also heavily
dependent on patent and intellectual property rights, the loss or impairment of which may adversely impact a company’s profitability. A small number of companies represent a large portion of the technology industry. In addition, a rising
interest rate environment tends to negatively affect technology companies, those technology companies seeking to finance expansion would have increased borrowing costs, which may negatively impact earnings. Technology companies having high market
valuations may appear less attractive to investors, which may cause sharp decreases in their market prices.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Foreign Securities
Risk
—
Investing in foreign instruments may involve greater risks than investing in domestic instruments. As a
result,
the Fund’s returns and net asset value may be affected to a large degree by fluctuations in
currency exchange
rates,
political, diplomatic or economic conditions and regulatory requirements
in
other
countries.
The laws and accounting,
auditing,
and financial reporting standards
in foreign
countries typically are not as strict as they are in the U.S.,
and there may be less public information available about foreign
companies.
7
|
Direxion Shares ETF
Trust Prospectus
|
Currency Exchange
Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in
securities denominated
in a country’s currency and the Fund’s share price.
Generally, when the U.S. Dollar rises in
value against a foreign currency, an investment in that country loses
value
because that currency is worth fewer U.S.
Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of
any investments denominated in that currency.
Currency markets generally are not as regulated as
securities markets. Additionally,
the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund held a more
diversified number of currencies.
Depositary Receipt Risk
—
To the extent the Fund invests in foreign companies, the Fund’s investment may be in the form of depositary
receipts or other securities convertible into securities of foreign issuers including American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), and Global Depositary Receipts (“GDRs”). While
the investment in ADRs, EDRs and GDRs, which are traded on exchanges and represent ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies,
investments in them continue to be subject to certain of the risks associated with investing directly in foreign securities, such as political and exchange rate risks.
International
Closed-Market Trading Risk
—
Because the Fund may invest
in, and/or have exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches of the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business
operations, potentially resulting in financial losses to the Fund. While the Fund has established business continuity plans and risk management systems seeking to address system breaches or failures, these plans and systems are inherently limited.
Further, cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index,
and/or may incur
substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in publicly issued equity securities, including common stocks, are subject to market risks that may cause
their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade
Direxion Shares
ETF Trust Prospectus
|
8
|
at a premium or
discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that large discounts or premiums to the net asset value of Shares should not be sustained. There may,
however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the
secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent
that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the
Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period of time shown in
the bar chart, the Fund’s highest calendar quarter return was 11.98% for the quarter ended September 30, 2013 and its lowest calendar quarter
return was
-13.84% for the quarter ended December 31, 2018. The year-to-date return as of December 31, 2018 was -4.92%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(3/21/2012)
|
Return
Before Taxes
|
-4.92%
|
9.52%
|
12.09%
|
Return
After Taxes on Distributions
|
-5.09%
|
9.26%
|
11.83%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-2.78%
|
7.50%
|
9.78%
|
NASDAQ-100
®
Equal Weighted Index
(reflects no deduction for fees, expenses or taxes)
|
-4.61%
|
9.93%
|
12.59%
|
NASDAQ-100
®
Index
(reflects no deduction for fees, expenses or taxes)
|
0.04%
|
13.34%
|
14.57%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
11.21%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the one-year period because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in March 2012
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
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Direxion Shares ETF
Trust Prospectus
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Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
NASDAQ
®
, OMX
®
, NASDAQ OMX
®
, and NASDAQ-100 Equal Weighted
SM
Index are registered
trademarks and certain trade names and service marks of The NASDAQ OMX Group, Inc. (which with its affiliates is referred to as the “Corporations”) and are licensed for use by Rafferty Asset Management, LLC. The Fund has not been passed
on by the Corporations as to their legality or suitability. The Fund is not issued, endorsed, sold, or promoted by the Corporations. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE PRODUCT(S).
Direxion Shares
ETF Trust Prospectus
|
10
|
The Direxion Shares ETF Trust
(the “Trust”) is a registered investment company offering a number of separate exchange-traded funds (“ETFs”). This Prospectus describes the ETFs noted in the table below (each a “Fund” and collectively the
“Funds”). Rafferty Asset Management, LLC serves as the investment advisor to the Fund ("Rafferty" or the "Adviser").
Each Fund seeks investment results,
before fees and expenses, that track the performance of an underlying index as noted below:
Fund
|
Underlying
Index
|
Direxion
All Cap Insider Sentiment Shares
|
Sabrient
Multi-Cap Insider/Analyst Quant-Weighted Index
|
Direxion
NASDAQ-100
®
Equal Weighted Index Shares
|
NASDAQ-100
®
Equal Weighted Index
|
Each Fund seeks to achieve its
investment objective by investing primarily in securities that comprise its relevant underlying index. Each Fund operates as a non-leveraged, index fund and is not actively managed. Adverse performance of a security in a Fund’s portfolio will
not ordinarily result in the elimination of the security from the Fund’s portfolio unless the security is removed, or is anticipated to be removed, from the Fund’s underlying index.
Each Fund may engage in
representative sampling, which is investing in a sample of securities selected by the Adviser to have a collective investment profile that is similar to that of the Fund’s underlying index. Securities selected have aggregate investment
characteristics, fundamental characteristics and liquidity measurements similar to those of its underlying index. If the Fund uses representative sampling, it generally does not hold all of the securities that are in its underlying index.
Shares of the Funds
(“Shares”) are listed and traded on the NYSE Arca, Inc. (the “Exchange”), where the market prices for the Shares may be different from the intra-day value of the Shares disseminated by the Exchange and from their net asset
value (“NAV”). Unlike conventional mutual funds, Shares are not individually redeemable directly with a Fund. Rather, each Fund issues and redeems Shares on a continuous basis at NAV only in large blocks of Shares called “Creation
Units.” A Creation Unit consists of 50,000 Shares. Creation Units of the Funds are issued and redeemed in cash and/or in-kind for securities included in the relevant underlying index. As a result, retail investors generally will not be able to
purchase or redeem Shares directly from, or with, each Fund. Most retail investors will purchase or sell Shares in the secondary market through a broker.
In order to
provide additional information regarding the value of Shares of a Fund, the Exchange, a market data vendor or other information provider, disseminates an Intraday Optimized Portfolio Value (“IOPV”) for each Fund. Each Fund’s IOPV
is expected to be disseminated every 15 seconds during the regular trading hours of the Exchange. The IOPV is based on the current market value of the securities and cash required to be deposited in exchange for a Creation Unit. The IOPV does not
necessarily reflect the precise composition of the current portfolio holdings of a Fund as of a particular point in time, or an accurate valuation of the current portfolio. The quotations of certain Fund holdings may not be updated during U.S.
trading hours if such holdings do not trade in the U.S. The Funds are not involved in, nor responsible for, the calculation or dissemination of the IOPV and make no representations or warranty as to its accuracy.
There is no assurance that the Funds
will achieve their investment objective and an investment in a Fund could lose money. No single Fund is a complete investment program.
Changes in Investment Objective
. Each Fund’s investment objective is not a fundamental policy and may be changed by the Funds' Board of Trustees without shareholder approval.
Additional Information Regarding Investment
Techniques and Policies
Rafferty uses a
number of investment techniques in an effort to achieve the stated investment objective for each Fund. Each Fund seeks investment results, before fees and expenses, that track the return of its underlying index. To do this, Rafferty uses statistical
and quantitative analysis to determine the investments a Fund makes and the techniques it employs. In general, if a Fund is performing as designed, the return of the underlying index will dictate the return for the Fund. Rafferty does not invest the
assets of a Fund in securities, derivatives or other investments based on Rafferty’s view of the investment merit of a particular security, instrument or company, nor does it conduct conventional investment research or analysis or forecast
market movements or trends. Each Fund generally pursues its investment objective regardless of market conditions and does not take defensive positions.
For each Fund, Rafferty seeks a
correlation over time of 0.95 or better between a Fund’s performance and the performance of its underlying index; a correlation of 1.00 would represent perfect correlation. To do this, at times each Fund may hold a representative sample of the
securities in its underlying index. The sampling of securities that is held by a Fund is intended to maintain high correlation with, and similar aggregate characteristics (
e.g.
, market capitalization and
industry weightings) to, its underlying index. A Fund also may invest in securities that are not included in its underlying index or may overweight
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Direxion Shares ETF
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or underweight certain components of its underlying
index. A Fund’s assets may be focused in an industry or group of industries to the extent that its underlying index focuses in a particular industry or group of industries. In addition, each Fund offered in this prospectus is non-diversified,
which means that it may invest in the securities of a limited number of issuers.
While Rafferty
attempts to minimize any differences between the investment results of a Fund and the performance of its underlying index, certain factors will tend to cause a Fund’s investment results to vary from the stated investment objective. A Fund may
have difficulty in achieving its investment objective due to fees, expenses, transaction costs, income items, accounting standards, significant purchase and redemption activity by Fund shareholders, transactions and costs associated with minimizing
the distribution of capital gains to shareholders and/or disruption or a temporary lack of liquidity in the markets for the securities held by the Fund.
Additionally, if a Fund's underlying
index includes foreign securities or tracks a foreign market index where the foreign market closes before or after the New York Stock Exchange (“NYSE”) closes (generally at 4 p.m. Eastern Time), the performance of a Fund's underlying
index may differ from the expected performance.
Direxion Shares
ETF Trust Prospectus
|
12
|
Additional Information Regarding Principal
Risks
An investment in a
Fund entails risks. A Fund may not achieve its investment objective and may decline in value. It is important that investors closely review and understand all of a Fund’s risks before making an investment. A Fund is not a complete investment
program. The table below provides the risks of investing in the Funds. Following the table, each risk is explained.
|
|
|
|
Direxion
All Cap Insider
Sentiment Shares
|
Direxion
NASDAQ-100
®
Equal Weighted
Index Shares
|
Index
Correlation/Tracking Risk
|
X
|
X
|
Index
Tracking Strategy Risk
|
X
|
X
|
Consumer
Discretionary Sector Risk
|
X
|
|
Consumer
Services Industry Risk
|
|
X
|
Financials
Sector Risk
|
X
|
|
Healthcare
Sector Risk
|
|
X
|
Technology
Sector Risk
|
|
X
|
Large-Capitalization
Company Risk
|
X
|
X
|
Micro-Capitalization
Company Risk
|
X
|
|
Small
and /or Mid-Capitalization Company Risk
|
X
|
|
Foreign
Securities Risk
|
|
X
|
Currency
Exchange Rate Risk
|
|
X
|
Depositary
Receipt Risk
|
|
X
|
International
Closed-Market Trading Risk
|
|
X
|
Cybersecurity
Risk
|
X
|
X
|
Early
Close/Trading Halt Risk
|
X
|
X
|
Equity
Securities Risk
|
X
|
X
|
High
Portfolio Turnover Risk
|
X
|
|
Investment
Risk
|
X
|
X
|
Liquidity
Risk
|
X
|
|
Market
Risk
|
X
|
X
|
Non-Diversification
Risk
|
X
|
X
|
Securities
Lending Risk
|
X
|
X
|
Special
Risks of Exchange-Traded Funds
|
X
|
X
|
Index Correlation/Tracking Risk
There is no
guarantee that a Fund will achieve a high degree of correlation to its underlying index and therefore achieve its investment objective. A Fund may have difficulty achieving its investment objective due to fees, expenses (including rebalancing
expenses), transaction costs, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for the securities held by a Fund, a Fund’s holding of uninvested cash, costs of complying with various new
or existing regulatory requirements, and transactions carried out to minimize the distribution of capital gains to shareholders and other requirements to maintain pass-through tax treatment. These are costs that may be incurred by a Fund that are
not incurred by its underlying index. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect a Fund’s ability to achieve its investment objective. A Fund may not have investment exposure to all components
of the its underlying index, or its weighting of investment exposure to such components may be different from that of its underlying index. In addition, a Fund may invest in financial instruments or securities not included in the underlying index.
Activities surrounding index reconstitutions and other index repositioning events may hinder a Fund’s ability to meet its investment objective.
If an underlying index includes instruments that
trade on a different market than a Fund, the Fund's return may vary from the performance of the underlying index because different markets may close before the NYSE opens or may not be open for business on the same calendar days as a Fund.
Index Tracking Strategy Risk
Securities held by
a Fund will generally not be bought or sold in response to market fluctuations and may be concentrated in a particular industry if its underlying index is so concentrated. A Fund will generally not sell a security because its issuer is in financial
trouble or its value has declined, unless that holding is removed or is anticipated to be removed from its underlying index.
A Fund’s underlying index
relies on various sources of information to assess the securities included in its underlying index, including information that may be based on assumptions or estimates. There is no assurance that the index provider’s calculation methodology or
sources of information will provide an accurate assessment of its underlying index’s securities. Errors in underlying index data, underlying index computations or the construction of the underlying index in accordance with its methodology
may
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|
Direxion Shares ETF
Trust Prospectus
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occur from time to
time and may not be identified and corrected by the index provider for a period of time or at all, which may have an adverse impact on a Fund and its shareholders.
Consumer Discretionary Sector Risk
Because companies in the consumer discretionary
sector manufacture products and provide discretionary services directly to the consumer, the success of these companies is tied closely to the performance of the overall domestic and international economy, interest rates, competition and consumer
confidence. Success depends heavily on disposable household income and consumer spending. Also, companies in the consumer discretionary sector may be subject to severe competition, which may have an adverse impact on a company’s profitability.
Changes in demographics and consumer tastes also can affect the demand for, and success of, consumer discretionary products in the marketplace.
Consumer Services
Industry Risk
The success of consumer product
manufacturers and retailers (including food and drug retailers, general retailers, media, and travel and leisure) is tied closely to the performance of the domestic and international economy, interest rates, exchange rates, competition and consumer
confidence. The consumer services industry depends heavily on disposable household income and consumer spending. Companies in the consumer services industry may be subject to severe competition, which may also have an adverse impact on their
profitability. Changes in demographics and consumer preferences may affect the success of consumer service providers.
Financials Sector Risk
Performance of companies in the financials sector
may be materially impacted by many factors, including but not limited to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is
largely dependent on the availability and cost of capital and can fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also
subject to substantial government regulation and intervention, which may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may
change frequently and may have significant adverse consequences for financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various
countries on any individual financial company or of the financials sector as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Healthcare Sector Risk
The profitability of companies in the healthcare
sector may be affected by extensive, costly and uncertain government regulation, restrictions on government reimbursement for
medical expenses, rising costs of medical products
and services, pricing pressure, an increased emphasis on outpatient services, limited number of products, industry innovation, changes in technologies and other market developments. Many healthcare companies are heavily dependent on patent
protection. The expiration of patents may adversely affect the profitability of these companies. Many healthcare companies are subject to extensive litigation based on product liability and similar claims. Healthcare companies are subject to
competitive forces that may make it difficult to raise prices and, in fact, may result in price discounting. Many new products in the healthcare sector may be subject to regulatory approvals. The process of obtaining such approvals may be long and
costly.
Technology Sector Risk
The market prices
of technology-related securities tend to exhibit a greater degree of market risk and sharp price fluctuations than other types of securities. These securities may fall in and out of favor with investors rapidly, which may cause sudden selling and
dramatically lower market prices. Technology securities also may be affected adversely by changes in technology, consumer and business purchasing patterns, government regulation and/or obsolete products or services. In addition, a rising interest
rate environment tends to negatively affect technology companies. Technology companies having high market valuations may appear less attractive to investors, which may cause sharp decreases in their market prices. Further, those technology companies
seeking to finance expansion would have increased borrowing costs, which may negatively impact earnings.
Large-Capitalization Company Risk
Large-capitalization companies may be less able to
adapt to changing market conditions or to respond quickly to competitive challenges or to changes in business, product, financial, or market conditions. Larger companies may not be able to maintain growth at rates that may be achieved by
well-managed smaller and mid-size companies, which may affect the companies’ returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Micro-Capitalization
Company Risk
Stock prices of
micro-capitalization companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition, micro-capitalization companies often have limited product lines, narrower
markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or mid-capitalization. In addition, because these stocks are not
well known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is
available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity of securities held by a Fund.
Direxion Shares
ETF Trust Prospectus
|
14
|
As a result, their
performance can be more volatile and they face greater risk of business failure, which could increase the volatility of a Fund’s portfolio.
Small- and/or Mid-Capitalization Company
Risk
Small- and/or mid-capitalization companies often
have narrower markets for their goods and/or services and more limited managerial and financial resources. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management
group. Because these stocks are not well-known to the investing public, there will normally be less publicly available information concerning these securities. Adverse publicity and investor perceptions, whether or not based on fundamental analysis,
can decrease the value and liquidity of securities held by a Fund, resulting in more volatile performance. They also face greater risk of business failure, which could increase the volatility of a Fund’s portfolio.
Foreign Securities
Risk
Foreign instruments may involve greater
risks than domestic instruments. As a result, a Fund’s returns and NAV may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in
other countries. The laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the United States, and there may be less public information available about foreign
companies.
Foreign securities
may involve additional risk, including, greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political
instability. Certain foreign markets may rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or countries, organizations,
entities and/or individuals, changes in international trade patterns, trade barriers, and other protectionists or retaliatory measures.
Currency Exchange Rate Risk
Changes in foreign currency exchange rates will
affect the value of what a Fund owns and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities
markets.
Depositary Receipt
Risk
To the extent a Fund invests in, or has
exposure to, foreign companies, investment may be in the form of depositary receipts or other securities convertible into securities of foreign issuers. American Depositary Receipts (“ADRs”) are receipts typically issued by an American
bank or trust company that evidence ownership of underlying securities issued by a foreign corporation. European Depositary Receipts (“EDRs”) are receipts issued in Europe that evidence a similar ownership arrangement. Global Depositary
Receipts (“GDRs”) are receipts
issued throughout the world that evidence a similar
arrangement. Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are designed for use in European securities markets. GDRs are tradable both in the United States and in Europe and are
designed for use throughout the world. Depositary receipts will not necessarily be denominated in the same currency as their underlying securities.
Depositary receipts may be purchased
through “sponsored” or “unsponsored” facilities. A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a depositary may establish an unsponsored facility without
participation by the issuer of the depositary security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of an unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts of the deposited securities.
Fund investments in depositary
receipts, which include ADRs, GDRs and EDRs, are deemed to be investments in foreign securities for purposes of a Fund’s investment strategy.
International
Closed-Market Trading Risk
Because a
Fund’s investments may be traded in markets that are closed when the Exchange is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
,
the last quote from its closed foreign market), resulting in premiums or discounts to NAV that may be greater than those experienced by other ETFs.
Adverse Market Conditions Risk
The performance of each Fund is designed to
correlate to the performance of its underlying index. As a consequence, a Fund’s performance will suffer during conditions which are adverse to its investment objective. For example, if its underlying index has fallen on a given day, a
Fund’s performance also should fall. Conversely, if its underlying index has risen on a given day, a Fund’s performance should rise.
Cybersecurity Risk
The increased use of technologies, such as the
internet, to conduct business increases the operational, information security and related “cyber” risks both directly to a Fund and through its service providers. Similar types of cyber security risks are also present for issuers of
securities in which a Fund may invest, which could result in material adverse consequences for such issuers. Unlike many other types of risks faced by a Fund, these risks typically are not covered by insurance. Cyber incidents can result from
deliberate attacks or unintentional events. Cyber incidents may include, but are not limited to, gaining unauthorized access to digital systems (
e.g.
, through “hacking” or malicious software
coding) for purposes of misappropriating assets or sensitive information, corrupting data, causing physical damage to computer or network systems, or causing operational disruption. Cyber attacks may also be carried out in a manner that does not
require gaining unauthorized access, such
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|
Direxion Shares ETF
Trust Prospectus
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as causing denial-of-service attacks on websites (
i.e
., efforts to make network services unavailable to intended users).
Failures or breaches of the
electronic systems of a Fund, a Fund’s advisor, distributor, other service providers, counterparties, securities trading venues, or the issuers of securities in which a Fund invests have the ability to cause disruptions and negatively impact a
Fund’s business operations, potentially resulting in financial losses to a Fund and its shareholders. Cyber attacks may also interfere with the Fund’s calculation of its NAV, result in the submission of erroneous trades or erroneous
creation or redemption orders, and could lead to violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs and/or additional compliance costs. While a Fund has
established business continuity plans, there are inherent limitations in such plans, including the possibility that certain risks have not been identified and that prevention and remediation efforts will not be successful. Furthermore, a Fund cannot
control the cyber security plans and systems of a Fund’s service providers or issuers of securities in which a Fund invests.
Early Close/Trading Halt Risk
An exchange or market may close or issue trading
halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in a Fund being unable to buy or sell certain securities or financial instruments. For example, there is a
risk that sharp price declines in securities owned by the Fund may trigger trading halts, which may result in the Fund’s shares trading at an increasingly large discount to NAV during part of, or all of, the trading day. In such circumstances,
a Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
Equity Securities Risk
Publicly-issued equity securities, including common
stocks, are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which a Fund invests will cause the NAV of the Fund to fluctuate.
High Portfolio Turnover Risk
Engaging in active and frequent trading leads to
increased portfolio turnover, higher transaction costs, and the possibility of increased short-term capital gains (which will be taxable to shareholders as ordinary income when distributed to them) and/or long-term capital gains.
Investment Risk
An investment in a Fund is not a deposit in a bank
and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Liquidity Risk
Some securities
held by a Fund, including derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including, but not limited to, an
economic crisis, natural disasters, new
legislation or regulatory changes inside or outside
the United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If a Fund is forced to sell an illiquid security at an unfavorable time or price, a Fund may incur a loss. Certain market conditions may
prevent a Fund from limiting losses, realizing gains or achieving a high correlation with its underlying index. There is no assurance that a security that is deemed liquid when purchased will continue to be liquid.
Market Risk
Market risks include political, regulatory, market
and economic developments, including developments that impact specific economic sectors, industries or segments of the market. A Fund typically would lose value on a day when its underlying index declines and would gain value on a day when its
underlying index increases. During a general downturn in the securities market, multiple asset classes may be negatively impacted.
Turbulence in the financial markets
and reduced liquidity may negatively affect issuers, which could have an adverse effect on each Fund. A Fund’s NAV could decline over short periods due to short-term market movements and over longer periods during market downturns.
Non-Diversification Risk
A Fund invests a high percentage of its assets in a
limited number of securities. A Fund’s NAV and total return may fluctuate more, or fall greater, in times of weaker markets than a diversified mutual fund because the Fund may invest its assets in a smaller number of issuers or may invest a
larger proportion of its assets in a single issuer. As a result, the gains or losses on a single investment may have a greater impact on a Fund’s NAV and may make a Fund more volatile than more diversified funds.
Regulatory Risk
Each Fund is subject to the risk that a change in
U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Fund’s operations and/or change the competitive landscape.
Additional legislative or regulatory
changes could occur that may materially and adversely affect each Fund. For example, the regulatory environment for derivative instruments in which a Fund may invest is evolving, and changes in the regulation or taxation of derivative instruments
may materially and adversely affect the ability of a Fund to pursue its investment objective or strategies. Such legislative or regulatory changes could pose additional risks and result in material adverse consequences to a Fund.
Securities Lending Risk
Securities lending
involves the risk that a Fund may lose money because the borrower of the loaned securities fails to return the securities in a timely manner or at all. A Fund could also lose money in the event of a decline in the value of collateral provided for
loaned securities, a decline in the value of any investments made with cash collateral, or a “gap” between the return on cash collateral reinvestments and any fees a Fund has agreed to pay a borrower. These events could also trigger
adverse tax consequences for a Fund. In the event of a large redemption while a Fund has
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ETF Trust Prospectus
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|
loaned portfolio securities, a Fund may suffer
losses (
e.g
. overdraft fees) if it is unable to recall the securities on loan in time to fulfill the redemption.
Special Risks of Exchange-Traded
Funds
Authorized Participants Concentration Risk
. A Fund may have a limited number of financial institutions that may act as Authorized Participants. Only Authorized Participants who have entered into agreements with a Fund’s distributor may
engage in creation or redemption transactions directly with the Fund. To the extent that those Authorized Participants exit the business or are unable to process creation and/or redemption orders, Shares may trade at a discount to NAV and possibly
face trading halts and/or delisting. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or investments that have lower trading volumes.
Market Price
Variance Risk
. Shares of a Fund that are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at NAV. The market prices of Shares will
fluctuate in response to changes in the value of a Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than NAV (a premium) or less than NAV (a
discount). The Adviser cannot predict if Shares will trade at a
premium or discount to the Fund’s NAV. Given the fact that Shares can be created and redeemed in creation units, the
Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and a shareholder may trade shares at a premium or a discount to a
Fund’s NAV. A Fund’s investment results are measured based upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent with those
experienced by those creating and redeeming directly with a Fund. There is no guarantee that an active secondary market will develop for Shares of a Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other
participants are unavailable or unable to trade a Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on a Fund’s Shares may widen and a Fund’s Shares may possibly be subject
to trading halts and/or delisting.
Trading Issues
. Trading in Shares on the Exchange may be halted due to market conditions or for reasons that, in the view of the Exchange, make trading in Shares inadvisable, such as extraordinary market volatility
or other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the Exchange or markets. There can be no assurance that Shares will continue to meet the listing requirements of the
Exchange, and the listing requirements may be amended from time to time.
A Precautionary Note to Retail
Investors
. The Depository Trust Company (“DTC”), a limited trust company and securities depositary that serves as a national clearinghouse for the settlement of trades for its participating banks and
broker-dealers, or its nominee, will be the registered owner of all outstanding Shares of each Fund of the Trust. Your
ownership of Shares will be shown on the records of
DTC and the DTC Participant broker through whom you hold the Shares. THE TRUST WILL NOT HAVE ANY RECORD OF YOUR OWNERSHIP. Your account information will be maintained by your broker, who will provide you with account statements, confirmations of
your purchases and sales of Shares, and tax information. Your broker also will be responsible for ensuring that you receive shareholder reports and other communications from a Fund whose Shares you own. Typically, you will receive other services (
e.g.
, average basis information) only if your broker offers these services.
A Precautionary Note to Purchasers of
Creation Units
. Because new Shares may be issued on an ongoing basis, a “distribution” of Shares could be occurring at any time. As a dealer, certain activities on your part could, depending on the
circumstances, result in your being deemed a participant in the distribution, in a manner that could render you a statutory underwriter and subject you to the prospectus delivery and liability provisions of the Securities Act of 1933, as amended
(“Securities Act”). For example, you could be deemed a statutory underwriter if you purchase Creation Units from an issuing Fund, break them down into the constituent Shares and sell those Shares directly to customers, or if you choose
to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for Shares. Whether a person is an underwriter depends upon all of the facts and circumstances pertaining to that
person’s activities, and the examples mentioned here should not be considered a complete description of all the activities that could cause you to be deemed an underwriter. Dealers who are not “underwriters,” but are participating
in a distribution (as opposed to engaging in ordinary secondary market transactions), and thus dealing with Shares as part of an “unsold allotment” within the meaning of Section 4(3)(C) of the Securities Act, will be unable to take
advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities Act.
A Precautionary Note
to Investment Companies
. For purposes of the Investment Company Act of 1940, as amended (“1940 Act”) each Fund is a registered investment company, and the acquisition of Shares by other investment
companies is subject to the restrictions of Section 12(d)(1) thereof. Section 12(d)(1) of the 1940 Act restricts investments by investment companies in the securities of other investment companies, including shares of each Fund. Provided, generally,
that a Fund’s investments comply with Section 12(d)(1)(A), registered investment companies are permitted to invest in a Fund beyond the limits set forth in Section 12(d)(1) subject to certain terms and conditions, including that such
investment companies enter into an agreement with a Fund.
The Trust and the Funds have obtained
an exemptive order from the U.S. Securities and Exchange Commission (the “SEC”) allowing a registered investment company to invest in a Fund beyond the limits of Section 12(d)(1) subject to certain conditions, including that a registered
investment company enters into a Participation Agreement with the Trust regarding the terms of the investment. Any investment company considering purchasing Shares of a Fund in amounts that
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Direxion Shares ETF
Trust Prospectus
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would cause it to exceed the restrictions under Section
12(d)(1) should contact the Trust.
A Precautionary Note Regarding Unusual
Circumstances
. The Trust can postpone payment of redemption proceeds for any period during which (1) the Exchange is closed other
than customary weekend and holiday closings, (2)
trading on the Exchange is restricted, as determined by the SEC, (3) any emergency circumstances exist, as determined by the SEC, or (4) the SEC by order permits for the protection of shareholders of a Fund.
Direxion Shares
ETF Trust Prospectus
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18
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Share Price of the Funds
A fund’s share price is known
as its NAV. Each Fund’s share price is calculated as of the close of regular trading on the NYSE, usually 4:00 p.m. Eastern Time (“Valuation Time”), each day the NYSE is open for business (“Business Day”). The NYSE is
open for business, Monday through Friday, except in observation of the following holidays: New Year’s Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The NYSE may close early on the business day before each of these holidays and on the day after Thanksgiving Day. NYSE holiday schedules are subject to change without notice.
If the exchange or market on which a
Fund’s investments are primarily traded closes early, the NAV may be calculated prior to its normal calculation time. Creation/redemption transaction order time cutoffs would also be accelerated.
The value of a Fund’s assets that
trade in markets outside the United States or in currencies other than the U.S. Dollar may fluctuate when foreign markets are open but a Fund is not open for business.
Share price is calculated by dividing
a Fund’s net assets by its shares outstanding. In calculating its NAV, a Fund generally values its assets on the basis of market quotations, last sale prices, or estimates of value furnished by a pricing service or brokers who make markets in
such instruments. If such information is not available for a security held by a Fund, is determined to be unreliable, or (to the Adviser’s knowledge) does not reflect a significant event occurring after the close of the market on which the
security principally trades (but before the close of trading on the NYSE), the security will be valued at fair value estimates by the Adviser under guidelines established by the Board of Trustees. Foreign securities, currencies and other assets
denominated in foreign currencies are translated into U.S. Dollars at the exchange rate of such currencies against the U.S. Dollar, as provided by an independent pricing service or reporting agency. Each Fund also relies on a pricing service in
circumstances where the U.S. securities markets exceed a pre-determined threshold to value foreign securities held in a Fund’s portfolio. The pricing service, its methodology or the threshold may change from time to time. Debt obligations with
maturities of 60 days or less are valued at amortized cost.
Fair Value Pricing.
Securities are priced at a fair value as determined by the Adviser, under the oversight of the Board of Trustees, when reliable market quotations are not readily available, the Funds' pricing service does not provide a
valuation for such securities, the Funds' pricing service provides a valuation that in the judgment of the Adviser does not represent fair value, the Adviser believes that the market price is stale, or an event that affects the value of an
instrument (a “Significant Event”) has occurred since closing prices were established, but before the time as of which a Fund calculates its NAV. Examples of Significant Events may include: (1) events that relate to a single issuer or to
an entire market sector; (2) significant fluctuations in domestic or foreign markets; or (3) occurrences not tied directly to the securities markets, such as natural disasters, armed conflicts, or significant government actions. If such Significant
Events occur, the Funds may value the instruments at fair value, taking into account such events when it calculates each Fund’s NAV. Fair value determinations are made in good faith in accordance with procedures adopted by the Board of
Trustees. In addition, the Funds may also fair value an instrument if trading in a particular instrument is halted and does not resume prior to the closing of the exchange or other market.
Attempts to determine the fair value
of securities introduce an element of subjectivity to the pricing of securities. As a result, the price of a security determined through fair valuation techniques may differ from the price quoted or published by other sources and may not accurately
reflect the market value of the security when trading resumes. If a reliable market quotation becomes available for a security formerly valued through fair valuation techniques, Rafferty compares the market quotation to the fair value price to
evaluate the effectiveness of the Funds' fair valuation procedures and will use that market value in the next calculation of NAV.
Rule 12b-1 Fees
The Board of Trustees of the Trust
has adopted a Distribution and Service Plan (the “Plan”) pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Plan, each Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year for certain
distribution-related activities and shareholder services.
No 12b-1 fees are currently paid by a
Fund, and there are no plans to impose these fees. However, in the event 12b-1 fees are charged in the future, because the fees are paid out of each Fund’s assets, over time these fees will increase the cost of your investment and may cost you
more than certain other types of sales charges.
Creations, Redemptions and Transaction
Fees
Creation Units.
Investors such as market makers, large investors and institutions who wish to deal in Creation Units directly with a Fund must have entered into an authorized participant agreement (“Authorized Participant
Agreement”) with the principal underwriter and the transfer agent, or purchase through a dealer that has entered into such an agreement. These investors are known as “Authorized Participants.” Set forth below is a brief description
of the procedures applicable to the purchase and redemption of Creation Units.
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Purchase of a Fund
. To purchase Creation Units directly from a Fund, you must deposit with the Fund a basket of securities and/or cash. Each Business Day, prior to the opening of trading on the Exchange, an agent of the Fund (“Index
Receipt Agent”) will make available through the National Securities Clearing Corporation (“NSCC”) a list of the names and number of shares of each security, if any, to be included in that day’s creation basket (“Deposit
Securities”). The identity and number of shares of the Deposit Securities required for a Creation Unit will change from time to time. Each Fund reserves the right to permit or require the substitution of an amount of cash
–
i.e.
, a “cash in lieu”
amount
–
to be added to the Balancing Amount (defined below) to replace any Deposit
Security that may not be available in sufficient quantity for delivery, eligible for transfer through the clearing process (discussed below) or the Federal Reserve System or eligible for trading by an Authorized Participant or the investor for which
it is acting. For such custom orders, “cash in lieu” may be added to the Balancing Amount (defined below). The Balancing Amount and any “cash in lieu” must be paid to the Trust on or before the third Business Day following
the Transmittal Date. You must also pay a Transaction Fee, described below, in cash.
In addition to the in-kind deposit of
securities, Authorized Participants will either pay to, or receive from, a Fund an amount of cash referred to as the “Balancing Amount.” The Balancing Amount is the amount equal to the differential, if any, between the market value of
the Deposit Securities and the NAV of a Creation Unit. Each Fund will publish, on a daily basis, information about the previous day’s Balancing Amount.
All purchase orders for Creation
Units must be placed by or through an Authorized Participant. Purchase orders will be processed either through a manual clearing process run at the DTC (“Manual Clearing Process”) or through an enhanced clearing process (“Enhanced
Clearing Process”) that is available only to those DTC participants that also are participants in the Continuous Net Settlement System of the NSCC. Authorized Participants that do not use the Enhanced Clearing Process will be charged a higher
Transaction Fee (discussed below). A purchase order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent’s automated system, telephone, facsimile or other means
permitted under the Authorized Participant Agreement, in order to receive that day’s NAV per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that
day.
Shares may be issued in
advance of receipt of Deposit Securities subject to various conditions including a requirement to maintain on deposit with the Trust cash in an amount up to 115% of the market value of the missing Deposit Securities. Any such transaction effected
with the Trust must be effected using the Manual Clearing Process consistent with the terms of the Authorized Participant Agreement.
Redemption from a Fund
. Redemption proceeds will be paid either in cash or in-kind with a basket of securities (“Redemption Securities”). Purchase orders will be processed either through a Manual Clearing Process or through
Enhanced Clearing Process that is available only to those DTC participants that also are participants in the Continuous Net Settlement System of the NSCC. Authorized Participants that do not use the Enhanced Clearing Process will be charged a higher
Transaction Fee (discussed below). In most cases, Redemption Securities will be the same as Deposit Securities on a given day. There will be times, however, when the Deposit and Redemption Securities differ. The composition of the Redemption
Securities will be available through the NSCC. Each Fund reserves the right to honor a redemption request with a non-conforming redemption basket.
If the value of a Creation Unit is
higher than the value of the Redemption Securities, you will receive from a Fund a Balancing Amount in cash. If the value of a Creation Unit is lower than the value of the Redemption Securities, you will be required to pay to the Fund a Balancing
Amount in cash. If you are receiving a Balancing Amount, the amount due will be reduced by the amount of the applicable Transaction Fee.
As with purchases, redemptions may be
processed either through the Manual Clearing Process or the Enhanced Clearing Process. Authorized Participants that do not use the Enhanced Clearing Process will be charged a higher Transaction Fee (discussed below). A redemption order must be
received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent’s automated system, telephone, facsimile or other means permitted under the Authorized Participant Agreement, in
order to receive that day’s NAV per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day.
An investor may request a redemption
in cash, which a Fund may in its sole discretion permit. Investors that elect to receive cash in lieu of one or more of the Redemption Securities are subject to an additional charge. Redemptions of Creation Units for cash (when available) and/or
outside of the Enhanced Clearing Process also require the payment of an additional charge.
Transaction Fees on Creation and
Redemption Transactions.
Each Fund will impose Transaction Fees to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units. There is a fixed and a variable component
to the total Transaction Fee on transactions in Creation Units. A fixed Transaction Fee is applicable to each creation and redemption transaction, regardless of the number of Creation Units transacted. Purchasers and redeemers of Creation Units
effected through the Manual Clearing Process may be required to pay an additional charge to compensate for brokerage and other expenses related to the costs of transferring the Deposit Securities to the Trust. A variable Transaction Fee based upon
the value of each Creation Unit also may be applicable to each purchase or redemption transaction. However, in no instance will the fees charged exceed 2% of the value of the Creation Units subject to a redemption transaction.
Purchasers
Direxion Shares
ETF Trust Prospectus
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and redeemers of Creation Units are responsible for
the costs of transferring securities to and from the Trust in connection with in-kind transactions. Investors who use the services of a broker or other such intermediary may pay additional fees for such services. In addition, Rafferty may, from time
to time, at its own expense, compensate purchasers of Creation Units who have purchased substantial amounts of Creation Units and other financial institutions for administrative or marketing services.
The table below summarizes the
components of the Transaction Fees.
Direxion
Shares ETF Trust
|
Fixed
Transaction Fee
|
Maximum
Additional
Charge for
Redemptions*
|
|
In-Kind
|
Cash
|
NSCC
|
Outside
NSCC
|
Outside
NSCC
|
Direxion
All Cap Insider Sentiment Shares
|
$500
|
Up
to 300% of NSCC Amount
|
$500
|
Up
to 2.00%
|
Direxion
NASDAQ-100
®
Equal Weighted Index Shares
|
$500
|
Up
to 300% of NSCC Amount
|
$500
|
Up
to 2.00%
|
*
|
As a percentage of the amount
invested.
|
Frequent Purchases and Redemptions
. The Trust’s Board of Trustees has determined not to adopt policies and procedures designed to prevent or monitor for frequent purchases and redemptions of each Fund’s shares because the Fund sells and
redeems its shares at NAV only in Creation Units pursuant to the terms of an Authorized Participant Agreement between the Authorized Participant and the Distributor, and such direct trading between the Fund and Authorized Participants is critical to
ensuring that the Fund’s shares trade at or close to NAV. Further, the vast majority of trading in Fund shares occurs on the secondary market, which does not involve a Fund directly and therefore does not cause a Fund to experience many of the
harmful effects of market timing, such as dilution and disruption of portfolio management. In addition, each Fund imposes a Transaction Fee on Creation Unit transactions, which is designed to offset transfer and other transaction costs incurred by
the Fund in connection with the issuance and redemption of Creation Units and may employ fair valuation pricing to minimize potential dilution from market timing. Although each Fund reserves the right to reject any purchase orders, each Fund does
not currently impose any trading restrictions on frequent trading or actively monitor for trading abuses.
How to Buy and Sell Shares
Each Fund issues and redeems Shares
only in large blocks of 50,000 Shares, called “Creation Units.”
Most investors will buy and sell
Shares of each Fund in secondary market transactions through brokers. Individual Shares of each Fund, once listed for trading on the Exchange, can be bought and sold throughout the trading day like other publicly traded securities. The Funds do not
require any minimum investment in such secondary market transactions.
When buying or selling Shares through
a broker, investors may incur customary brokerage commissions and charges, and may pay some or all of the spread between the bid and the offer prices in the secondary market. In addition, because secondary market transactions occur at market prices,
investors may pay more than NAV when buying Shares, and receive less than NAV when selling Shares.
The Adviser may pay brokers and other
financial intermediaries for educational training programs, the development of technology platforms and reporting systems or other administrative services related to a Fund. Ask your salesperson or visit your financial intermediary’s website
for more information.
The
Funds’ Exchange trading symbols are as follows:
Fund
|
Symbol
|
Direxion
All Cap Insider Sentiment Shares
|
KNOW
|
Direxion
NASDAQ-100
®
Equal Weighted Index Shares
|
QQQE
|
Share
prices are reported in dollars and cents per Share. For information about acquiring or selling Shares through a secondary market purchase, please contact your broker.
Book Entry
. Shares are held in book-entry form, which means that no stock certificates are issued. DTC or its nominee is the record owner of all outstanding Shares of the Funds and is recognized as the owner of all Shares for all
purposes.
Investors
owning Shares are beneficial owners as shown on the records of DTC or its participants. DTC serves as the securities depository for all Shares. Participants in DTC include securities brokers and dealers, banks, trust companies, clearing corporations
and other institutions that directly or indirectly maintain a custodial relationship with DTC. As a beneficial owner of Shares, you are not entitled to receive physical delivery of stock certificates or to have Shares registered in your name, and
you are not considered a registered owner of Shares. Therefore, to exercise any right as an owner of Shares, you must rely upon the procedures of DTC and its participants. These procedures are the same as those that apply to any other stocks that
you hold in book entry or “street name” through your brokerage account.
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Rafferty provides
investment management services to the Funds. Rafferty has been managing investment companies since 1997. Rafferty is located at 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019. As of October 31, 2018, the Adviser had
approximately $12.8 billion in assets under management.
Pursuant to an investment advisory
agreement between the Trust and Rafferty, each Fund pays Rafferty the following fee at an annualized rate based on a percentage of each Fund’s average daily net assets:
Fund
|
Advisory
Fee Charged
|
Direxion
All Cap Insider Sentiment Shares
|
0.40%*
|
Direxion
NASDAQ-100
®
Equal Weighted Index Shares
|
0.30%
|
* The
contractual advisory fee on net assets equal to or greater than $500 million will be 0.31%.
For the fiscal year
ended October 31, 2018, the Adviser received net management fees as a percentage of average daily net assets from each Fund as follows:
Fund
|
Percentage
|
Direxion
All Cap Insider Sentiment Shares
|
0.31%
|
Direxion
NASDAQ-100
®
Equal Weighted Index Shares
|
0.16%
|
A discussion
regarding the basis on which the Board of Trustees approved the investment advisory agreement for the Funds is included in the Funds' Annual Report for the period ended October 31, 2018.
Rafferty has entered into an
Operating Expense Limitation Agreement with each Fund. Under this Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse each Fund for Other Expenses through
September 1, 2020, to the extent that a Fund’s Total Annual Fund Operating Expenses exceed the percentage listed in the table below of the Fund’s average daily net assets (excluding, as applicable, among other expenses, taxes, swap
financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
Any expense waiver or reimbursement
is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. Solely at Rafferty’s
option and discretion, Rafferty may pay, reimburse or otherwise assume one or more of the excluded expenses, in which case such expense will be subject to reimbursement by Rafferty in accordance with the Operating Expense Limitation Agreement. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
Fund
|
Expense
Cap
|
Direxion
All Cap Insider Sentiment Shares
|
0.59%
|
Direxion
NASDAQ-100
®
Equal Weighted Index Shares
|
0.35%
|
Paul
Brigandi and Tony Ng are jointly and primarily responsible for the day-to-day management of the Funds (the “Portfolio Managers”). An investment trading team of Rafferty employees assists the Portfolio Managers in the day-to-day
management of the Funds subject to their primary responsibility and oversight. The Portfolio Managers work with the investment trading team to decide the target allocation of each Fund’s investments and on a day-to-day basis, an individual
portfolio trader executes transactions for the Funds consistent with the target allocation. The members of the investment trading team rotate periodically among the various series of the Trust, including the Funds, so that no single individual is
assigned to a specific Fund for extended periods of time.
Mr. Brigandi has been a Portfolio
Manager at Rafferty since June 2004. Mr. Brigandi was previously involved in the equity trading training program for Fleet Boston Financial Corporation from August 2002 to April 2004. Mr. Brigandi is a 2002 graduate of Fordham University.
Mr. Ng has been a Portfolio Manager
at Rafferty since April 2006. Mr. Ng was previously a Team Leader in the Trading Assistant Group with Goldman Sachs from 2004 to 2006. He was employed with Deutsche Asset Management from 1998 to 2004. Mr. Ng graduated from State University at
Buffalo in 1998.
The Funds'
Statement of Additional Information ("SAI") provides additional information about the investment team members’ compensation, other accounts they manage and their ownership of securities in the Funds.
A description of the Funds' policies
and procedures with respect to the disclosure of the Funds' portfolio securities is available in the Funds' SAI.
Direxion Shares
ETF Trust Prospectus
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Foreside Fund Services, LLC
(“Distributor”) serves as the Funds’ distributor. U.S. Bancorp Fund Services, LLC (“USBFS”) serves as the Funds’ administrator. Bank of New York Mellon (“BNYM”) serves as the transfer agent, fund
accountant, custodian and index receipt agent for the Funds. The Distributor is not affiliated with Rafferty, USBFS, or BNYM.
Fund Distributions
. Each Fund pays out dividends from its net investment income, and distributes any net capital gains, if any, to its shareholders at least annually. Each Fund is authorized to declare and pay capital gain distributions
in additional Shares or in cash. A Fund may have extremely high portfolio turnover, which may cause it to generate significant amounts of taxable income. Each Fund will generally need to distribute net short-term capital gain to satisfy certain tax
requirements. As a result of the Funds' high portfolio turnover, they could need to make larger and/or more frequent distributions than traditional ETFs.
Dividend Reinvestment Service
. Brokers may make the DTC book-entry dividend reinvestment service (“Reinvestment Service”) available to their customers who are shareholders of a Fund. If the Reinvestment Service is used with respect to a
Fund, its distributions of both net income and capital gains will automatically be reinvested in additional and fractional Shares thereof purchased in the secondary market. Without the Reinvestment Service, investors will receive Fund distributions
in cash, except as noted above under “Fund Distributions.” To determine whether the Reinvestment Service is available and whether there is a commission or other charge for using the service, consult your broker. Fund shareholders should
be aware that brokers may require them to adhere to specific procedures and timetables to use the Reinvestment Service.
As with any investment, you
should consider the tax consequences of buying, holding, and disposing of Shares. The tax information in this Prospectus is only a general summary of some important federal tax considerations generally affecting a Fund and its shareholders. No
attempt is made to present a complete explanation of the federal tax treatment of the Funds' activities, and this discussion is not intended as a substitute for careful tax planning. Accordingly, potential investors are urged to consult their own
tax advisers for more detailed information and for information regarding any state, local, or foreign taxes applicable to the Funds and to an investment in Shares.
Fund distributions to you and your
sale of your Shares will have tax consequences to you unless you hold your Shares through a tax-exempt entity or tax-deferred retirement arrangement, such as an individual retirement account (“IRA”) or 401(k) plan.
Each Fund intends to continue to
qualify each taxable year for taxation as a “regulated investment company” under Subchapter M of the Internal Revenue Code. If a Fund so qualifies and satisfies certain distribution requirements, the Fund will not be subject to federal
income tax on income that is distributed in a timely manner to its shareholders in the form of income dividends or capital gain distributions.
Taxes on Distributions
. Dividends from a Fund’s investment company taxable income
–
generally, the sum of net investment income, the excess of net short-term capital gain over net long-term capital loss, and net gains and losses from certain foreign currency transactions, if any, all determined without
regard to any deduction for dividends paid
–
will be taxable to you as ordinary
income to the extent of its earnings and profits, whether they are paid in cash or reinvested in additional Shares. However, dividends a Fund pays to you that are attributable to its “qualified dividend income” (i.e., dividends it
receives on stock of most domestic and certain foreign corporations with respect to which it satisfies certain holding period and other restrictions) generally will be taxed to you, if you are an individual, trust, or estate and satisfy those
restrictions with respect to your Shares, for federal income tax purposes, at the rates of 15% or 20% for such shareholders with taxable income exceeding certain thresholds (which will be indexed for inflation annually). A portion of a Fund’s
dividends also may be eligible for the dividends-received deduction allowed to corporations
–
the eligible portion may not exceed the aggregate dividends the Fund receives from domestic corporations subject to federal income tax (excluding real estate investment trusts) and excludes dividends from foreign
corporations
–
subject to similar restrictions; however, dividends a corporate
shareholder deducts pursuant to that deduction are subject indirectly to the federal alternative minimum tax. No Fund expects to earn a significant amount of income that would qualify for those maximum rates or that deduction.
Distributions of a Fund’s net
capital gain (which is the excess of net long-term capital gain over net short-term capital loss) that it recognizes on sales or exchanges of capital assets (“capital gain distributions”), if any, will be taxable to you as long-term
capital gains, at the maximum rates mentioned above if you are an individual, trust, or estate, regardless of your holding period for the Shares on which the distributions are paid and regardless of whether they are paid in cash or reinvested in
additional Shares. A Fund’s capital gain distributions may vary considerably from one year to the next as a
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Direxion Shares ETF
Trust Prospectus
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result of its investment activities and cash flows and
the performance of the markets in which it invests. No Fund expects to earn a significant amount of net capital gain.
Distributions in excess of a
Fund’s current and accumulated earnings and profits, if any, first will reduce your adjusted tax basis in your Shares in the Fund and, after that basis is reduced to zero, will constitute capital gain. That capital gain will be long-term
capital gain, and thus will be taxed at the maximum rates mentioned above if you are an individual, trust, or estate if the distributions are attributable to Shares you held for more than one year.
Investors should be aware that the
price of Shares at any time may reflect the amount of a forthcoming dividend or capital gain distribution, so if they purchase Shares shortly before the record date therefor, they will pay full price for the Shares and receive some part of the
purchase price back as a taxable distribution even though it represents a partial return of invested capital.
In general, distributions are subject to
federal income tax for the year when they are paid. However, certain distributions paid in January may be treated as paid on December 31 of the prior year.
Because of the possibility of high
portfolio turnover, the Funds may generate significant amounts of taxable income. Accordingly, the Funds may need to make larger and/or more frequent distributions than traditional unleveraged ETFs. A substantial portion of that income typically
will be short-term capital gain, which will generally be treated as ordinary income when distributed to shareholders.
Fund distributions to tax-deferred or
qualified plans, such as an IRA, retirement plan or pension plan, generally will not be taxable. However, distributions from such plans will be taxable to the individual participant notwithstanding the character of the income earned by the qualified
plan. Please consult a tax adviser for a more complete explanation of the federal, state, local and foreign tax consequences of investing in a Fund through such a plan.
Taxes When Shares are Sold.
Generally, you will recognize taxable gain or loss if you sell or otherwise dispose of your Shares. Any gain arising from such a disposition generally will be treated as long-term capital gain if you held the Shares for
more than one year, taxable at the maximum rates (15% or 20%) mentioned above if you are an individual, trust, or estate; otherwise, the gain will be treated as short-term capital gain. However, any capital loss arising from the disposition of
Shares held for six months or less will be treated as long-term capital loss to the extent of capital gain distributions, if any, received with respect to those Shares. In addition, all or a portion of any loss recognized on a sale or exchange of
Shares of a Fund will be disallowed to the extent other Shares of the same Fund are purchased (whether through reinvestment of distributions or otherwise) within a period of 61 days beginning 30 days before and ending 30 days after the date of the
sale or exchange; in that event, the basis in the newly purchased Shares will be adjusted to reflect the disallowed loss.
Holders of Creation Units
. A person who purchases Shares of a Fund by exchanging securities for a Creation Unit generally will recognize capital gain or loss equal to the difference between the market value of the Creation Unit and the
person’s aggregate basis in the exchanged securities, adjusted for any Balancing Amount paid or received. A shareholder who redeems a Creation Unit generally will recognize gain or loss to the same extent and in the same manner as described in
the immediately preceding paragraph.
Miscellaneous.
Backup Withholding
. A Fund must withhold and remit to the U.S. Treasury 24% of dividends and capital gain distributions otherwise payable to any individual or
certain other non-corporate shareholder who fails to certify that the social security or other taxpayer identification number furnished to the Fund is correct or who furnishes an incorrect number (together with the withholding described in the next
sentence, “backup withholding”). Withholding at that rate also is required from a Fund’s dividends and capital gain distributions otherwise payable to such a shareholder who is subject to backup withholding for any other reason.
Backup withholding is not an additional tax, and any amounts so withheld may be credited against a shareholder’s federal income tax liability or refunded.
Additional Tax
. An individual must pay a 3.8% federal tax on the lesser of (1) the individual’s “net investment income,” which generally includes dividends, interest, and net gains from the disposition of investment
property (including dividends and capital gain distributions a Fund pays and net gains realized on the sale or redemption of Shares), or (2) the excess of the individual’s “modified adjusted gross income” over a threshold amount
($250,000 for married persons filing jointly and $200,000 for single taxpayers). This tax is in addition to any other taxes due on that income. A similar tax will apply for those years to estates and trusts. Shareholders should consult their own tax
advisers regarding the effect, if any, this provision may have on their investment in Fund shares.
Basis Determination
. A shareholder who wants to use the average basis method for determining basis in Shares he or she acquires after December 31, 2011 (“Covered Shares”), must elect to do so in writing (which may be electronic)
with the broker through which he or she purchased the Shares. A shareholder who wishes to use a different IRS-acceptable method for basis determination (
e.g.
, a specific identification method) may elect to do
so. Fund shareholders are urged to consult with their brokers regarding the application of the basis determination rules to them.
You may also be subject to state and
local taxes on Fund distributions and dispositions of Shares.
Non-U.S. Shareholders
. “A “non-U.S. shareholder” is an investor that, for federal tax purposes, is a nonresident alien individual, a foreign corporation or a foreign estate or trust. Except where discussed otherwise, the
following disclosure assumes that a non-U.S. shareholder’s ownership of Shares is not effectively connected with a trade or business conducted by such non-U.S.
Direxion Shares
ETF Trust Prospectus
|
24
|
shareholder in the United States and does not
address non-U.S. shareholders who are present in the United States for 183 days or more during the taxable year. The tax consequences to a non-U.S. shareholder entitled to claim the benefits of an applicable tax treaty may be different from those
described herein. Non-U.S. shareholders should consult their tax advisers with respect to the particular tax consequences to them of an investment in a Fund.
Withholding
. Dividends paid by a Fund to non-U.S. shareholders will be subject to withholding tax at a 30% rate or a reduced rate specified by an applicable income tax treaty to the extent derived from investment income (other than
“qualified interest income” or “qualified short-term capital gains,” as described below). In order to obtain a reduced rate of withholding, a non-U.S. shareholder will be required to provide an IRS Form W-8BEN (or substitute
form) certifying its entitlement to benefits under a treaty. The withholding tax does not apply to regular dividends paid to a non-U.S. shareholder who provides an IRS Form W-8ECI, certifying that the dividends are effectively connected with the
non-U.S. shareholder’s conduct of a trade or business within the United States. Instead, the effectively connected dividends will be subject to regular U.S. income tax as if the non-U.S. shareholder were a U.S. shareholder. A non-U.S.
corporation’s earnings and profits attributable to such dividends may also be subject to additional “branch profits tax” imposed at a rate of 30% (or lower treaty rate).
A non-U.S. shareholder who fails to
provide an IRS Form W-8BEN or other applicable form may be subject to backup withholding at the appropriate rate. See the discussion of backup withholding under “Miscellaneous” above.
Exemptions from Withholding
. In general, federal income tax will not apply to gain realized on the sale or other disposition of Shares or to any Fund distributions reported as capital gain dividends, short-term capital gain dividends, or
interest-related dividends.
“ Short-term capital gain
dividends” are dividends that are attributable to “qualified short-term gain” a Fund realizes (generally, the excess of a Fund’s net short-term capital gain over long-term capital loss for a taxable year, computed with
certain adjustments). “Interest-related dividends” are dividends that are attributable to “qualified net interest income” from U.S. sources. Depending on its circumstances, a Fund may report all, some or none of its
potentially eligible dividends as short-term capital gain dividends and interest-related dividends and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. To qualify for the exemption, a non-U.S.
shareholder will need to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN or substitute form). In the case of shares held through an intermediary, the
intermediary may withhold even if a Fund designates the payment as a short-term capital gain dividend or an interest-related dividend. Non-U.S. shareholders should contact their intermediaries with respect to the application of these rules to their
accounts.
Foreign Account
Tax Compliance Act (“FATCA”).
Under FATCA, “foreign financial institutions” (“FFIs”) or “non-financial foreign entities” (“NFFEs”) that are Fund
shareholders may be subject to a generally nonrefundable 30% withholding tax on income dividends. As discussed more fully in the Funds' SAI under “Taxes,” the FATCA withholding tax generally can be avoided (a) by an FFI, if it reports
certain information regarding direct and indirect ownership of financial accounts U.S. persons hold with the FFI and (b) by an NFFE, if it certifies as such and, in certain circumstances, that (i) it has no substantial U.S. persons as owners or (ii)
it does have such owners and reports information relating to them to the withholding agent. The U.S. Treasury has negotiated intergovernmental agreements (“IGAs”) with certain countries and is in various stages of negotiations with other
foreign countries with respect to one or more alternative approaches to implement FATCA; entities in those countries may be required to comply with the terms of the IGA instead of Treasury regulations. Non-U.S. shareholders should consult their own
tax advisers regarding the application of these requirements to their own situation and the impact thereof on their investment in a Fund.
More information about taxes is in the
Funds' SAI.
The Trust enters into contractual
arrangements with various parties, which may include, among others, the Funds' investment adviser, custodian, and transfer agent, who provide services to the Funds. Shareholders are not parties to any such contractual arrangements and are not
intended beneficiaries of those contractual arrangements, and those contractual arrangements are not intended to create in any shareholder any right to enforce them against the service providers or to seek any remedy under them against the service
providers, either directly or on behalf of the Trust.
This Prospectus provides information
concerning the Funds that you should consider in determining whether to purchase Fund shares. Neither this Prospectus nor the SAI is intended, or should be read, to be or give rise to an agreement or contract between the Trust or the Funds and any
investor, or to give rise to any rights in any shareholder or other person other than any rights under federal or state law that may not be waived.
25
|
Direxion Shares ETF
Trust Prospectus
|
NASDAQ Index
. The NASDAQ-100
®
Equal Weighted
SM
Index is not sponsored, endorsed, sold or promoted by The NASDAQ OMX Group, Inc. or its affiliates (NASDAQ OMX, with its affiliates, are referred to as
the “Corporations”). The Corporations have not passed on the legality or suitability of, or the accuracy or adequacy of descriptions and disclosures relating to, the Direxion NASDAQ-100
®
Equal Weighted Shares. The Corporations make no representation or warranty, express or implied to the owners of the Direxion NASDAQ-100
®
Equal Weighted Shares or any member of the public regarding the advisability of investing in securities generally or in the Direxion NASDAQ-100
®
Equal Weighted Shares particularly, or the ability of the NASDAQ-100
®
Equal Weighted
SM
Index to track general stock market
performance. The Corporations’ only relationship to Rafferty Asset Management, LLC (“Licensee”) is in the licensing of the
NASDAQ
®
, OMX
®
, NASDAQ OMX
®
, and NASDAQ-100
®
Equal Weighted
SM
Index, Index registered trademarks, and certain trade names and service marks of the Corporations and the use of the NASDAQ-100
®
Equal Weighted
SM
Indexwhich is determined, composed
and calculated by NASDAQ OMX without regard to Licensee or the Direxion NASDAQ-100
®
Equal Weighted Shares. NASDAQ OMX has no obligation to take the
needs of the Licensee or the owners of the Direxion NASDAQ-100
®
Equal Weighted Shares into consideration in determining, composing or calculating
the NASDAQ-100
®
Equal Weighted
SM
Index. The
Corporations are not responsible for and have not participated in the determination of the timing of, prices at, or quantities of the Direxion
NASDAQ-100
®
Equal Weighted Shares to be issued or in the determination or calculation of the equation by which the Direxion NASDAQ-100
®
Equal Weighted Shares is to be converted into cash. The Corporations have no liability in connection with the administration, marketing or trading of
the Direxion NASDAQ-100
®
Equal Weighted Shares.
THE CORPORATIONS DO NOT GUARANTEE THE
ACCURACY AND/OR UNINTERRUPTED CALCULATION OF THE NASDAQ-100
®
EQUAL WEIGHTED INDEX OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS MAKE NO WARRANTY,
EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE DIREXION NASDAQ-100
®
EQUAL WEIGHTED SHARES, OR ANY OTHER PERSON OR
ENTITY FROM THE USE OF THE NASDAQ-100
®
EQUAL WEIGHTED INDEX OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS MAKE NO EXPRESS OR IMPLIED WARRANTIES,
AND EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE NASDAQ-100
®
EQUAL WEIGHTED
INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL THE CORPORATIONS HAVE ANY LIABILITY FOR ANY LOST PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES, EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
Sabrient
. The Sabrient indexes are the exclusive property of Sabrient Systems, LLC (“Sabrient”). Sabrient and the Sabrient index names are service mark(s) of Sabrient or its affiliates and have been licensed for use
for certain purposes by the Trust. The financial securities referred to herein are not sponsored, endorsed, or promoted by Sabrient, and Sabrient bears no liability with respect to any such financial securities. The Prospectus contains a more
detailed description of the limited relationship Sabrient has with the Trust and any related financial securities. No purchaser, seller or holder of this product, or any other person or entity, should use or refer to any Sabrient trade name,
trademark or service mark to sponsor, endorse, market or promote this product without first contacting Sabrient to determine whether Sabrient’s permission is required. Under no circumstances may any person or entity claim any affiliation with
Sabrient without the prior written permission of Sabrient.
Direxion Shares
ETF Trust Prospectus
|
26
|
The financial highlights table is
intended to help you understand the financial performance of the Funds for the periods indicated. The information set forth below was audited by Ernst & Young LLP, Independent Registered Public Accounting Firm, whose report, along with the
Funds' financial statements, is included in the Annual shareholder report, which is available upon request and incorporated by reference into the Funds' SAI. Certain information reflects financial results for a single Share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an investment in a Fund (assuming reinvestment of all dividends and distributions).
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asset
Value,
Beginning of
Year/Period
|
Net
Investment
Income
(Loss)
1
|
Net
Investment
Income
(Loss)
1,2
|
Net
Realized
and
Unrealized
Gain (Loss)
on Investments
3
|
Net
Increase
(Decrease)
in Net
Asset Value
Resulting
from Operations
|
Dividends
from Net
Investment
Income
|
Distributions
from Realized
Capital Gains
|
Distributions
from
Return of
Capital
|
Total
Distributions
|
Net
Asset
Value,
End of
Year/Period
|
Direxion
All Cap Insider Sentiment Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$41.48
|
$0.72
|
$0.76
|
($0.05)
|
$0.67
|
($
0.79)
|
($
3.58
)
|
$
–
|
$(4.37)
|
$37.78
|
For
the Year Ended October 31, 2017
|
$36.93
|
0.51
|
0.51
|
6.01
|
6.52
|
(0.48)
|
(1.49
)
|
–
|
(1.97)
|
$41.48
|
For
the Year Ended October 31, 2016
|
$35.47
|
0.60
|
0.60
|
1.40
|
2.00
|
(0.54)
|
–
|
–
|
(0.54)
|
$36.93
|
For
the Year Ended October 31, 2015
|
$33.36
|
0.34
|
0.34
|
2.05
|
2.39
|
(0.28)
|
–
|
–
|
(0.28)
|
$35.47
|
For
the Year Ended October 31, 2014
|
$27.73
|
0.40
|
0.41
|
5.56
|
5.96
|
(0.33)
|
–
|
–
|
(0.33)
|
$33.36
|
Direxion
NASDAQ-100
®
Equal Weighted Index Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$41.90
|
0.31
|
0.31
|
1.37
|
1.68
|
(0.31)
|
–
|
–
|
(0.31)
|
$43.27
|
For
the Year Ended October 31, 2017
|
$33.44
|
0.28
|
0.28
|
8.44
|
8.72
|
(0.26)
|
–
|
–
|
(0.26)
|
$41.90
|
For
the Year Ended October 31, 2016
|
$32.60
|
0.35
|
0.35
|
0.83
|
1.18
|
(0.34)
|
–
|
–
|
(0.34)
|
$33.44
|
For
the Year Ended October 31, 2015
|
$30.69
|
0.30
|
0.30
|
1.90
|
2.20
|
(0.29)
|
–
|
–
|
(0.29)
|
$32.60
|
For
the Year Ended October 31, 2014
|
$25.58
|
0.32
|
0.32
|
5.11
|
5.43
|
(0.32)
|
–
|
–
|
(0.32)
|
$30.69
|
27
|
Direxion Shares ETF
Trust Prospectus
|
Financial Highlights
(continued)
|
|
|
RATIOS
TO AVERAGE NET ASSETS
5
|
Portfolio
Turnover
Rate
7
|
|
|
Total
Return
4
|
Net
Assets,
End of
Year/Period
(000's omitted)
|
Net
Expenses
6
|
Total
Expenses
|
Net
Investment
Income (Loss)
after
Expense
Reimbursement
|
Net
Expenses
2,6
|
Total
Expenses
2
|
Net
Investment
Income (Loss)
after
Expense
Reimbursement
2
|
|
Direxion
All Cap Insider Sentiment Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
1.04%
|
$204,008
|
0.67%
|
0.76%
|
1.74%
|
0.59%
|
0.68%
|
1.82%
|
919%
|
|
For
the Year Ended October 31, 2017
|
18.07%
|
$228,127
|
0.64%
|
0.74%
|
1.30%
|
0.64%
|
0.74%
|
1.30%
|
932%
|
|
For
the Year Ended October 31, 2016
|
5.66%
|
$173,551
|
0.65%
|
0.77%
|
1.66%
|
0.65%
|
0.77%
|
1.66%
|
890%
|
|
For
the Year Ended October 31, 2015
|
7.16%
|
$134,797
|
0.65%
|
0.78%
|
0.97%
|
0.65%
|
0.78%
|
0.97%
|
827%
|
|
For
the Year Ended October 31, 2014
|
21.60%
|
$
30,024
|
0.66%
|
0.91%
|
1.33%
|
0.65%
|
0.91%
|
1.34%
|
835%
|
|
Direxion
NASDAQ-100
®
Equal Weighted Index Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
3.98%
|
$179,574
|
0.35%
|
0.49%
|
0.68%
|
0.35%
|
0.49%
|
0.68%
|
27%
|
|
For
the Year Ended October 31, 2017
|
26.16%
|
$144,561
|
0.35%
|
0.52%
|
0.73%
|
0.35%
|
0.52%
|
0.73%
|
31%
|
|
For
the Year Ended October 31, 2016
|
3.68%
|
$
83,589
|
0.35%
|
0.55%
|
1.11%
|
0.35%
|
0.55%
|
1.11%
|
35%
|
|
For
the Year Ended October 31, 2015
|
7.16%
|
$
84,744
|
0.35%
|
0.52%
|
0.91%
|
0.35%
|
0.52%
|
0.91%
|
50%
|
|
For
the Year Ended October 31, 2014
|
21.35%
|
$
33,755
|
0.35%
|
0.62%
|
1.16%
|
0.35%
|
0.61%
|
1.17%
|
80%
|
|
1
|
Net investment income (loss)
per share represents net investment income divided by the daily average shares of beneficial interest outstanding throughout each period.
|
2
|
Excludes interest expense and
extraordinary expenses which comprise of tax and litigation expenses.
|
3
|
Due to the timing of sales
and redemptions of capital shares, the net realized and unrealized gain (loss) per share will not equal the Fund's changes in net realized and unrealized gain (loss) on investments, in-kind redemptions, futures and swaps for the period.
|
4
|
Total return is calculated
assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period and redemption on the last day of the period. Total return calculated for
a period of less than one year is not annualized. The total return would have been lower if certain expenses had not been reimbursed/waived or recouped by the investment advisor.
|
5
|
For periods less than a year,
these ratios are annualized.
|
6
|
Net expenses include effects
of any reimbursement/waiver or recoupment.
|
7
|
Portfolio turnover rate is
not annualized and excludes the value of portfolio securities received or delivered as a result of in-kind creations or redemptions of the Fund's capital shares. Portfolio turnover rate does not include effects of turnover of the swap and future
contracts portfolio. Short-term securities with maturities less than or equal to 365 days are also excluded from portfolio turnover calculation.
|
Direxion Shares
ETF Trust Prospectus
|
28
|
1301
Avenue of the Americas (6th Avenue), 28th Floor
|
New York,
New York 10019
|
866-476-7523
|
More Information on the Direxion Shares ETF Trust
Statement of Additional Information
(“SAI”):
The Funds' SAI contains
more information on each Fund and its investment policies. The SAI is incorporated in this Prospectus by reference (meaning it is legally part of this Prospectus). A current SAI is on file with the Securities and Exchange Commission
(“SEC”).
Annual and Semi-Annual Reports
to Shareholders:
The Funds' reports will provide
additional information on the Funds' investment holdings, performance data and a letter discussing the market conditions and investment strategies that significantly affected the Funds' performance during that period.
To Obtain the SAI or Fund Reports Free of Charge:
Write
to:
|
Direxion
Shares ETF Trust
|
|
1301 Avenue
of the Americas (6th Avenue), 28th Floor
New York, New York 10019
|
Call:
|
866-476-7523
|
By
Internet:
|
www.direxioninvestments.com
|
These documents and other
information about the Funds can be reviewed and copied at the SEC Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at (202) 551-8090. Reports and other information
about the Funds may be viewed on screen or downloaded from the EDGAR Database on the SEC’s website at http://www.sec.gov. Copies of these documents may be obtained, after paying a duplicating fee, by electronic request at the following e-mail
address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-1520.
SEC File Number: 811-22201
Direxion Shares ETF Trust
Statement of Additional Information
1301
Avenue of the Americas (6th Avenue), 28th Floor
|
New York,
New York 10019
|
866-476-7523
|
www.direxioninvestments.com
The Direxion Shares ETF Trust
(“Trust”) is an investment company that offers shares of a variety of exchange-traded funds to the public. The shares of the funds offered in this Statement of Additional Information (“SAI”) are listed and traded on the NYSE
Arca, Inc. This SAI relates to the funds listed below (each, a “Fund” and collectively, the “Funds”).
Direxion All Cap Insider Sentiment Shares (KNOW)
Direxion NASDAQ-100
®
Equal Weighted Index Shares (QQQE)
There is no assurance that a Fund will achieve its investment
objective and an investment in a Fund could lose money. No single Fund is a complete investment program.
This SAI, dated February 28, 2019, is not
a prospectus. It should be read in conjunction with the Funds' prospectus dated February 28, 2019 (“Prospectus”). This SAI is incorporated by reference into the Prospectus. In other words, it is legally part of the Prospectus. To receive
a copy of the Prospectus, without charge, write or call the Trust at the address or telephone number listed above.
February 28, 2019
Table of Contents
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53
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53
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54
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54
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55
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58
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58
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59
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59
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59
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59
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64
|
|
A-1
|
Direxion Shares ETF Trust
The Trust is a
Delaware statutory trust organized on April 23, 2008 and is registered with the Securities and Exchange Commission (“SEC”) as an open-end management investment company under the Investment Company Act of 1940, as amended (“1940
Act”). The Trust currently consists of 120 separate series or “Funds.”
Each Fund seeks to provide investment
results, before fees and expenses, which correspond to the performance of an underlying index.
Shares of each
Fund (“Shares”) are issued and redeemed at net asset value per share (“NAV”) only in large blocks called “Creation Units.” Creation Units are issued and redeemed in-kind for securities and an amount of cash or
entirely cash, in each case at the discretion of Rafferty Asset Management, LLC (“Rafferty” or the “Adviser”). Shares cannot be purchased from, and are not redeemable securities of, each Fund, except when aggregated in
Creation Units. Therefore, most investors will buy and sell Shares of each Fund in secondary market transactions through brokers. Shares can be bought and sold throughout the trading day like other publicly traded shares. Investors may acquire
Shares directly from each Fund, and shareholders may tender their Shares for redemption directly to each Fund, only in Creation Units of 50,000 Shares, as discussed in the “Purchases and Redemptions” section below.
The Shares offered in this SAI are
listed and traded on the NYSE Arca, Inc. (the “Exchange”).
Classification of the Funds
Each Fund is a
“non-diversified” series of the Trust pursuant to the 1940 Act. A Fund is considered “non-diversified” because a relatively high percentage of its assets may be invested in the securities of a limited number of issuers. To
the extent that a Fund assumes large positions in the securities of a small number of issuers, the Fund’s net asset value ("NAV") may fluctuate to a greater extent than that of a diversified company as a result of changes in the financial
condition or in the market’s assessment of the issuers, and the Fund may be more susceptible to any single economic, political or regulatory occurrence than a diversified company.
Exchange Listing and Trading
The Shares are
listed and traded on the Exchange and may trade at prices that differ to some degree from their NAV. There can be no assurance that the requirements of the Exchange necessary to maintain the listing of Shares of each Fund will continue to be met.
The Exchange may, but is not required to, remove the Shares of a Fund from listing if (i) following the initial 12-month period beginning at the commencement of trading of a Fund, there are fewer than 50 beneficial owners of the Shares of the Fund;
(ii) the value of the underlying index is no longer calculated or available; (iii) a Fund's underlying index no longer meets various liquidity and other metrics as required by the Exchange’s continued listing standards; or (iv)such other event
shall occur or condition exist that, in the opinion of the Exchange, makes further dealings on the Exchange inadvisable. The Exchange will remove the Shares of a Fund from listing and trading upon termination of such Fund.
As is the case with other publicly
listed securities, when Shares of a Fund are bought or sold through a broker, an investor may incur a brokerage commission determined by that broker, as well as other charges.
The Trust reserves the right to
adjust the price levels of the Shares in the future to help maintain convenient trading ranges for investors. Any adjustments would be accomplished through stock splits or reverse stock splits, which would have no effect on the net assets of a Fund
or an investor’s equity interest in a Fund.
The trading prices of each
Fund’s shares in the secondary market generally differ from each Fund’s daily NAV per share and are affected by market forces such as supply and demand, economic conditions and other factors. Rafferty Asset Management, LLC ("Rafferty" or
"Adviser") may, from time to time, make payments to certain market makers in the Trust’s shares pursuant to an Exchange authorized program.
In order to provide additional
information regarding the value of Shares of a Fund, the Exchange, a market data vendor or other information provider, disseminates an Intraday Optimized Portfolio Value (“IOPV”) for each Fund. Each Fund’s IOPV is expected to be
disseminated every 15 seconds during the regular trading hours of the Exchange. The IOPV is based on the current market value of the securities and cash required to be deposited in exchange for a Creation Unit. The IOPV does not necessarily reflect
the precise composition of the current portfolio holdings of a Fund as of a particular point in time, or an accurate valuation of the current portfolio. The quotations of certain Fund holdings may not be updated during U.S. trading hours if such
holdings do not trade in the U.S. The Funds are not involved in, nor responsible for, the calculation or dissemination of the IOPV and make no representations or warranty as to its accuracy.
Investment Policies and Techniques
Each Fund seeks investment
results, before fees and expenses, that track the performance of an underlying index as noted below:
Fund
|
Underlying
Index
|
Direxion
All Cap Insider Sentiment Shares
|
Sabrient
Multi-Cap Insider/Analyst Quant-Weighted Index
|
Direxion
NASDAQ-100
®
Equal Weighted Index Shares
|
NASDAQ-100
®
Equal Weighted Index
|
Each Fund seeks to achieve its
investment objective by investing primarily in securities that comprise its relevant underlying index. Each Fund operates as a non-leveraged, index fund and is not actively managed. Adverse performance of a security in a Fund’s portfolio will
not ordinarily result in the elimination of the security from the Fund’s portfolio unless the security is removed, or is anticipated to be removed, from the Fund’s underlying index.
Each Fund may engage in
representative sampling, which is investing in a sample of securities selected by the Adviser to have a collective investment profile that is similar to that of the Fund’s underlying index. Securities selected have aggregate investment
characteristics, fundamental characteristics and liquidity measurements similar to those of its underlying index. If the Fund uses representative sampling, it generally does not hold all of the securities that are in its underlying index.
Each Fund’s investment
objective is a non-fundamental policy of the Fund that may be changed by the Board without shareholder approval.
With the exception of limitations
described in the “Investment Restrictions” section, each Fund may engage in the investment strategies discussed below. There is no assurance that any of these strategies or any other strategies and methods of investment available to a
Fund will result in the achievement of the Fund’s investment objective.
This section provides a description
of the securities in which a Fund may invest to achieve its investment objective, the strategies it may employ and the corresponding risks of such securities and strategies. The greatest risk of investing in an exchange-traded fund ("ETF") is that
its returns will fluctuate and you could lose money.
A Fund may invest in asset-backed
securities of any rating or maturity. Asset-backed securities are securities issued by trusts and special purpose entities that are backed by pools of assets, such as automobile and credit-card receivables and home equity loans, which pass through
the payments on the underlying obligations to the security holders (less servicing fees paid to the originator or fees for any credit enhancement). Typically, the originator of the loan or accounts receivable paper transfers it to a specially
created trust, which repackages it as securities with a minimum denomination and a specific term. The securities are then privately placed or publicly offered. Examples include certificates for automobile receivables and so-called plastic bonds,
backed by credit card receivables.
The value of an asset-backed security
is affected by, among other things, changes in the market’s perception of the asset backing the security, the creditworthiness of the servicing agent for the loan pool, the originator of the loans and the financial institution providing any
credit enhancement. Payments of principal and interest passed through to holders of asset-backed securities are frequently supported by some form of credit enhancement, such as a letter of credit, surety bond, limited guarantee by another entity or
by having a priority to certain of the borrower’s other assets. The degree of credit enhancement varies, and generally applies to only a portion of the asset-backed security’s par value. Value is also affected if any credit enhancement
has been exhausted.
Money Market Instruments
. A Fund may invest in bankers’ acceptances, certificates of deposit, demand and time deposits, savings shares and commercial paper of domestic
banks and savings and loans that have assets of at least $1 billion and capital, surplus, and undivided profits of over $100 million as of the close of their most recent fiscal year, or instruments that are insured by the Bank Insurance Fund or the
Savings Institution Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”). A Fund also may invest in high quality, short-term, corporate debt obligations, including variable rate demand notes, having terms-to-maturity of
less than 397 days. Because there is no secondary trading market in demand notes, the inability of the issuer to make required payments could impact adversely a Fund’s ability to resell when it deems advisable to do so.
A Fund may invest in foreign money
market instruments, which typically involve more risk than investing in U.S. money market instruments. See “Foreign Securities” below. These risks include, among others, higher brokerage commissions, less public information, and less
liquid markets in which to sell and meet large shareholder redemption requests.
Bankers’ Acceptances
. Bankers’ acceptances generally are negotiable instruments (time drafts) drawn to finance the export, import, domestic shipment or storage
of goods. They are termed “accepted” when a bank writes on the draft its agreement to pay it at maturity, using the word “accepted.” The bank is, in effect, unconditionally guaranteeing to pay the face value of the instrument
on its maturity date. The acceptance may then be held by the accepting bank as an asset, or it may be sold in the secondary market at the going rate of interest for a specified maturity.
Certificates of Deposit (“CDs”)
. The FDIC is an agency of the U.S. government that insures the deposits of certain banks and savings and loan associations up to
$250,000 per deposit. The interest on such deposits may not be insured to the extent this limit is exceeded. Current federal regulations also permit such institutions to issue insured negotiable CDs in amounts of $250,000 or more without regard to
the interest rate ceilings on other deposits. To remain fully insured, these investments must be limited to $250,000 per insured bank or savings and loan association.
Commercial Paper
. Commercial paper includes notes, drafts or similar instruments payable on demand or having a maturity at the time of issuance not exceeding nine months,
exclusive of days of grace or any renewal thereof. A Fund may invest in commercial paper rated A-l or A-2 by Standard & Poor’s
®
Ratings
Services (“S&P
®
”) or Prime-1 or Prime-2 by Moody’s Investors Service
®
, Inc. (“Moody’s”), and in other lower quality commercial paper.
Corporate Debt Securities
A Fund may invest in investment
grade corporate debt securities of any rating or maturity. Investment grade corporate bonds are those rated BBB or better by S&P
®
or Baa or
better by Moody’s. Securities rated BBB by S&P
®
are considered investment grade, but Moody’s considers securities rated Baa to have
speculative characteristics. See Appendix A for a description of corporate bond ratings. A Fund may also invest in unrated securities.
Corporate debt securities are
fixed-income securities issued by businesses to finance their operations, although corporate debt instruments may also include bank loans to companies. Notes, bonds, debentures and commercial paper are the most common types of corporate debt
securities, with the primary difference being their maturities and secured or un-secured status. Commercial paper has the shortest term and is usually unsecured.
The broad category of corporate debt
securities includes debt issued by domestic or foreign companies of all kinds, including those with small-, mid- and large-capitalizations. Corporate debt may be rated investment-grade or below investment-grade and may carry variable or floating
rates of interest.
Because of
the wide range of types and maturities of corporate debt securities, as well as the range of creditworthiness of its issuers, corporate debt securities have widely varying potentials for return and risk profiles. For example, commercial paper issued
by a large established domestic corporation that is rated investment grade may have a modest return on principal, but carries relatively limited risk. On the other hand, a long-term corporate note issued by a small foreign corporation from an
emerging market country that has not been rated may have the potential for relatively large returns on principal, but carries a relatively high degree of risk.
Corporate debt securities carry both
credit risk and interest rate risk. Credit risk is the risk that a Fund could lose money if the issuer of a corporate debt security is unable to pay interest or repay principal when it is due. Some corporate debt securities that are rated below
investment grade are generally considered speculative because they present a greater risk of loss, including default, than higher-quality debt securities. The credit risk of a particular issuer’s debt security may vary based on its priority
for repayment. For example, higher ranking (senior) debt securities have a higher priority than lower ranking (subordinated) securities. This means that the issuer might not make payments on subordinated securities while continuing to make payments
on senior securities. In addition, in the event of bankruptcy, holders of higher-ranking senior securities may receive amounts otherwise payable to the holders of more junior securities. Interest rate risk is the risk that the value of certain
corporate debt securities will tend to fall when interest rates rise. In general, corporate debt securities with longer terms tend to fall more in value when interest rates rise than corporate debt securities with shorter terms.
On July 27, 2017, the U.K.-based
Financial Conduct Authority (the “FCA”) announced its intention to cease sustaining LIBOR after 2021. It is possible that the ICE Benchmark Administration (“IBA”) and the banks that offer reference rates could continue to
produce LIBOR on the current basis after 2021, but it cannot be assured that LIBOR will survive in its current form. The effect of the FCA’s decision not to sustain LIBOR, or, if changes are ultimately made to LIBOR, the effect of those
changes, cannot be predicted. In addition, it cannot be predicted what alternative index would be chosen should this occur. If LIBOR in its current form does not survive or if an alternative index is chosen, the market value and/or liquidity of
securities with distributions or interest rates based on LIBOR could be adversely affected.
Common Stocks
. A Fund may invest in common stocks. Common stocks represent the residual ownership interest in the issuer and are entitled to the income and increase in the
value of the assets and business of the entity after all of its obligations and preferred stock are satisfied. Common stocks generally have voting rights. Common stocks fluctuate in price in response
to many factors including historical and prospective
earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity.
Convertible Securities
. A Fund may invest in convertible securities that may be considered high yield securities. Convertible securities include corporate bonds, notes and
preferred stock that can be converted into or exchanged for a prescribed amount of common stock of the same or a different issue within a particular period of time at a specified price or formula. A convertible security entitles the holder to
receive interest paid or accrued on debt or dividends paid on preferred stock until the convertible stock matures or is redeemed, converted or exchanged. While no securities investment is without some risk, investments in convertible securities
generally entail less risk than the issuer’s common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a fixed income security. The
market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline. While convertible securities generally offer lower interest or dividend yields than nonconvertible debt
securities of similar quality, they do enable the investor to benefit from increases in the market price of the underlying common stock. When investing in convertible securities, a Fund may invest in the lowest credit rating category.
Preferred Stock
. A Fund may invest in preferred stock. A preferred stock blends the characteristics of a bond and common stock. It can offer the higher yield of a bond and
has priority over common stock in equity ownership, but does not have the seniority of a bond and its participation in the issuer’s growth may be limited. Preferred stock has preference over common stock in the receipt of dividends and in any
residual assets after payment to creditors if the issuer is dissolved. Although the dividend is set at a fixed annual rate, in some circumstances it can be changed or omitted by the issuer. When investing in preferred stocks, a Fund may invest in
the lowest credit rating category.
Warrants and Rights
. A Fund may purchase warrants and rights, which are instruments that permit a Fund to acquire, by subscription, the capital stock of a corporation at a
set price, regardless of the market price for such stock. Warrants may be either perpetual or of limited duration, but they usually do not have voting rights or pay dividends. The market price of warrants is usually significantly less than the
current price of the underlying stock. Thus, there is a greater risk that warrants might drop in value at a faster rate than the underlying stock.
A Fund may have both direct and
indirect exposure to foreign securities through investments in publicly traded securities such as stocks and bonds, stock index futures contracts, options on stock index futures contracts and options on securities and on stock indices to foreign
securities. In most cases, the best available market for foreign securities will be on exchanges or in OTC markets located outside the United States.
Investing in foreign securities
carries political and economic risks distinct from those associated with investing in the United States. Non-U.S. securities may be subject to currency risks or to foreign government taxes. There may be less information publicly available about a
non-U.S. issuer than about a U.S. issuer, and a foreign issuer may or may not be subject uniform accounting, auditing and financial reporting standards and practices comparable to those in the U.S. Other risks of investing in such securities include
political or economic instability in the country involved, the difficulty of predicting international trade patterns and the possibility of the imposition of exchange controls. The prices of such securities may be more volatile than those of U.S.
securities. There maybe also be the possibility of expropriation of assets or nationalization, imposition of withholding taxes on dividend or interest payments, difficulty obtaining and enforcing judgments against foreign entities or diplomatic
developments which could affect investment in these countries. Losses and other expenses may be incurred in converting currencies in connection with purchases and sales of foreign securities.
Non-U.S. stocks markets may not be as
developed or efficient as, and may be more volatile than, those in the U.S. While the volume of shares traded on non-U.S. stock markets generally has been growing, such markets usually have substantially less volume than U.S. markets. Therefore, a
Fund’s investment in non-U.S. equity securities may be less liquid and subject to more rapid and erratic price movements than comparable securities listed for trading on U.S. exchanges. Non-U.S. equity securities may trade at price/earnings
multiples higher than comparable U.S. securities and such levels may not be sustainable. There may be less government supervision and regulation of foreign stock exchanges, brokers, banks and listed companies abroad than in the U.S. Moreover,
settlement practices for transactions in foreign markets may differ from those in U.S. markets. Such differences may include delays beyond periods customary in the U.S. and practices, such as delivery of securities prior to receipt of payment, that
increase the likelihood of a failed settlement, which can result in losses to a Fund. The value of non-U.S. investments and the investment income derived from them may also be affected unfavorably by changes in currency exchange control regulations.
Foreign brokerage commissions, custodial expenses and other fees are also generally higher than for securities traded in the U.S. This may cause a Fund to incur higher portfolio transaction costs than domestic equity funds. Fluctuations in exchanges
rates may also affect the earning power and asset value of the foreign entity issuing a security, even on denominated in U.S. dollars. Dividend and interest payments may be repatriated based on the exchange rate at the time of disbursement, and
restrictions on capital flows may be imposed.
Developing and Emerging Markets
.
Emerging and developing markets abroad may offer special opportunities for
investing,
but may have greater risks than more developed foreign markets, such as those in Europe,
Canada,
Australia,
New Zealand
and Japan. There
may be even less liquidity in their securities markets, and settlements of purchases and sales of securities may be subject to additional delays. They are subject to greater risks of limitations on the repatriation of income and profits because of
currency restrictions imposed by local governments. Those countries may also be subject to the risk of greater political and economic instability, which can greatly affect the volatility of prices of securities in those countries.
Investing in emerging market
securities imposes risks different from, or greater than, risks of investing in foreign developed countries. These risks include: smaller market capitalization of securities markets, which may suffer periods of relative illiquidity; significant
price volatility; restrictions on foreign investment; and possible repatriation of investment income and capital. In addition, foreign investors may be required to register the proceeds of sales; future economic or political crises could lead to
price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization, or creation of government monopolies. The currencies of emerging market countries may experience significant declines against the U.S. Dollar.
Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries. Additional risks of emerging markets securities may include:
greater social, economic and political uncertainty and instability; more substantial governmental involvement in the economy; less governmental supervision and regulation; unavailability of currency hedging techniques; companies that are newly
organized and small; differences in auditing and financial reporting standards, which may result in unavailability of material information about issuers; and less developed legal systems. In addition, emerging securities markets may have different
clearance and settlement procedures, which may be unable to keep pace with the volume of securities transactions or otherwise make it difficult to engage in such transactions.
Asia-Pacific Countries
. In addition to the risks associated with foreign and emerging markets, the developing market Asia-Pacific countries in which a Fund may invest are
subject to certain additional or specific risks. A Fund may make substantial investments in Asia-Pacific countries. In the Asia-Pacific markets, there is a high concentration of market capitalization and trading volume in a small number of issuers
representing a limited number of industries, as well as a high concentration of investors and financial intermediaries. Many of these markets also may be affected by developments with respect to more established markets in the region, such as Japan
and Hong Kong. Brokers in developing market Asia-Pacific countries typically are fewer in number and less well-capitalized than brokers in the United States. These factors, combined with the U.S. regulatory requirements for open-end investment
companies and the restrictions on foreign investment, result in potentially fewer investment opportunities for a Fund and may have an adverse impact on a Fund’s investment performance.
Many of the developing market
Asia-Pacific countries may be subject to a greater degree of economic, political and social instability than is the case in the United States and Western European countries. Such instability may result from, among other things: (i) authoritarian
governments or military involvement in political and economic decision-making, including changes in government through extra-constitutional means; (ii) popular unrest associated with demands for improved political, economic and social conditions;
(iii) internal insurgencies; (iv) hostile relations with neighboring countries; and/or (v) ethnic, religious and racial disaffection. In addition, the governments of many of such countries, such as Indonesia, have a heavy role in regulating and
supervising the economy.
An
additional risk common to most such countries is that the economy is heavily export-oriented and, accordingly, is dependent upon international trade. The existence of overburdened infrastructure and obsolete financial systems also present risks in
certain countries, as do environmental problems. Certain economies also depend to a significant degree upon exports of primary commodities and, therefore, are vulnerable to changes in commodity prices that, in turn, may be affected by a variety of
factors. The legal systems in certain developing market Asia-Pacific countries also may have an adverse impact on a Fund. For example, while the potential liability of a shareholder in a U.S. corporation with respect to acts of the corporation is
generally limited to the amount of the shareholder's investment, the notion of limited liability is less clear in certain emerging market Asia-Pacific countries. Similarly, the rights of investors in developing market Asia-Pacific companies may be
more limited than those of shareholders of U.S. corporations. It may be difficult or impossible to obtain and/or enforce a judgment in a developing market Asia-Pacific country.
Governments of many developing
market Asia-Pacific countries have exercised and continue to exercise substantial influence over many aspects of the private sector. In certain cases, the government owns or controls many companies, including the largest in the country. Accordingly,
government actions in the future could have a significant effect on economic conditions in developing market Asia-Pacific countries, which could affect private sector companies and a Fund itself, as well as the value of securities in a Fund's
portfolio. In addition, economic statistics of developing market Asia-Pacific countries may be less reliable than economic statistics of more developed nations.
It is possible that developing market
Asia-Pacific issuers may not be subject to the same accounting, auditing and financial reporting standards as U.S. companies. Inflation accounting rules in some developing market Asia-Pacific countries require companies that keep accounting records
in the local currency, for both tax and accounting purposes, to restate certain assets and liabilities on the company’s balance sheet in order to express items in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits for certain developing market Asia-Pacific companies. In addition, satisfactory custodial services for investment securities may not be available in some developing Asia-Pacific countries, which may result in a
Fund incurring additional costs and delays in providing transportation and custody services for such securities outside such countries.
Certain developing Asia-Pacific
countries are especially large debtors to commercial banks and foreign governments. Fund management may determine that, notwithstanding otherwise favorable investment criteria, it may not be practicable or appropriate to invest in a particular
developing Asia-Pacific country. A Fund may invest in countries in which foreign investors, including management of the Fund, have had no or limited prior experience.
Brazil
. Investing in Brazil involves certain considerations not typically associated with investing in the United States. Additional considerations include: (i) investment
and repatriation controls, which could affect a Fund’s ability to operate, and to qualify for the favorable tax treatment afforded to RICs for U.S. federal income tax purposes; (ii) fluctuations in the rate of exchange between the Brazilian
Real and the U.S. Dollar; (iii) the generally greater price volatility and lesser liquidity that characterize Brazilian securities markets, as compared with U.S. markets; (iv) the effect that balance of trade could have on Brazilian economic
stability and the Brazilian government's economic policy; (v) potentially high rates of inflation, a rising unemployment rate, and a high level of debt, each of which may hinder economic growth; (vi) governmental involvement in and influence on the
private sector; (vii) Brazilian accounting, auditing and financial standards and requirements, which differ from those in the United States; (viii) political and other considerations, including changes in applicable Brazilian tax laws; and (ix)
restrictions on investments by foreigners. In addition, commodities, such as oil, gas and minerals, represent a significant percentage of Brazil’s exports and, therefore, its economy is particularly sensitive to fluctuations in commodity
prices. Additionally, an investment in Brazil is subject to certain risks stemming from political and economic corruption. For example, the Brazilian Federal Police conducted a criminal investigation into corruption allegations, known as Operation
Car Wash, which led to charges against high level politicians and corporate executives and resulted in substantial fines for some of Brazil’s largest companies. This has had a widespread political and economic impact and may continue to affect
negatively the country and the reputation of Brazilian companies connected with the investigation, and therefore, the trading price of securities issued by those companies. While the economy of Brazil has enjoyed substantial economic growth in
recent years, there can be no guarantee that this growth will continue.
China
. Investing in China involves special considerations not typically associated with investing in countries with more democratic governments or more established economies
or currency markets. These risks include: (i) the risk of nationalization or expropriation of assets or confiscatory taxation; (ii) greater governmental involvement in and control over the economy, interest rates and currency exchange rates; (iii)
controls on foreign investment and limitations on repatriation of invested capital; (iv) greater social, economic and political uncertainty (including the risk of war); (v) dependency on exports and the corresponding importance of international
trade; (vi) currency exchange rate fluctuations; (vii) differences in, or lack of, auditing and financial reporting standards that may result in unavailability of material information about issuers; and (viii) the risk that certain companies in
which the Fund may invest may have dealings with countries subject to sanctions or embargoes imposed by the U.S. government or identified as state sponsors of terrorism.
For over three decades, the Chinese
government has been reforming economic and market practice and has been providing a larger sphere for private ownership of property. While currently contributing to growth and prosperity, the government may decide not to continue to support these
economic reform programs and could possible return to the completely centrally planned economy that existed prior to 1978. There is also a greater risk in China than in many other countries of currency fluctuations, currency non-convertibility,
interest rate fluctuations and higher rates of inflation as a result of internal social unrest or conflicts with other countries. China is an emerging market and demonstrates significantly higher volatility from time to time in comparison to
developed markets. The government of China maintains strict currency controls in support of economic, trade and political objectives and regularly intervenes in the currency market. The government's actions in this respect may not be transparent or
predictable. As a result, the value of the Yuan, and the value of securities designed to provide exposure to the Yuan, can change quickly and arbitrarily. Furthermore, it is difficult for foreign investors to directly access money market securities
in China because of investment and trading restrictions. While the economy of China has enjoyed substantial economic growth in recent years, there can be no guarantee this growth will continue. Reduction in spending on Chinese products and services,
the institution of additional tariffs or other trade barriers, including as a result of heightened trade tensions between China and the United States, or a downturn in any of the economies of China’s key trading partners may have an adverse
impact on the Chinese economy. These and other factors may decrease the value and liquidity of a Fund's investments. The Chinese economy may experience a significant slowdown as a result of, among other things, a deterioration of global demand for
Chinese exports, as well as contraction in spending on domestic goods by Chinese consumers. In addition, China may experience substantial rates of inflation or economic recessions, which would have a negative effect on its economy and securities
market.
Recently, there has
been increased attention from the SEC and the Public Company Accounting Oversight Board (“PCAOB”) with regard to international auditing standards of U.S.-listed companies with significant operations in China as well as PCAOB-registered
auditing firms in China. Currently, the SEC and PCAOB are only able to get limited information about these auditing firms and are restricted from inspecting the audit work and practices of registered accountants in China. These restrictions may
result in the unavailability of material information about the Chinese issuers.
China A-shares are equity securities
of companies based in mainland China that trade on Chinese stock exchanges such as the Shanghai Stock Exchange (“SSE”) and the Shenzhen Stock Exchange (“SZSE”) (“A-shares”). Foreign investment in A-shares on the
SSE and SZSE has historically not been permitted other than through licenses granted by the People’s Republic of
China
(“PRC”) known as the Qualified Foreign Institutional Investor (“QFII”) and Renminbi Qualified Foreign Institutional Investor (“RQFII”) licenses. Each license permits investment in A-shares only up to a specified
quota.
Because restrictions
continue to exist and capital therefore cannot flow freely into and out of the A-Share market, it is possible that in the event of a market disruption, the liquidity of the A-Share market and trading prices of A-Shares could be more severely
affected than the liquidity and trading prices of markets where securities are freely tradable and capital therefore flows more freely. The nature and duration of such a market disruption or the impact that it may have on the A-Share market are
unknown. In the event that a Fund invests in A-Shares directly, a Fund may incur significant losses, or may not be able fully to implement or pursue its investment objectives or strategies, due to investment restrictions on RQFIIs and QFIIs,
illiquidity of the Chinese securities markets, or delay or disruption in execution or settlement of trades. A-Shares may become subject to frequent and widespread trading halts.
The Chinese government has in the
past taken actions that benefitted holders of A-Shares. As A-Shares become more available to foreign investors, such as a Fund, the Chinese government may be less likely to take action that would benefit holders of A-Shares. In addition, there is no
guarantee that an A-Shares quota will be sufficient for a Fund’s intended scope of investment.
The regulations which apply to
investments by RQFIIs and QFIIs, including the repatriation of capital, are relatively new. The application and interpretation of such regulations are therefore relatively untested. In addition, there is little precedent or certainty evidencing how
such discretion may be exercised now or in the future; and even if there were precedent, it may provide little guidance as PRC authorities would likely continue to have broad discretion.
Investment in eligible A-shares
listed and traded on the SSE is now permitted through the Stock Connect program. Stock Connect is a securities trading and clearing program established by Hong Kong Securities Clearing Company Limited, the SSE and Chinese Securities Depositary and
Clearing Corporation that aims to provide mutual stock market access between China and Hong Kong by permitting investors to trade and settle shares on each market through their local exchanges. Certain Funds may invest in other investment companies
that invest in A-shares through Stock Connect or on such other stock exchanges in China which participate in Stock Connect from time to time. Under Stock Connect, a Fund’s trading of eligible A-shares listed on the SSE would be effectuated
through its Hong Kong broker.
Although no individual investment
quotas or licensing requirements apply to investors in Stock Connect, trading through Stock Connect’s Northbound Trading Link is subject to aggregate and daily investment quota limitations that require that buy orders for A-shares be rejected
once the remaining balance of the relevant quota drops to zero or the daily quota is exceeded (although a Fund will be permitted to sell A-shares regardless of the quota balance). These limitations may restrict a Fund from investing in A-shares on a
timely basis, which could affect a Fund’s ability to effectively pursue its investment strategy. Investment quotas are also subject to change. Investment in eligible A-shares through Stock Connect is subject to trading, clearance and
settlement procedures that could pose risks to a Fund. A-shares purchased through Stock Connect generally may not be sold or otherwise transferred other than through Stock Connect in accordance with applicable rules. In addition, Stock Connect will
only operate on days when both the Chinese and Hong Kong markets are open for trading and when banks in both markets are open on the corresponding settlement days. Therefore, an investment in A-shares through Stock Connect may subject a Fund to a
risk of price fluctuations on days where the Chinese market is open, but Stock Connect is not trading.
Europe
.
Investing in European countries may impose economic and political risks associated with Europe in general and the specific European countries in which it invests.
The economies and markets of European countries are often closely connected and interdependent, and events in one European country can have an adverse impact on other European countries. A Fund makes investments in securities of issuers that are
domiciled in, or have significant operations in, member countries of the Economic and Monetary Union of the European Union (the “EU”), which requires member countries to comply with restrictions on inflation rates, deficits, interest
rates, debt levels and fiscal and monetary controls, each of which may significantly affect every country in Europe. Decreasing imports or exports, changes in governmental or EU regulations on trade, changes in the exchange rate of the euro (the
common currency of certain EU countries), the default or threat of default by an EU member country on its sovereign debt, and/or an economic recession in an EU member country may have a significant adverse effect on the economies of EU member
countries and their trading partners, including some or all of the emerging markets materials sector countries. Although certain European countries do not use the euro, many of these countries are obliged to meet the criteria for joining the euro
zone. Consequently, these countries must comply with many of the restrictions noted above. The European financial markets have experienced volatility and adverse trends in recent years due to concerns about economic downturns, rising government debt
levels and the possible default of government debt in several European countries, including Greece, Ireland, Italy, Portugal and Spain. In order to prevent further economic deterioration, certain countries, without prior warning, can institute
“capital controls.” Countries may use these controls to restrict volatile movements of capital entering and exiting their country. Such controls may negatively affect a Fund’s investments. A default or debt restructuring by any
European country would adversely impact holders of that country’s debt and sellers of credit default swaps linked to that country’s creditworthiness, which may be located in countries other than those listed above. In addition, the
credit ratings of certain European countries were recently downgraded. These downgrades may result in further deterioration of investor confidence. These events have adversely affected the value and exchange rate of the euro and may continue to
significantly affect the economies of every country in Europe, including countries that do not use the euro and non-EU
member countries. Responses to the financial
problems by European governments, central banks and others, including austerity measures and reforms, may not produce the desired results, may result in social unrest and may limit future growth and economic recovery or have other unintended
consequences. Further defaults or restructurings by governments and other entities of their debt could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, one or more countries may
abandon the euro and/or withdraw from the EU, including, with respect to the latter, the United Kingdom, which is a significant market in the global economy. The impact of these actions, especially if they occur in a disorderly fashion, is not clear
but could be significant and far-reaching and could adversely impact the value of investments in the region.
In a referendum
held on June 23, 2016, the United Kingdom (the “UK”) resolved to leave the EU (referred to as “Brexit”). The referendum has introduced significant uncertainties and instability in the financial markets as the UK negotiates
its exit from the EU, which is currently scheduled for March 29, 2019, however, this timing could change. The outcome of negotiations and the potential consequences remain uncertain. The effects of Brexit will depend on any agreements the UK makes
to retain access to the EU Common Market either during a transitional period or more permanently. Brexit could lead to legal and tax uncertainty and potentially divergent national laws and regulations as the UK determines which EU laws to replace or
replicate. Additionally, Brexit could lead to global economic uncertainty and result in significant volatility in the global stock markets and currency exchange rate fluctuations. The UK has one of the largest economies in Europe and is a major
trading partner with the other EU countries and the United States. If implemented, Brexit might negatively affect the City of London’s economy, which is heavily dominated by financial services, as banks might be forced to move staff and comply
with two separate sets of rules or lose business to banks in Continental Europe. In addition, Brexit would likely create additional economic stresses for the UK, including the potential for decreased trade, capital outflows, devaluation of the
British pound, wider corporate bond spreads due to uncertainty, and declines in business and consumer spending as well as foreign direct investment.
Brexit may also have a destabilizing
impact on the EU to the extent that other member states similarly seek to withdraw from the EU. Any further exits from the EU would likely cause additional market disruptions globally and introduce new legal and regulatory uncertainties.
India
. Investments in India involve special considerations not typically associated with investing in countries with more established economies or currency markets.
Political, religious, and border disputes persist in India. India has recently experienced and may continue to experience civil unrest and hostilities with certain of its neighboring countries, including Pakistan, and the Indian government has
confronted separatist movements in several Indian states, including Kashmir. Government control over the economy, currency fluctuations or blockage, and the risk of nationalization or expropriation of assets offer higher potential losses.
Governmental actions could have a negative effect on the economic conditions in India, which could adversely affect the value and liquidity of investments made by a Fund. The securities markets in India are comparatively underdeveloped with some
exceptions and consist of a small number of listed companies with small market capitalization, greater price volatility and substantially less liquidity than companies in more developed markets. The limited liquidity of the Indian securities market
may also affect a Fund’s ability to acquire or dispose of securities at the price or time that it desires or the Fund’s ability to track its underlying index.
The Indian government exercises
significant influence over many aspects of the economy, and the number of public sector enterprises in India is substantial. While the Indian government has implemented economic structural reform with the objectives of liberalizing India's exchange
and trade policies, reducing the fiscal deficit, controlling inflation, promoting a sound monetary policy, reforming the financial sector, and placing greater reliance on market mechanisms to direct economic activity, there can be no assurance that
these policies will continue or that the economic recovery will be sustained.
Global factors and foreign actions
may inhibit the flow of foreign capital on which India is dependent to sustain its growth. In addition, the Reserve Bank of India has imposed limits on foreign ownership of Indian companies, which may decrease the liquidity of a Fund’s
portfolio and result in extreme volatility in the prices of Indian securities. In November 2016, the Indian government eliminated certain large denomination cash notes as legal tender, causing uncertainty in certain financial markets. These factors,
coupled with the lack of extensive accounting, auditing and financial reporting standards and practices, as applicable in the United States, may increase the risk of loss for a Fund.
Securities laws in India are
relatively new and unsettled and, as a result, there is a risk of significant and unpredictable change in laws governing foreign investment, securities regulation, title to securities and shareholder rights. Foreign investors in particular may be
adversely affected by new or amended laws and regulations. Certain Indian regulatory approvals, including approvals from the Securities and Exchange Board of India, the central government and the tax authorities (to the extent that tax benefits need
to be utilized), may be required before a Fund can make investments in Indian companies. Foreign investors in India still face burdensome taxes on investments in income producing securities.
While the Indian economy has enjoyed
substantial economic growth in recent years, there can be no guarantee this growth will continue. Technology and software sectors represent a significant portion of the total capitalization of the Indian securities markets. The value of these
companies will generally fluctuate in response to technological and regulatory developments, and, as a result, a Fund’s holdings are expected to experience correlated fluctuations. Natural disasters, such as tsunamis, flooding or droughts,
could occur in India or surrounding areas and could negatively affect the Indian economy. Agriculture
occupies a prominent position in the Indian economy,
therefore, it may be negatively affected by adverse weather conditions and the effects of global climate change. These and other factors may decrease the value and liquidity of a Fund's investments.
Italy
.
Investment in Italian issuers involves risks that are specific to Italy, including, regulatory, political, currency, and economic risks. Italy’s economy is
dependent upon external trade with other economies
—
specifically Germany, France and
other Western European developed countries. As a result, Italy is dependent on the economies of these other countries and any change in the price or demand for Italy’s exports may have an adverse impact on its economy. Interest rates on
Italy’s debt may rise to levels that may make it difficult for it to service high debt levels without significant financial help from the EU and could potentially lead to default. Recently, the Italian economy has experienced volatility due to
concerns about economic downturn and rising government debt levels. Italy has been warned by the Economic and Monetary Union of the EU to reduce its public spending and debt and actions by Italy to cut spending or increase taxes in response could
have significant adverse effects on the Italian economy. These events have adversely impacted the Italian economy, causing credit agencies to lower Italy’s sovereign debt rating and could decrease outside investment in Italian companies. High
amounts of debt and public spending may stifle Italian economic growth or cause prolonged periods of recession.
Japan
. Japanese investments may be significantly affected by events influencing Japan’s economy and changes in the exchange rate between the Japanese yen and the U.S.
Dollar. Japan’s economy fell into a long recession in the 1990s. After a few years of mild recovery in the mid-2000s, Japan’s economy fell into another recession as a result of the recent global economic crisis. Japan is heavily
dependent on exports and foreign oil and may be adversely affected by higher commodity prices, trade tariffs, protectionist measures, competition from emerging economies, and the economic conditions of its trading partners, such as China.
Furthermore, Japan is located in a seismically active area, and in 2011 experienced an earthquake of a sizeable magnitude and a tsunami that significantly affected important elements of its infrastructure and resulted in a nuclear crisis. Since
these events, Japan’s financial markets have fluctuated dramatically. The full extent of the impact of these events on Japan’s economy and on foreign investment in Japan is difficult to estimate. The risks of natural disaster of varying
degrees, such as earthquakes and tsunamis, and the resulting damage, continue to exist. Japan’s economic prospects may be affected by the political and military situations of its near neighbors, notably North and South Korea, China, and
Russia. In addition, Japan’s labor market is adapting to an aging workforce, declining population, and demand for increased labor mobility. These demographic shifts and fundamental structural changes to the labor markets may negatively impact
Japan’s economic competiveness.
South Korea
. South Korean investments may be significantly affected by events influencing its economy, which is heavily dependent on exports and the demand for certain
finished goods. South Korea’s main industries include electronics, automobile production, chemicals, shipbuilding, steel, textiles, clothing, footwear, and food processing. Conditions that weaken demand for such products worldwide or in other
Asian countries could have a negative impact on the South Korean economy as a whole. The South Korean economy’s reliance on international trade makes it highly sensitive to fluctuations in international commodity prices, currency exchanges
rates and government regulation, and vulnerable to downturns of the world economy, particularly with respects to its four largest export markets (the EU, Japan, United States, and China). South Korea has experienced modest economic growth in recent
years, but such continued growth may slow due, in part, to the economic slowdown in China and the increased competitive advantage of Japanese exports with the weakened yen. The South Korean economy’s long-term challenges include an aging
population, inflexible labor market, and overdependence on exports to drive economic growth. Relations with North Korea could also have as significant impact on the economy of South Korea. Relations between South Korea and North Korea remain tense,
as exemplified in periodic acts of hostility, and the possibility of serious military engagement still exists. Armed conflict between North Korea and South Korea could have a severe adverse impact on the South Korean economy and its securities
markets.
Latin America
. Investments in Latin American countries involve special considerations not typically associated with investing in the United States. Most Latin American
countries have experienced, at one time or another, severe and persistent levels of inflation, including, in some cases, hyperinflation. This has, in turn, led to high interest rates, extreme measures by governments to keep inflation in check, and a
generally debilitating effect on economic growth. Although inflation in many countries has lessened, there is no guarantee it will remain at lower levels. In addition, the political history of certain Latin American countries has been characterized
by political uncertainty, military intervention in civilian and economic spheres, and political corruption. Such developments, if they were to reoccur, could reverse favorable trends toward market and economic reform, privatization, and removal of
trade barriers, and result in significant disruption to the securities markets. Certain Latin American countries may also have managed currencies, which are maintained at artificial levels to the U.S. Dollar rather than at levels determined by the
market. This type of system can lead to sudden and large adjustments in the currency which, in turn, can have a disruptive and negative effect on foreign investors. For example, in late 1994, the value of the Mexican peso lost more than one-third of
its value relative to the U.S. Dollar. Certain Latin American countries also restrict the free conversion of their currency into foreign currencies, including the U.S. Dollar. There is no significant foreign exchange market for many currencies and
it would, as a result, be difficult for the Fund to engage in foreign currency transactions designed to protect the value of the Fund’s interests in securities denominated in such currencies. Finally, a number of Latin American countries are
among the largest debtors of developing countries. There have been moratoria on, and reschedulings of, repayment with respect to these debts. Such events can restrict the flexibility of these debtor nations in the international markets and result in
the imposition of onerous conditions on their economies.
Mexico
. Investment in Mexican issuers involves risks that are specific to Mexico, including regulatory, political, and economic risks. In the past, Mexico has experienced
high interest rates, economic volatility, significant devaluation of its currency (the peso), and high unemployment rates. The Mexican economy is dependent upon external trade with other economies, specifically with the United States and certain
Latin American countries. Additionally, a high level of foreign investment in Mexican assets may increase Mexico’s exposure to risks associated with changes in international investor sentiment. Recent political developments in the U.S. may
also have potential implications for the current trade arrangements between the U.S. and Mexico, which could affect the value of securities held by the Fund. For example, uncertainty regarding the status of the North American Free Trade Agreement
(NAFTA) or its recently negotiated successor -- the United States-Mexico-Canada Agreement -- may have a significant impact on Mexico’s economic outlook and the value of a fund’s investment in Mexico.
The Mexican economy is heavily
dependent on trade with, and foreign investment from, the U.S. and Canada, which are Mexico’s principal trading partners. Any changes in the supply, demand, price or other economic component of Mexico’s imports or exports, as well as any
reductions in foreign investment from, or changes in the economies of, the U.S. or Canada, may have an adverse impact on the Mexican economy. Because commodities such as oil and gas, minerals and metals represent a large portion of the
region’s exports, the economies of these countries are particularly sensitive to fluctuations in commodity prices. Mexico’s economy has also become increasingly oriented toward manufacturing in the years since NAFTA entered into force.
Because Mexico’s top export is automotive vehicles, its economy is strongly tied to the U.S. automotive market, and changes to certain segments in the U.S. market could have an impact on the Mexican economy. The automotive industry and other
industrial products can be highly cyclical, and companies in these industries may suffer periodic operating losses. These industries can also be significantly affected by labor relations and fluctuating component prices. The agricultural and mining
sectors of Mexico’s economy also account for a large portion of its exports, and Mexico is susceptible to fluctuations in the price and demand for agricultural products and natural resources. In addition, Mexico has privatized or has begun the
process of privatization of certain entities and industries, and some investors have suffered losses due to the inability of the newly privatized entities to adjust to a competitive environment and changing regulatory standards.
Mexico has been destabilized by local
insurrections, social upheavals and drug related violence. Additionally, violence near border areas, border-related political disputes, and other social upheaval may lead to strained international relations. Mexico has also experienced contentious
and very closely decided elections. Changes in political parties and other political events may affect the economy and contribute to additional instability. Recurrence of these or similar conditions may adversely impact the Mexican economy.
Russia
. Investing in Russia involves risks and special considerations not typically associated with investing in United States. Since the breakup of the Soviet Union at the
end of 1991, Russia has experienced dramatic political, economic, and social change. The political system in Russia is emerging from a long history of extensive state involvement in economic affairs. The country is undergoing a rapid transition from
a centrally-controlled command system to a market-oriented, democratic model. As a result, companies in Russia are characterized by a lack of: (i) management with experience of operating in a market economy; (ii) modern technology; and, (iii) a
sufficient capital base with which to develop and expand their operations. It is unclear what will be the future effect on Russian companies, if any, of Russia’s continued attempts to move toward a more market-oriented economy. Russia’s
economy has experienced severe economic recession, if not depression, since 1990 during which time the economy has been characterized by high rates of inflation, high rates of unemployment, declining gross domestic product, deficit government
spending, and a devalued currency. The economic reform program has involved major disruptions and dislocations in various sectors of the economy, and those problems have been exacerbated by growing liquidity problems. Russia’s economy is also
heavily reliant on the energy and defense-related sectors, and is therefore susceptible to the risks associated with these industries. Further, Russia presently receives significant financial assistance from a number of countries through various
programs. To the extent these programs are reduced or eliminated in the future, Russian economic development may be adversely impacted. The laws and regulations in Russia affecting Western business investment continue to evolve in an unpredictable
manner. Russian laws and regulations, particularly those involving taxation, foreign investment and trade, title to property or securities, and transfer of title, which may be applicable to a Fund’s activities are relatively new and can change
quickly and unpredictably in a manner far more volatile than in the United States or other developed market economies. Although basic commercial laws are in place, they are often unclear or contradictory and subject to varying interpretation, and
may at any time be amended, modified, repealed or replaced in a manner adverse to the interest of the Funds.
As a result of
recent events involving Ukraine and Russia and other political conflicts, the United States and the European Union imposed sanctions on certain Russian individuals and companies, including certain financial institutions, and have limited certain
exports and imports to and from Russia. The United States and other nations or international organizations may impose additional, broader economic sanctions or take other actions that may adversely affect Russian-related issuers in the future. These
sanctions, any future sanctions or other actions, or even the threat of further sanctions or other actions, may negatively affect the value and liquidity of a Fund’s investments. Russia may undertake countermeasures or retaliatory actions
which may further impair the value and liquidity of a Fund’s investments.
To the extent a Fund invests in
stocks of foreign corporations, a Fund’s investment in such stocks may also be in the form of depositary receipts or other securities convertible into securities of foreign issuers. Depository receipts are receipts, typically issued by a
financial institution, with evidence of underlying securities issued by a non-U.S. issuer. Types of depositary receipts include American Depositary Receipts (“ADRs”), Global Depositary Receipts (“GDRs”) and European
Depositary Receipts (“EDRs”). Depository receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted.
ADRs are receipts typically issued by
an American bank or trust company that evidence ownership of underlying securities issued by a foreign corporation. Investments in ADRs have certain advantages over direct investment in the underlying foreign securities because: (i) ADRs are U.S.
dollar-denominated investments that are easily transferable and for which market quotations are readily available, and (ii) issuers whose securities are represented by ADRs are generally subject to auditing, accounting and financial reporting
standards similar to those applied to domestic issuers. By investing in ADRs rather than directly in the stock of foreign issuers outside the U.S. a Fund may avoid certain risks related to investing in foreign securities in non-U.S. markets,
however, ADRs do not eliminate all risks inherent in investing in the securities of foreign issuers.
EDRs are receipts issued in Europe
that evidence a similar ownership arrangement. GDRs are receipts issued throughout the world that evidence a similar arrangement. Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are
designed for use in European securities markets. GDRs are tradable both in the United States and in Europe and are designed for use throughout the world.
Depositary receipts may be purchased
through “sponsored” or “unsponsored” facilities, in which a Fund may invest. A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a depositary may establish an
unsponsored facility without participation by the issuer of the depositary security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts of the deposited securities.
Fund investments in depositary receipts,
which include ADRs, GDRs and EDRs, are deemed to be investments in foreign securities for purposes of a Fund’s investment strategy.
A Fund may invest directly and
indirectly in foreign currencies. Investments in foreign currencies are subject to numerous risks not least being the fluctuation of foreign currency exchange rates with respect to the U.S. Dollar. Exchange rates fluctuate for a number of
reasons.
Inflation
. Exchange rates change to reflect changes in a currency’s buying power. Different countries experience different inflation rates due to different monetary
and fiscal policies, different product and labor market conditions, and a host of other factors.
Trade
Deficits
. Countries with trade deficits tend to experience a depreciating currency. Inflation may be the cause of a trade deficit, making a country’s goods more expensive and less competitive and so
reducing demand for its currency.
Interest
Rates
. High interest rates may raise currency values in the short term by making such currencies more attractive to investors. However, since high interest rates are often the result of high inflation,
long-term results may be the opposite.
Budget Deficits and Low Savings Rates
. Countries that run large budget deficits and save little of their national income tend to suffer a depreciating currency because they
are forced to borrow abroad to finance their deficits. Payments of interest on this debt can inundate the currency markets with the currency of the debtor nation. Budget deficits also can indirectly contribute to currency depreciation if a
government chooses inflationary measures to cope with its deficits and debt.
Political
Factors
. Political instability in a country can cause a currency to depreciate. Demand for a certain currency may fall if a country appears a less desirable place in which to invest and do
business.
Government Control
. Through their own buying and selling of currencies, the world’s central banks sometimes manipulate exchange rate movements. In addition,
governments occasionally issue statements to influence people’s expectations about the direction of exchange rates, or they may instigate policies with an exchange rate target as the goal.
The value of a Fund’s
investments is calculated in U.S. Dollars each day that the New York Stock Exchange (“NYSE”) is open for business. As a result, to the extent that a Fund’s assets are invested in instruments denominated in foreign currencies and
the currencies appreciate relative to the U.S. Dollar, a Fund’s NAV per share as expressed in U.S. Dollars (and, therefore, the value of your investment) should increase. If the U.S. Dollar appreciates relative to the other currencies, the
opposite should occur.
The
currency-related gains and losses experienced by a Fund will be based on changes in the value of portfolio securities attributable to currency fluctuations only in relation to the original purchase price of such securities as stated in U.S. Dollars.
Gains or losses on shares of a Fund will be based on changes attributable to fluctuations in the NAV of such shares, expressed in U.S. Dollars, in relation to the original U.S. Dollar purchase price of the shares. The amount of appreciation or
depreciation in a Fund’s assets also will be affected by the net investment income generated by the money market instruments in which each Fund invests and by changes in the value of the securities that are unrelated to changes in currency
exchange rates.
A Fund may incur
currency exchange costs when it sells instruments denominated in one currency and buys instruments denominated in another.
Currency Transactions
. A Fund conducts currency exchange transactions on a spot basis. Currency transactions made on a spot basis are for cash at the spot rate prevailing in
the currency exchange market for buying or selling currency. A Fund also enters into forward currency contracts. See “Futures Contracts, Options, and Other Derivative Strategies” section below. A forward currency contract is an
obligation to buy or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are entered into on the
interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A currency forward contract will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the
currency that is purchased, similar to when a fund sells a security denominated in one currency and purchases a security denominated in another currency. For example, a Fund may enter into a forward contract when it owns a security that is
denominated in a non-U.S. currency and desires to “lock in” the U.S. dollar value of the security.
A Fund may invest in a combination of
forward currency contracts and U.S. Dollar-denominated market instruments in an attempt to obtain an investment result that is substantially the same as a direct investment in a foreign currency-denominated instrument. This investment technique
creates a “synthetic” position in the particular foreign-currency instrument whose performance the Adviser is trying to duplicate. For example, the combination of U.S. Dollar-denominated instruments with “long” forward
currency exchange contracts creates a position economically equivalent to a money market instrument denominated in the foreign currency itself. Such combined positions are sometimes necessary when the money market in a particular foreign currency is
small or relatively illiquid.
A
Fund may invest in forward currency contracts to hedge either specific transactions (transaction hedging) or portfolio positions (position hedging). Transaction hedging is the purchase or sale of forward currency contracts with respect to specific
receivables or payables of a Fund in connection with the purchase and sale of portfolio securities. Position hedging is the sale of a forward currency contract on a particular currency with respect to portfolio positions denominated or quoted in
that currency.
A Fund may use
forward currency contracts for position hedging if consistent with its policy of trying to expose its net assets to foreign currencies. A Fund is not required to enter into forward currency contracts for hedging purposes and it is possible that a
Fund may not be able to hedge against a currency devaluation that is so generally anticipated that a Fund is unable to contract to sell the currency at a price above the devaluation level it anticipates. It also is possible, under certain
circumstances, that a Fund may have to limit its currency transactions to continue to qualify as a “regulated investment company” (“RIC”) under Subchapter M of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986, as
amended (“Code”). See “Dividends, Other Distributions and Taxes.”
Each Fund currently does not intend
to enter into a forward currency contract with a term of more than one year, or to engage in position hedging with respect to the currency of a particular country to more than the aggregate market value (at the time the hedging transaction is
entered into) of its portfolio securities denominated in (or quoted in or currently convertible into or directly related through the use of forward currency contracts in conjunction with money market instruments to) that particular currency.
Under definitions adopted by the
Commodity Futures Trading Commission (“CFTC”) and SEC, non-deliverable forwards are considered swaps, and therefore are included in the definition of “commodity interests.” Although non-deliverable forwards have historically
been traded in the over-the-counter (“OTC”) market, as swaps they may in the future be required to be centrally cleared and traded on public facilities. For more information on central clearing and trading of cleared swaps, see
“Cleared swaps,” “Risks of cleared swaps,” “Comprehensive swaps regulation” and “Developing government regulation of derivatives.” Currency forwards that qualify as deliverable forwards are not
regulated as swaps for most purposes, and are not included in the definition of “commodity interests.” However these forwards are subject to some requirements applicable to swaps, including reporting to swap data repositories,
documentation requirements, and business conduct rules applicable to swap dealers. CFTC regulation of currency forwards, especially non-deliverable forwards, may restrict a Fund’s ability to use these instruments in the manner described above
or subject the investment manager to CFTC registration and regulation as a commodity pool operator (“CPO”).
At or before the maturity of a
forward currency contract, a Fund may either sell a portfolio security and make delivery of the currency, or retain the security and terminate its contractual obligation to deliver the currency by buying an “offsetting” contract
obligating it to buy, on the same maturity date, the same amount of the currency. If a Fund engages in an offsetting transaction, it may later enter into a new forward currency contract to sell the currency.
If a Fund engages
in an offsetting transaction, it will incur a gain or loss to the extent that there has been movement in forward currency contract prices. If forward prices go down during the period between the date a Fund enters into a forward currency contract
for the sale of a currency and the date it enters into an offsetting contract for the purchase of the currency, a Fund will realize a gain to the extent that the price of the currency it has agreed to sell exceeds the price of the currency it has
agreed to buy. If forward prices go up, a Fund will suffer a loss to the extent the price of the currency it has agreed to buy exceeds the price of the currency it has agreed to sell.
Since a Fund invests in money market
instruments denominated in foreign currencies, it may hold foreign currencies pending investment or conversion into U.S. Dollars. Although a Fund values its assets daily in U.S. Dollars, it does not convert its holdings of foreign currencies into
U.S. Dollars on a daily basis. A Fund will convert its holdings from time to time, however, and incur the costs of currency conversion. Foreign exchange dealers do not charge a fee for conversion, but they do realize a profit based on the difference
between the prices at which they buy and sell various currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one rate, and offer to buy the currency at a lower rate if a Fund tries to resell the currency to the dealer.
Risks of currency forward contracts
.
The successful use of these transactions will usually depend on the Adviser’s ability to accurately forecast currency exchange
rate movements. Should exchange rates move in an unexpected manner, a Fund may not achieve the anticipated benefits of the transaction, or it may realize losses. In addition, these techniques could result in a loss if the counterparty to the
transaction does not perform as promised, including because of the counterparty’s bankruptcy or insolvency. While a Fund uses only counterparties that meet its credit quality standards, in unusual or extreme market conditions, a
counterparty’s creditworthiness and ability to perform may deteriorate rapidly, and the availability of suitable replacement counterparties may become limited. Currency forward contracts may limit potential gain from a positive change in the
relationship between the U.S. Dollar and foreign currencies. Unanticipated changes in currency prices may result in poorer overall performance for a Fund than if it had not engaged in such contracts. Moreover, there may be an imperfect correlation
between a Fund’s portfolio holdings of securities denominated in a particular currency and the currencies bought or sold in the forward contracts entered into by a Fund. This imperfect correlation may cause a Fund to sustain losses that will
prevent the Fund from achieving a complete hedge or expose the Fund to risk of foreign exchange loss.
Foreign Currency Options
. A Fund may invest in foreign currency-denominated securities and may buy or sell put and call options on foreign currencies. A Fund may buy or sell
put and call options on foreign currencies either on exchanges or in the OTC market. A put option on a foreign currency gives the purchaser of the option the right to sell a foreign currency at the exercise price until the option expires. A call
option on a foreign currency gives the purchaser of the option the right to purchase the currency at the exercise price until the option expires. Currency options traded on U.S. or other exchanges may be subject to position limits which may limit
the ability of a Fund to reduce foreign currency risk using such options. OTC options differ from traded options in that they are two-party contracts with price and other terms negotiated between buyer and seller, and generally do not have as much
market liquidity as exchange-traded options.
Foreign Currency
Exchange-Related Securities
Foreign Currency Warrants
. Foreign currency warrants such as Currency Exchange Warrants
SM
(“CEWs
SM
”) are warrants which entitle the
holder to receive from their issuer an amount of cash (generally, for warrants issued in the United States, in U.S. Dollars) which is calculated pursuant to a predetermined formula and based on the exchange rate between a specified foreign currency
and the U.S. Dollar as of the exercise date of the warrant. Foreign currency warrants generally are exercisable upon their issuance and expire as of a specified date and time. Foreign currency warrants have been issued in connection with U.S.
Dollar-denominated debt offerings by major corporate issuers in an attempt to reduce the foreign currency exchange risk which, from the point of view of prospective purchasers of the securities, is inherent in the international fixed-income
marketplace. Foreign currency warrants may attempt to reduce the foreign exchange risk assumed by purchasers of a security by, for example, providing for a supplemental payment in the event that the U.S. Dollar depreciates against the value of a
major foreign currency such as the Japanese yen or the Euro. The formula used to determine the amount payable upon exercise of a foreign currency warrant may make the warrant worthless unless the applicable foreign currency exchange rate moves in a
particular direction (
e.g.
, unless the U.S. Dollar appreciates or depreciates against the particular foreign currency to which the warrant is linked or indexed). Foreign currency warrants are severable from
the debt obligations with which they may be offered, and may be listed on exchanges. Foreign currency warrants may be exercisable only in certain minimum amounts, and an investor wishing to exercise warrants who possesses less than the minimum
number required for exercise may be required either to sell the warrants or to purchase additional warrants, thereby incurring additional transaction costs. In the case of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate relating to exercise is determined, during which time the exchange rate could change significantly, thereby affecting both the market and cash settlement values of the
warrants being exercised. The expiration date of the warrants may be accelerated if the warrants should be delisted from an exchange or if their trading should be suspended permanently, which would result in the loss of any remaining “time
value” of the warrants (
i.e.
, the difference between the current market value and the exercise value of the warrants), and, in the case the warrants were “out-of-the-money,” in a total loss
of the purchase price of the warrants.
Warrants are
generally unsecured obligations of their issuers and are not standardized foreign currency options issued by the Options Clearing Corporation (“OCC”). Unlike foreign currency options issued by OCC, the terms of foreign exchange warrants
generally will not be amended in the event of governmental or regulatory actions affecting exchange rates or in the event of the imposition of other regulatory controls affecting the international currency markets. The initial public offering price
of foreign currency warrants is generally considerably in excess of the price that a commercial user of foreign currencies might pay in the interbank market for a comparable option involving significantly larger amounts of foreign currencies.
Foreign currency warrants are subject to significant foreign exchange risk, including risks arising from complex political or economic factors.
Principal Exchange Rate Linked Securities
. Principal exchange rate linked securities (“PERLs
SM
”) are debt obligations the principal on which is payable at maturity in an amount that may vary based on the exchange rate between the U.S. Dollar
and a particular foreign currency at or about that time. The return on “standard” principal exchange rate linked securities is enhanced if the foreign currency to which the security is linked appreciates against the U.S. Dollar, and is
adversely affected by increases in the foreign exchange value of the U.S. Dollar; “reverse” principal exchange rate linked securities are like the “standard” securities, except that their return is enhanced by increases in
the value of the U.S. Dollar and adversely impacted by increases in the value of foreign currency. Interest payments on the securities are generally made in U.S. Dollars at rates that reflect the degree of foreign currency risk assumed or given up
by the purchaser of the notes (
i.e.
, at relatively higher interest rates if the purchaser has assumed some of the foreign exchange risk, or relatively lower interest rates if the issuer has assumed some of the
foreign exchange risk, based on the expectations of the current market). Principal exchange rate linked securities may in limited cases be subject to acceleration of maturity (generally, not without the consent of the holders of the securities),
which may have an adverse impact on the value of the principal payment to be made at maturity.
Performance Indexed Paper
. Performance indexed paper
(“PIPs
SM
”)
is U.S.
Dollar-denominated commercial paper the yield of which
is
linked
to certain foreign exchange rate movements.
The
yield to the investor on
performance indexed paper is established at maturity as a function of spot exchange rates between the U.S. Dollar
and a designated currency as
of
or about that time
(generally, the index maturity two days prior to maturity).
The yield to the
investor will be within a range stipulated at the time of purchase of the obligation, generally with a guaranteed minimum rate of return that is below, and a potential maximum rate of return that is above,
market yields on U.S. Dollar-denominated commercial paper, with both the minimum and
maximum rates
of return
on the investment
corresponding to the minimum and maximum values of the spot exchange rate two business days prior to maturity.
A Fund may invest in hybrid
instruments. A hybrid instrument is a type of potentially high-risk derivative that combines a traditional stock, bond, or commodity with an option or forward contract. Generally, the principal amount, amount payable upon maturity or redemption, or
interest rate of a hybrid is tied (positively or negatively) to the price of some commodity, currency or securities index or another interest rate or some other economic factor (each a “benchmark”). The interest rate or (unlike most
fixed income securities) the principal amount payable at maturity of a hybrid security may be increased or decreased, depending on changes in the value of the benchmark. A hybrid could be, for example, a bond issued by an oil company that pays a
small base level of interest, in addition to interest that accrues when oil prices exceed a certain predetermined level. Such a hybrid instrument would be a combination of a bond and a call option on oil.
Hybrids can be used as an efficient
means of pursuing a variety of investment goals, including currency hedging, and increased total return. Hybrids may not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a result,
may be leveraged and move (up or down) more steeply and rapidly than the benchmark. These benchmarks may be sensitive to economic and political events, such as commodity shortages and currency devaluations, which cannot be readily foreseen by the
purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero. Thus, an investment in a hybrid may entail significant market risks that are not associated with a similar investment in a traditional, U.S.
Dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest. The purchase of hybrids also exposes a Fund to the credit risk of the issuer of the hybrids. These risks may cause significant fluctuations
in the NAV of a Fund.
Certain
issuers of structured products such as hybrid instruments may be deemed to be investment companies as defined in the 1940 Act. As a result, a Fund’s investment in these products may be subject to limits applicable to investments in investment
companies and may be subject to restrictions contained in the 1940 Act.
Illiquid Investments and Restricted
Securities
Each Fund
may purchase and hold illiquid investments. A Fund will not purchase or otherwise acquire any security if, as a result, more than 15% of its net assets (taken at current value) would be invested in investments that are illiquid.
The term “illiquid
investments” for this purpose means any investment that a Fund reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing
the market value of the investment. A Fund will not
acquire illiquid securities if, as a result, such securities would comprise more than 15% of the value of the Fund’s net assets. Rafferty, subject to oversight by the Board of Trustees, has the ultimate authority to determine, to the extent
permissible under the federal securities laws, which securities are liquid or illiquid for purposes of this 15% limitation under a Fund’s liquidity risk management program, adopted pursuant to Rule 22e-4 under the 1940 Act. Illiquid securities
will be priced at fair value as determined in good faith under procedures adopted by the Board of Trustees. If, through the appreciation of illiquid securities or the depreciation of liquid securities, a Fund should be in a position where more than
15% of the value of its net assets are invested in illiquid securities, including restricted securities which are not readily marketable, Rafferty will report such occurrence to the Board of Trustees and take such steps as are deemed advisable to
protect liquidity in accordance with a Fund’s liquidity risk management program.
A Fund may not be able to sell
illiquid investments when Rafferty considers it desirable to do so or may have to sell such investments at a price that is lower than the price that could be obtained if the investments were liquid. In addition, the sale of illiquid investments may
require more time and result in higher dealer discounts and other selling expenses than does the sale of investments that are not illiquid. Illiquid investments also may be more difficult to value due to the unavailability of reliable market
quotations for such investments, and investment in illiquid investments may have an adverse impact on NAV.
Rule 144A
establishes a “safe harbor” from the registration requirements of the 1933 Act for resales of certain securities to qualified institutional buyers. Institutional markets for restricted securities that have developed as a result of Rule
144A provide both readily ascertainable values for certain restricted securities and the ability to liquidate an investment to satisfy share redemption orders. This policy does not include restricted securities eligible for resale pursuant to Rule
144A under the Securities Act of 1933, as amended (“1933 Act”), which the Trust’s Board of Trustees (“Board” or “Trustees”), or Rafferty, under Board-approved guidelines, has determined are liquid. Each Fund
currently does not anticipate investing in such restricted securities. However, to the extent that a Fund does invest in such restricted securities, an insufficient number of qualified institutional buyers interested in purchasing Rule 144A-eligible
securities held by a Fund could adversely affect the marketability of such portfolio securities, and a Fund may be unable to dispose of such securities promptly or at reasonable prices.
A Fund may purchase indexed
securities, which are securities, the value of which varies positively or negatively in relation to the value of other securities, securities indices or other financial indicators, consistent with its investment objective. Indexed securities may be
debt securities or deposits whose value at maturity or coupon rate is determined by reference to a specific instrument or statistic. Recent issuers of indexed securities have included banks, corporations and certain U.S. government agencies.
The performance of indexed securities
depends to a great extent on the performance of the security or other instrument to which they are indexed and also may be influenced by interest rate changes in the United States and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values may decline substantially if the issuer’s creditworthiness deteriorates. Indexed securities may be more volatile than the underlying instruments. Certain indexed
securities that are not traded on an established market may be deemed illiquid. See “Illiquid Investments and Restricted Securities” above.
Inflation Protected Securities
Inflation protected securities
are fixed income securities whose value is periodically adjusted according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers utilize a structure that accrues inflation into the principal value of the bond.
Other issuers pay out the Consumer Price Index (“CPI”) accruals as part of a semiannual coupon. Inflation protected securities issued by the U.S. Treasury have maturities of approximately five, ten or thirty years, although it is
possible that securities with other maturities will be issued in the future. The U.S. Treasury securities pay interest on a semi-annual basis equal to a fixed percentage of the inflation adjusted principal amount.
If the periodic adjustment rate
measuring inflation falls, the principal value of inflation protected bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of
the original bond principal upon maturity (as adjusted for inflation) is guaranteed by the U.S. Treasury in the case of U.S. Treasury inflation indexed bonds, even during a period of deflation. However, the current market value of the bonds is not
guaranteed and will fluctuate. A Fund may also invest in other inflation related bonds which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond to be repaid at maturity
may be less than the original principal amount and, therefore, is subject to credit risk.
The value of inflation protected
bonds is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate
than nominal interest rates, real interest rates might decline, leading to an increase in value
of inflation protected bonds. In contrast, if
nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation protected bonds. While these securities are expected to be protected from long-term inflationary trends,
short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation, investors in these securities may not be protected to the extent that the increase is not reflected in the bond’s
inflation measure.
The periodic
adjustment of U.S. inflation protected bonds is tied to the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (“CPI-U”), published monthly by the U.S. Bureau of Labor Statistics. The CPI-U
is a measurement of changes in the cost of living, made up of components such as housing, food, transportation and energy.
Any increase in principal for an
inflation protected security resulting from inflation adjustments is considered by the IRS to be taxable income in the year it occurs. A Fund’s distributions to shareholders include interest income and the income attributable to principal
adjustments, both of which will be taxable to shareholders. The tax treatment of the income attributable to principal adjustments may result in the situation where a Fund needs to make its required annual distributions to shareholders in amounts
that exceed the cash received. As a result, a Fund may need to liquidate certain investments when it is not advantageous to do so. Also, if the principal value of an inflation protected security is adjusted downward due to deflation, amounts
previously distributed in the taxable year may be characterized in some circumstances as a return of capital.
A Fund may invest in lower-rated
debt securities, including securities in the lowest credit rating category, of any maturity, otherwise known as “junk bonds.”
Junk bonds generally offer a higher
current yield than that available for higher-grade issues. However, lower-rated securities involve higher risks, in that they are especially subject to adverse changes in general economic conditions and in the industries in which the issuers are
engaged, to changes in the financial condition of the issuers and to price fluctuations in response to changes in interest rates. During periods of economic downturn or rising interest rates, highly leveraged issuers may experience financial stress
that could adversely affect their ability to make payments of interest and principal and increase the possibility of default. In addition, the market for lower-rated debt securities has expanded rapidly in recent years, and its growth paralleled a
long economic expansion. At times in recent years, the prices of many lower-rated debt securities declined substantially, reflecting an expectation that many issuers of such securities might experience financial difficulties. As a result, the yields
on lower-rated debt securities rose dramatically, but such higher yields did not reflect the value of the income stream that holders of such securities expected, but rather, the risk that holders of such securities could lose a substantial portion
of their value as a result of the issuers’ financial restructuring or default. There can be no assurance that such declines will not recur.
The market for lower-rated debt
issues generally is thinner and less active than that for higher quality securities, which may limit a Fund’s ability to sell such securities at fair value in response to changes in the economy or financial markets. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may also decrease the values and liquidity of lower-rated securities, especially in a thinly traded market. Changes by recognized rating services in their rating of a fixed-income
security may affect the value of these investments. A Fund will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase. However, Rafferty will monitor the investment to determine whether continued
investment in the security will assist in meeting a Fund’s investment objective.
Mortgage-Backed Securities
A Fund may invest in
mortgage-backed securities. A mortgage-backed security is a type of pass-through security, which is a security representing pooled debt obligations repackaged as interests that pass income through an intermediary to investors. In the case of
mortgage-backed securities, the ownership interest is in a pool of mortgage loans.
Mortgage-backed securities are most
commonly issued or guaranteed by the Government National Mortgage Association (“Ginnie Mae
®
” or “GNMA”), Federal National
Mortgage Association (“Fannie Mae
®
” or “FNMA”) or Federal Home Loan Mortgage Corporation (“Freddie Mac
®
” or “FHLMC”), but may also be issued or guaranteed by other private issuers. GNMA is a government-owned corporation that is an
agency of the U.S. Department of Housing and Urban Development. It guarantees, with the full faith and credit of the United States, full and timely payment of all monthly principal and interest on its mortgage-backed securities. FNMA is a publicly
owned, government-sponsored corporation that mostly packages mortgages backed by the Federal Housing Administration, but also sells some non-governmentally backed mortgages. Pass-through securities issued by FNMA are guaranteed as to timely payment
of principal and interest only by FNMA. FHLMC is a publicly chartered agency that buys qualifying residential mortgages from lenders, re-packages them and provides certain guarantees. Pass-through securities issued by FHLMC are guaranteed as to
timely payment of principal and interest only by FHLMC.
The Federal
Housing Finance Agency (“FHFA”) is mandating that Fannie Mae
®
and Freddie Mac
®
cease issuing their own mortgage-backed securities and begin issuing "Uniform Mortgage-Backed Securities" or "UMBS" in 2019. Each UMBS will have a
55-day remittance cycle and can be used as collateral in either a Fannie Mae
®
or Freddie Mac
®
security or held for
investment. Investors may be approached to convert
existing mortgage-backed securities into UMBS, possibly with an inducement fee being offered to holders of Freddie Mac
®
mortgage-backed securities.
Mortgage-backed securities issued by private issuers, whether or not such obligations are subject to guarantees by the private issuer, may entail greater risk than obligations directly guaranteed by the U.S. government. The average life of a
mortgage-backed security is likely to be substantially less than the original maturity of the mortgage pools underlying the securities. Prepayments of principal by mortgagors and mortgage foreclosures will usually result in the return of the greater
part of principal invested far in advance of the maturity of the mortgages in the pool.
Collateralized mortgage obligations
(“CMOs”) are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collateral collectively hereinafter referred to as “Mortgage Assets”). Multi-class pass-through securities are interests in a
trust composed of Mortgage Assets and all references in this section to CMOs include multi-class pass-through securities. Principal prepayments on the Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated
maturities or final distribution dates, resulting in a loss of all or part of the premium if any has been paid. Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly or semi-annual basis. The principal and interest payments
on the Mortgage Assets may be allocated among the various classes of CMOs in several ways. Typically, payments of principal, including any prepayments, on the underlying mortgages are applied to the classes in the order of their respective stated
maturities or final distribution dates, so that no payment of principal is made on CMOs of a class until all CMOs of other classes having earlier stated maturities or final distribution dates have been paid in full.
Stripped
mortgage-backed securities (“SMBS”) are derivative multi-class mortgage securities. A Fund will only invest in SMBS issued by Ginnie
Mae
®
, which are obligations backed by the full faith and credit of the U.S. government. SMBS are usually structured with two or more classes that
receive different proportions of the interest and principal distributions from a pool of Mortgage Assets. A Fund will only invest in SMBS whose Mortgage Assets are U.S. government obligations. A common type of SMBS will be structured so that one
class receives some of the interest and most of the principal from the Mortgage Assets, while the other class receives most of the interest and the remainder of the principal. If the underlying Mortgage Assets experience greater than anticipated
prepayments of principal, each Fund may fail to fully recoup its initial investment in these securities. The market value of any class which consists primarily, or entirely, of principal payments generally is unusually volatile in response to
changes in interest rates.
Investment in mortgage-backed
securities poses several risks, including among others, prepayment, market and credit risk. Prepayment risk reflects the risk that borrowers may prepay their mortgages faster than expected, thereby affecting the investment’s average life and
perhaps its yield. Whether or not a mortgage loan is prepaid is almost entirely controlled by the borrower. Borrowers are most likely to exercise prepayment options at the time when it is least advantageous to investors, generally prepaying
mortgages as interest rates fall, and slowing payments as interest rates rise. Besides the effect of prevailing interest rates, the rate of prepayment and refinancing of mortgages may also be affected by home value appreciation, ease of the
refinancing process and local economic conditions. Market risk reflects the risk that the price of a security may fluctuate over time. The price of mortgage-backed securities may be particularly sensitive to prevailing interest rates, the length of
time the security is expected to be outstanding, and the liquidity of the issue. In a period of unstable interest rates, there may be decreased demand for certain types of mortgage-backed securities, and a Fund invested in such securities wishing to
sell them may find it difficult to find a buyer, which may in turn decrease the price at which they may be sold. Credit risk reflects the risk that a Fund may not receive all or part of its principal because the issuer or credit enhancer has
defaulted on its obligations. Obligations issued by U.S. government-sponsored entities are guaranteed as to the payment of principal and interest, but are not backed by the full faith and credit of the U.S. government. The performance of private
label mortgage-backed securities, issued by private institutions, is based on the financial health of those institutions. With respect to GNMA certificates, although GNMA guarantees timely payment even if homeowners delay or default, tracking the
“pass-through” payments may, at times, be difficult.
A Fund may invest in municipal
obligations. Municipal securities are fixed-income securities issued by states, counties, cities and other political subdivisions and authorities. Although most municipal securities are exempt from federal income tax, municipalities also may issue
taxable securities. Tax exempt securities are generally classified by their source of payment. In addition to the usual risks associated with investing for income, the value of municipal obligations can be affected by changes in the actual or
perceived credit quality of the issuers. The credit quality of a municipal obligation can be affected by, among other factors: a) the financial condition of the issuer or guarantor; b) the issuer’s future borrowing plans and sources of
revenue; c) the economic feasibility of the revenue bond project or general borrowing purpose; d) political or economic developments in the region or jurisdiction where the security is issued; and e) the liquidity of the security. Because municipal
obligations are generally traded OTC, the liquidity of a particular issue often depends on the willingness of dealers to make a market in the security. The liquidity of some municipal issues can be enhanced by demand features, which enable a Fund to
demand payment from the issuer or a financial intermediary on short notice.
Futures Contracts, Options, and
Other Derivative Strategies
Generally, derivatives are
financial instruments whose value depends on, or is derived from, the value of one or more underlying assets, reference rates, or indices or other market factors (“reference assets”) and may relate to stocks bonds, interest rates, credit
currencies, commodities or related indices. Derivative instruments can provide an efficient means to gain long or short exposure to the value of a reference asset without actually owning or selling the instrument. Examples of derivative instruments
include futures contracts, swap agreements, options, options on futures contracts and forward currently contracts.
Each Fund may enter into derivatives
instruments which may include futures contracts, forward contracts, options on currencies, commodities, indices, or futures contracts and swaps which provide long and short exposure to reference assets. Derivatives may be more sensitive to changes
in interest rates or to sudden fluctuations in market prices and thus a Fund’s losses may be greater if it invests in derivatives than if it invests in non-derivative instruments. Derivatives are also subject to counterparty risk, which is the
risk that the other party in the transaction will not fulfill its contractual obligations.
The use of derivative instruments is
subject to applicable regulations of the SEC, the several exchanges upon which they are traded and the CFTC. In addition, a Fund’s ability to use derivative instruments will be limited by tax considerations. See “Dividends, Other
Distributions and Taxes.”
Under current CFTC regulations, if a
Fund uses commodity interests (such as futures contracts, options on futures contracts and swaps) other than for bona fide hedging purposes (as defined by the CFTC) the aggregate initial margin and premiums required to establish these positions
(after taking into account unrealized profits and unrealized losses on any such positions and excluding the amount by which options that are “in-the-money” at the time of purchase) may not exceed 5% of a Fund’s NAV, or
alternatively, the aggregate net notional value of those positions, as determined at the time the most recent position was established, may not exceed 100% of the fund’s NAV (after taking into account unrealized profits and unrealized losses
on any such positions). Pursuant to an exemption filed with the National Futures Association, the Funds are not deemed to be commodity pools under the Commodity Exchange Act ("CEA").
Each Fund is subject to the risk that
a change in U.S. law and related regulations will impact the way a Fund operates, increase the particular costs of a Fund’s operation and/or change the competitive landscape. In this regard, any further amendment to the CEA or its related
regulations that subject a Fund to additional regulation may have adverse impacts on a Fund’s operations and expenses.
In addition to the
instruments, strategies and risks described below and in the Prospectus, Rafferty may discover additional opportunities in connection with derivative instruments and other similar or related techniques. These new opportunities may become available
as Rafferty develops new techniques, as regulatory authorities broaden the range of permitted transactions and as new derivative instruments or other techniques are developed. Rafferty may utilize these opportunities to the extent that they are
consistent with a Fund’s investment objective and permitted by a Fund’s investment limitations and applicable regulatory authorities. A Fund’s Prospectus or this SAI will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or in the Prospectus.
Special Risks
. The use of derivative instruments involves special considerations and risks, certain of which are described below. Risks pertaining to particular derivative instruments are described in the sections that
follow.
(1) Options and
futures prices can diverge from the prices of their underlying instruments. Options and futures prices are affected by such factors as current and anticipated short-term interest rates, changes in volatility of the underlying instrument and the time
remaining until expiration of the contract, which may not affect security prices the same way. Imperfect or no correlation also may result from differing levels of demand in the options and futures markets and the securities markets, from structural
differences in how options and futures and securities are traded, and from imposition of daily price fluctuation limits or trading halts.
(2) As described below, a Fund might
be required to maintain assets as “cover,” maintain segregated accounts or make margin payments when it takes positions in Financial Instruments involving obligations to third parties (
e.g.
,
Financial Instruments other than purchased options). If a Fund were unable to close out its positions in such Financial Instruments, it might be required to continue to maintain such assets or accounts or make such payments until the position
expired or matured. These requirements might impair a Fund’s ability to sell a portfolio security or make an investment when it would otherwise be favorable to do so or require that a Fund sell a portfolio security at a disadvantageous time. A
Fund’s ability to close out a position in a Financial Instrument prior to expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of the other party to the
transaction (the “counterparty”) to enter into a transaction closing out the position. Therefore, there is no assurance that any position can be closed out at a time and price that is favorable to a Fund.
(3) Losses may arise due to
unanticipated market price movements, lack of a liquid secondary market for any particular instrument at a particular time or due to losses from premiums paid by a Fund on options transactions.
Cover
. Transactions using derivative instruments, other than purchased options, expose a Fund to an obligation to another party. A Fund will not enter into any such
transactions unless it owns either (1) an offsetting (“covered”) position in securities or other options or futures contracts or (2) cash and liquid assets with a value, marked-to-market daily, sufficient to cover
its potential obligations to the extent not covered
as provided in (1) above. Each Fund will comply with SEC guidelines regarding cover for these instruments and will, if the guidelines so require, set aside cash or liquid assets in an account with its custodian, the Bank of New York Mellon ("BNYM"),
in the prescribed amount as determined daily.
Assets used as
cover or held in an account cannot be sold while the position in the corresponding derivative instrument is open, unless they are replaced with other appropriate assets. As a result, the commitment of a large portion of a Fund’s assets to
cover or accounts could impede portfolio management or a Fund’s ability to meet redemption requests or other current obligations.
Futures Contracts
. A Fund may use certain options (traded on an exchange or OTC, or otherwise), futures contracts (sometimes referred to as “futures”) and
options on futures contracts as a substitute for a comparable market position in the underlying security or index, to attempt to hedge or limit the exposure of a Fund’s position, to create a synthetic money market position, for certain
tax-related purposes or to effect closing transactions.
Generally, a futures contract is a
standard binding agreement to buy or sell a specified quantity of an underlying reference instrument, such as a specific security, currency or commodity, at a specified price at a specified later date. A “sale” of a futures contract
means the acquisition of a contractual obligation to deliver the underlying reference instrument called for by the contract at a specified price on a specified date. A “purchase” of a futures contract means the acquisition of a
contractual obligation to acquire the underlying reference instrument called for by the contract at a specified price on a specified date. The purchase or sale of a futures contract will allow a Fund to increase or decrease its exposure to the
underlying reference instrument without having to buy the actual instrument.
The underlying reference instruments
to which futures contracts may relate include non-U.S. currencies, interest rates, stock and bond indices and debt securities, including U.S. government debt obligations. In most cases the contractual obligation under a futures contract may be
offset, or “closed out,” before the settlement date so that the parties do not have to make or take delivery. The closing out of a contractual obligation is usually accomplished by buying or selling, as the case may be, an identical,
offsetting futures contract. This transaction, which is effected through a member of an exchange, cancels the obligation to make or take delivery of the underlying instrument or asset. If the original position entered into is a long position
(futures contract purchased), there will be a gain (loss) if the offsetting sell transaction is carried out at a higher (lower) price, inclusive of commissions. If the original position entered into is a short position (futures contract sold) there
will be a gain (loss) if the offsetting buy transaction is carried out at a lower (higher) price, inclusive of commissions.
Certain futures contracts are
cash-settled, meaning the futures contract obligates the seller to deliver (and purchaser to accept) an amount of cash equal to a specific dollar amount multiplied by the difference between the final settlement price of a specific futures contract
and the price at which the agreement is made. No physical delivery of the underlying asset is made.
Whether a Fund realizes a gain/loss
from futures activities depends generally upon the movements in the underlying reference asset (generally a commodity, currency, security or index). The extent of a Fund’s loss from an unhedged short position in a futures contract is
potentially unlimited, and investors may lose the amount that they invest plus any profits recognized on their investment.
Futures contracts may be bought and
sold on U.S. and non-U.S. exchanges. Futures contracts in the U.S. have been designed by exchanges that have been designated “contract markets” by the CFTC and must be executed through a futures commission merchant (“FCM”),
which is a brokerage firm that is a member of the relevant contract market. Each exchange guarantees performance of the contracts as between the clearing members of the exchange, thereby reducing the risk of counterparty default. Because all
transactions in the futures market are made, offset, or fulfilled by an FCM through a clearinghouse associated with the exchange on which the contracts are traded, a Fund will incur brokerage fees when it buys or sells futures contracts. A Fund
generally buys and sells futures contracts only on contract markets (including exchanges or boards of trade) where there appears to be an active market for the futures contracts, but there is no assurance that an active market will exist for any
particular contract or at any particular time. An active market makes it more likely that futures contracts will be liquid and bought and sold at competitive market prices. In addition, many of the futures contracts available may be relatively new
instruments without a significant trading history. As a result, there can be no assurance that an active market will develop or continue to exist.
When a Fund enters into a futures
contract, it must deliver to an account controlled by the FCM (that has been selected by the Fund), an amount referred to as “initial margin” that is typically calculated as an amount equal to the volatility in market value of a contract
over a fixed period. Initial margin requirements are determined by the respective exchanges on which the futures contracts are traded and the FCM. Thereafter, a “variation margin” amount may be required to be paid by a Fund or received
by a Fund in accordance with margin controls set for such accounts, depending upon changes in the marked-to-market value of the futures contract. The account is marked-to-market daily and the variation margin is monitored by a Fund’s
investment manager and custodian on a daily basis. When the futures contract is closed out, if a Fund has a loss equal to, or greater than, the margin amount, the margin amount is paid to the FCM along with any loss in excess of the margin amount.
If a Fund has a loss of less than the margin amount, the excess margin is returned to a Fund. If a Fund has a gain, the full margin amount and the amount of the gain is paid to the Fund. Some futures contracts provide for the delivery of securities
that are different than those that are specified in the contract. For a futures contract
for delivery of debt securities, on the settlement
date of the contract, adjustments to the contract can be made to recognize differences in value arising from the delivery of debt securities with a different interest rate from that of the particular debt securities that were specified in the
contract. In some cases, securities called for by a futures contract may not have been issued when the contract was written.
Risks of futures contracts.
A Fund’s use of futures contracts is subject to the risks associated with derivative instruments generally. A Fund may not be able to properly effect its strategy when a liquid market is unavailable for the futures
contract the Fund wishes to close, which may at times occur. If a Fund were unable to liquidate a futures position due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial losses. A Fund would
continue to be subject to market risk with respect to the position. In addition, a Fund would continue to be required to make daily variation margin payments and might be required to maintain cash or liquid assets in an account.
A purchase or sale of a futures
contract may result in losses to a Fund in excess of the amount that the Fund delivered as initial margin. Because of the relatively low margin deposits required, futures trading involves a high degree of leverage; as a result, a relatively small
price movement in a futures contract may result in immediate and substantial loss, or gain, to a Fund. In addition, if a Fund has insufficient cash to meet daily variation margin requirements or close out a futures position, it may have to sell
securities from its portfolio at a time when it may be disadvantageous to do so. Adverse market movements could cause a Fund to experience substantial losses on an investment in a futures contract. There is a risk of loss by a Fund of the initial
and variation margin deposits in the event of bankruptcy of the FCM with which the Fund has an open position in a futures contract. The assets of a Fund may not be fully protected in the event of the bankruptcy of the FCM or central counterparty
because the Fund might be limited to recovering only a pro rata share of all available funds and margin segregated on behalf of an FCM’s customers. If the FCM does not provide accurate reporting, a Fund is also subject to the risk that the FCM
could use a Fund’s assets, which are held in an omnibus account with assets belonging to the FCM’s other customers, to satisfy its own financial obligations or the payment obligations of another customer to the central
counterparty.
The difference
(called the “spread”) between prices in the cash market for the purchase and sale of the underlying reference instrument and the prices in the futures market is subject to fluctuations and distortions due to differences in the nature of
those two markets. First, all participants in the futures market are subject to initial deposit and variation margin requirements. Rather than meeting additional variation margin requirements, investors may close futures contracts through offsetting
transactions that could distort the normal pricing spread between the cash and futures markets. Second, the liquidity of the futures markets depends on participants entering into offsetting transactions rather than making or taking delivery of the
underlying instrument. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, resulting in pricing distortion. Third, from the point of view of speculators, the margin deposit requirements that
apply in the futures market are less onerous than similar margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions. When such distortions occur, a
correct forecast of general trends in the price of an underlying reference instrument by the investment manager may still not necessarily result in a profitable transaction.
Futures contracts that are traded on
non-U.S. exchanges may not be as liquid as those purchased on CFTC-designated contract markets. In addition, non-U.S. futures contracts may be subject to varied regulatory oversight. The price of any non-U.S. futures contract and, therefore, the
potential profit and loss thereon, may be affected by any change in the non-U.S. exchange rate between the time a particular order is placed and the time it is liquidated, offset or exercised.
The CFTC and the various exchanges
have established limits referred to as “speculative position limits” on the maximum net long or net short position that any person, such as a Fund, may hold or control in a particular futures contract. Trading limits are also imposed on
the maximum number of contracts that any person may trade on a particular trading day. An exchange may order the liquidation of positions found to be in violation of these limits and it may impose other sanctions or restrictions. The regulation of
futures, as well as other derivatives, is a rapidly changing area of law.
Futures exchanges may also limit the
amount of fluctuation permitted in certain futures contract prices during a single trading day. This daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day’s settlement
price. Once the daily limit has been reached in a futures contract subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and does not
limit potential losses because the limit may prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of positions and subjecting some holders of futures contracts to substantial losses.
Risks Associated with Commodity Futures
Contracts
. There are several additional risks associated with transactions in commodity futures contracts.
Unlike the financial futures markets,
in the commodity futures markets there are costs of physical storage associated with purchasing the underlying commodity. The price of the commodity futures contract will reflect the storage costs of purchasing the physical commodity, including the
time value of money invested in the physical commodity. To the extent that the
storage costs for an underlying commodity change while
a Fund is invested in futures contracts on that commodity, the value of the futures contract may change proportionately.
In the commodity futures markets,
producers of the underlying commodity may decide to hedge the price risk of selling the commodity by selling futures contracts today to lock in the price of the commodity at delivery tomorrow. In order to induce speculators to purchase the other
side of the same futures contract, the commodity producer generally must sell the futures contract at a lower price than the expected future spot price. Conversely, if most hedgers in the futures market are purchasing futures contracts to hedge
against a rise in prices, then speculators will only sell the other side of the futures contract at a higher futures price than the expected future spot price of the commodity. The changing nature of the hedgers and speculators in the commodity
markets will influence whether futures prices are above or below the expected future spot price, which can have significant implications for a Fund. If the nature of hedgers and speculators in futures markets has shifted when it is time for a Fund
to reinvest the proceeds of a maturing contract in a new futures contract, the Fund might reinvest at higher or lower futures prices, or choose to pursue other investments.
The commodities which underlie
commodity futures contracts may be subject to additional economic and non-economic variables, such as drought, floods, weather, livestock disease, embargoes, tariffs, and international economic, political and regulatory developments. These factors
may have a larger impact on commodity prices and commodity-linked instruments, including futures contracts, than on traditional securities. Certain commodities are also subject to limited pricing flexibility because of supply and demand factors.
Others are subject to broad price fluctuations as a result of the volatility of the prices for certain raw materials and the instability of supplies of other materials. These additional variables may create additional investment risks which subject
a Fund’s investments to greater volatility than investments in traditional securities.
Forward Contracts
. Each Fund may enter into equity, equity index or interest rate forward contracts for purposes of attempting to gain exposure to an index or group of
securities without actually purchasing these securities, or to hedge a position. Forward contracts are two-party contracts pursuant to which one party agrees to pay the counterparty a fixed price for an agreed upon amount of commodities, securities,
or the cash value of the commodities, securities or the securities index, at an agreed upon date. Because they are two-party contracts and may have terms greater than seven days, forward contracts may be considered to be illiquid for a Fund’s
illiquid investment limitations. A Fund will not enter into any forward contract unless Rafferty believes that the other party to the transaction is creditworthy. A Fund bears the risk of loss of the amount expected to be received under a forward
contract in the event of the default or bankruptcy of a counterparty. If such a default occurs, a Fund will have contractual remedies pursuant to the forward contract, but such remedies may be subject to bankruptcy and insolvency laws which could
affect the Fund’s rights as a creditor.
Options
. The value of an option position will reflect, among other things, the current market value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying investment and general market conditions. Options that expire unexercised have no value. Options currently are traded on the Chicago Board Options Exchange
®
and other exchanges, as well as the OTC markets.
By buying a call option on a
security, a Fund has the right, in return for the premium paid, to buy the security underlying the option at the exercise price. By writing (selling) a call option and receiving a premium, a Fund becomes obligated during the term of the option to
deliver securities underlying the option at the exercise price if the option is exercised. By buying a put option, a Fund has the right, in return for the premium, to sell the security underlying the option at the exercise price. By writing a put
option, a Fund becomes obligated during the term of the option to purchase the securities underlying the option at the exercise price.
Because options premiums paid or
received by a Fund are small in relation to the market value of the investments underlying the options, buying and selling put and call options can be more speculative than investing directly in securities.
A Fund may effectively terminate its
right or obligation under an option by entering into a closing transaction. For example, a Fund may terminate its obligation under a call or put option that it had written by purchasing an identical call or put option; this is known as a closing
purchase transaction. Conversely, a Fund may terminate a position in a put or call option it had purchased by writing an identical put or call option; this is known as a closing sale transaction. Closing transactions permit a Fund to realize profits
or limit losses on an option position prior to its exercise or expiration.
Risks of Options on Currencies and
Securities
. Exchange-traded options in the United States are issued by a clearing organization affiliated with the exchange on which the option is listed that, in effect, guarantees completion of every
exchange-traded option transaction. In contrast, OTC options are contracts between a Fund and its counterparty (usually a securities dealer or a bank) with no clearing organization guarantee. Thus, when a Fund purchases an OTC option, it relies on
the counterparty from which it purchased the option to make or take delivery of the underlying investment upon exercise of the option. Failure by the counterparty to do so would result in the loss of any premium paid by a Fund as well as the loss of
any expected benefit of the transaction.
A Fund’s ability to establish
and close out positions in exchange-traded options depends on the existence of a liquid market. However, there can be no assurance that such a market will exist at any particular time. Closing transactions can be made for OTC options only by
negotiating directly with the counterparty, or by a transaction in the secondary market if any such market exists. There can be no assurance that a Fund will in fact be able to close out an OTC option position at a favorable
price prior to expiration. In the event of insolvency
of the counterparty, a Fund might be unable to close out an OTC option position at any time prior to its expiration.
If a Fund were unable to effect a
closing transaction for an option it had purchased, it would have to exercise the option to realize any profit. The inability to enter into a closing purchase transaction for a covered call option written by a Fund could cause material losses
because a Fund would be unable to sell the investment used as cover for the written option until the option expires or is exercised.
Options on Indices
. An index fluctuates with changes in the market values of the securities included in the index. Options on indices give the holder the right to receive an
amount of cash upon exercise of the option. Receipt of this cash amount will depend upon the closing level of the index upon which the option is based being greater than (in the case of a call) or less than (in the case of put) the exercise price of
the option. Some stock index options are based on a broad market index such as the S&P 500
®
Composite Stock Index, the NYSE Composite Index or
the NYSE Arca Major Market Index or on a narrower index such as the Philadelphia Stock Exchange Over-the-Counter Index.
Each of the exchanges has established
limitations governing the maximum number of call or put options on the same index that may be bought or written by a single investor, whether acting alone or in concert with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through one or more brokers). Under these limitations, option positions of all investment companies advised by Rafferty are combined for purposes of these limits. Pursuant to
these limitations, an exchange may order the liquidation of positions and may impose other sanctions or restrictions. These position limits may restrict the number of listed options that a Fund may buy or sell.
Puts and calls on indices are similar
to puts and calls on securities or futures contracts except that all settlements are in cash and gain or loss depends on changes in the index in question rather than on price movements in individual securities or futures contracts. When a Fund
writes a call on an index, it receives a premium and agrees that, prior to the expiration date, the purchaser of the call, upon exercise of the call, will receive from a Fund an amount of cash if the closing level of the index upon which the call is
based is greater than the exercise price of the call. The amount of cash is equal to the difference between the closing price of the index and the exercise price of the call multiplied by a specific factor (“multiplier”), which
determines the total value for each point of such difference. When a Fund buys a call on an index, it pays a premium and has the same rights to such call as are indicated above. When a Fund buys a put on an index, it pays a premium and has the
right, prior to the expiration date, to require the seller of the put, upon a Fund’s exercise of the put, to deliver to a Fund an amount of cash if the closing level of the index upon which the put is based is less than the exercise price of
the put, which amount of cash is determined by the multiplier, as described above for calls. When a Fund writes a put on an index, it receives a premium and the purchaser of the put has the right, prior to the expiration date, to require a Fund to
deliver to it an amount of cash equal to the difference between the closing level of the index and the exercise price times the multiplier if the closing level is less than the exercise price.
Risks of Options on Indices
. If a Fund has purchased an index option and exercises it before the closing index value for that day is available, it runs the risk that the level of the index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, a Fund will be required to pay the difference between the closing index value and the exercise price of the option (times the applicable multiplier) to the assigned writer.
OTC Options
. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size and strike price, the terms of
OTC options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract. While this type of arrangement allows a Fund great flexibility to tailor the option to its needs, OTC options
generally involve greater risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded.
Options on Futures Contracts
. When a Fund writes an option on a futures contract, it becomes obligated, in return for the premium paid, to assume a position in the futures
contract at a specified exercise price at any time during the term of the option. If a Fund writes a call, it assumes a short futures position. If it writes a put, it assumes a long futures position. When a Fund purchases an option on a futures
contract, it acquires the right in return for the premium it pays to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put).
Whether a Fund realizes a gain or
loss from futures activities depends upon movements in the underlying security or index. The extent of a Fund’s loss from an unhedged short position from writing unhedged call options on futures contracts is potentially unlimited. A Fund only
purchases and sells options on futures contracts that are traded on a U.S. exchange or board of trade.
Purchasers and sellers of options on
futures can enter into offsetting closing transactions, similar to closing transactions in options, by selling or purchasing, respectively, an instrument identical to the instrument purchased or sold. Positions in options on futures contracts may be
closed only on an exchange or board of trade that provides a secondary market. However, there can be no assurance that a liquid secondary market will exist for a particular contract at a particular time. In such event, it may not be possible to
close a futures contract or options position.
Under certain
circumstances, futures exchanges may establish daily limits on the amount that the price of an option on a futures contract can vary from the previous day’s settlement price; once that limit is reached, no trades may be made that day at a
price beyond the limit. Daily price limits do not limit potential losses because prices could move to the daily limit for several consecutive days with little or no trading, thereby preventing liquidation of unfavorable positions.
If a Fund were unable to liquidate an
option on a futures position due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial losses. A Fund would continue to be subject to market risk with respect to the position. In addition, except
in the case of purchased options, a Fund would continue to be required to make daily variation margin payments and might be required to maintain cash or liquid assets in an account.
Risks of Options on Futures Contracts
. The ordinary spreads between prices in the cash and futures markets (including the options on futures markets), due to differences in the natures of those markets, are subject to the following factors, which may create
distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions,
which could distort the normal relationships between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery. To the extent
participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing distortion. Third, from the point of view of speculators, the deposit requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions.
Combined Positions
.
A Fund may purchase
and write options in combination with each other. For
example, a Fund may purchase a put option and write a call option on the same underlying instrument, in order to construct a combined position whose risk and return characteristics are similar to selling a futures contract. Another possible combined
position would involve writing a call option at one strike price and buying a call option at a lower price, in order to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out.
A Fund may enter into
caps, floors and collars relating to securities, interest rates or currencies. In a cap or floor, the buyer pays a premium (which is generally, but not always, a single up-front amount) for the right to receive payments from the other party if, on
specified payment dates, the applicable rate, index or asset is greater than (in the case of a cap) or less than (in the case of a floor) an agreed level, for the period involved and the applicable notional amount. A collar is a combination
instrument in which the same party buys a cap and sells a floor. Depending upon the terms of the cap and floor comprising the collar, the premiums will partially, or entirely, offset each other. The notional amount of a cap, collar or floor is used
to calculate payments, but is not itself exchanged. A Fund may be both a buyer and seller of these instruments. In addition, a Fund may engage in combinations of put and call options on securities (also commonly known as collars), which may involve
physical delivery of securities. Like swaps, caps, floors and collars are very flexible products. The terms of the transactions entered by the Funds may vary from the typical examples described here.
A Fund may enter into swap and
other derivatives to obtain exposure to an underlying asset without actually purchasing such asset. Swap agreements are generally two-party contracts entered into primarily by institutional investors for periods ranging from a day to more than one
year. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or
“swapped” between the parties are calculated with respect to a “notional amount,”
i.e.
, the return on, or increase/decrease, in value of a particular dollar amount invested in a
“basket” of securities representing a particular index or an ETF representing a particular index or group of securities.
Each Fund may enter into swaps to
invest in a market without owning or taking physical custody of securities. For example, in one common type of total return swap, a Fund’s counterparty will agree to pay the Fund the rate at which the specified asset or indicator (
e.g.
, an ETF, or securities comprising a benchmark index, plus the dividends or interest that would have been received on those assets) increased in value multiplied by the relevant notional amount of the swap. A
Fund will agree to pay to the counterparty an interest fee (based on the notional amount) and the rate at which, the specified asset or indicator would decreased in value multiplied by the notional amount of the swap, plus, in certain instances,
commissions or trading spreads on the notional amount.
As a result, the swap has a similar
economic effect as if a Fund were to invest in the assets underlying the swap in an amount equal to the notional amount of the swap. The return to the Fund on such swap should be the gain or loss on the notional amount plus dividends or interest on
the assets less the interest paid by a Fund on the notional amount. However, unlike cash investments in the underlying assets, a Fund will not be an owner of the underlying assets and will not have voting or similar rights in respect of such
assets.
As a trading
technique, Rafferty may substitute physical securities with a swap having investment characteristics substantially similar to the underlying securities.
The use of swaps is a highly
specialized activity which involves investment techniques and risks in addition to, and in some cases different from, those associated with ordinary portfolio securities transactions. The primary risks associated with the use of swaps are mispricing
or improper valuation, imperfect correlation between movements in the notional amount and the price of the underlying investments, and the inability of the counterparties or clearing organization to perform. If a counterparty’s
creditworthiness for an over-the-counter swap declines, the value of the swap would likely decline. Moreover, there is no guarantee that a Fund could eliminate its exposure under an outstanding swap by entering into an offsetting swap with the same
or another party. In addition, a Fund may use a combination of swaps on an underlying index and swaps on an ETF that is designed to track the performance of that index. The performance of an ETF may deviate from the performance of its underlying
index due to embedded costs and other factors. Thus, to the extent a Fund invests in swaps that use an ETF as the reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of correlation with its
underlying index as it would if a Fund used only swaps on the underlying index. Rafferty, under the supervision of the Board of Trustees, is responsible for determining and monitoring the liquidity of a Fund’s transactions in swaps.
Common
Types of Swaps
A Fund may
enter into any of several types of swaps, including:
Total Return Swaps.
Total return swaps may be used either as economically similar substitutes for owning the reference asset specified in the swap, such as the securities that comprise a given market index,
particular securities or commodities, or other assets or indicators. They
also may be used as a means of obtaining exposure in markets
where
the reference asset is unavailable or it may otherwise be impossible or impracticable for a Fund to own that asset.
“Total return”
refers to the
payment
(or receipt)
of the total return on the underlying reference asset, which is then exchanged for the receipt
(or
payment)
of an interest rate.
Total return swaps provide a Fund with the additional flexibility of gaining exposure to a market or sector index by
using the most cost-effective vehicle available.
Interest Rate Swaps.
Interest rate swaps, in their most basic form, involve the exchange by a Fund with another party of their respective commitments to pay or receive interest. For example, a Fund might exchange its right to receive certain
floating rate payments in exchange for another party’s right to receive fixed rate payments. Interest rate swaps can take a variety of other forms, such as agreements to pay the net differences between two different interest indexes or rates.
Despite their differences in form, the function of interest rate swaps is generally the same: to increase or decrease a Fund’s exposure to long- or short-term interest rates. For example, a Fund may enter into an interest rate swap to preserve
a return or spread on a particular investment or a portion of its portfolio or to protect against any increase in the price of securities a Fund anticipates purchasing at a later date.
Other Financial Instruments
. Other forms of swaps that a Fund may enter into include: interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified
rate, or “cap”; interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified level, or “floor,” and interest rate collars,
under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels.
Mechanics
of Swaps
Payments
. Most swaps entered into by a Fund calculate and settle the obligations of the parties to the agreement on a “net basis” with a single payment. Consequently, a Fund’s current obligations (or rights)
under a swap will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the “net amount”). Other swaps may require initial
premium (discount) payments as well as periodic payments (receipts) related to the interest leg of the swap or to the default of the reference entity. A Fund’s current obligations under most swaps (
e.g.
,
total return swaps, equity/index swaps, interest rate swaps) will be accrued daily (offset against any amounts owed to a Fund by the counterparty to the swap) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by
segregating or earmarking cash or other assets determined to be liquid. However, typically no payments will be made until the settlement date. The net amount of the excess, if any, of a Fund’s obligations over its entitlements with respect to
a swap agreement entered into on a net basis will be accrued daily and an amount of cash or liquid asset having an aggregate NAV at least equal to the accrued excess will be maintained in an account with the Custodian that satisfies the 1940 Act. A
Fund also will establish and maintain such accounts with respect to its total obligations under any swaps that are not entered into on a net basis. Obligations under swap agreements so covered will not be construed to be “senior
securities” for purposes of a Fund’s investment restriction concerning senior securities.
Counterparty Credit Risk
. A Fund will not enter into any uncleared swap (
i.e.
, not cleared by a central counterparty) unless Rafferty believes that the other party to the transaction is creditworthy. The
counterparty to an uncleared swap will typically be a major global financial institution. A Fund bears the risk of loss of the amount expected to be received under a swap in the event of the default or bankruptcy of a swap counterparty. If such a
default occurs, a Fund will have contractual
remedies pursuant to the swaps, but such remedies
may be subject to bankruptcy and insolvency laws that could affect the Fund’s rights as a creditor. The counterparty risk for cleared swaps is generally lower than for uncleared over-the-counter swaps because, in a cleared swap, a clearing
organization becomes substituted for each counterparty to a cleared swap. The clearing organization takes on the obligations of each side of the swap and a Fund would only to the clearing organization for performance of financial obligations.
However, there can be no assurance that the clearing organization, or its members, will satisfy its obligations to a Fund. Upon entering into a cleared swap, a Fund may be required to deposit with its futures commission merchant an amount of cash or
cash equivalents equal to a small percentage of the notional amount (this amount is subject to change by the clearing organization that clears the trade). This amount, known as “initial margin,” is in the nature of a performance bond or
good faith deposit on the cleared swap and is returned to a Fund upon termination of the swap, assuming all contractual obligations have been satisfied. Subsequent payments, known as “variation margin” to and from the broker will be made
daily as the price of the swap fluctuates, making the long and short position in the swap contract more or less valuable, a process known as “marking-to-market.” The premium (discount) payments are built into the daily price of the swap
and thus are amortized through the variation margin. The variation margin payment also includes the daily portion of the periodic payment stream.
Termination and Default Risk
. Swap agreements do not involve the delivery of securities or other underlying assets. Accordingly, if a swap is entered into on a net basis, if the other party to a swap agreement defaults, a Fund’s risk of loss
consists of the net amount of payments that the Fund is contractually entitled to receive, if any.
Regulatory
Margin
In recent years,
regulators across the globe, including the CFTC and the U.S. banking regulators, have adopted margin requirements applicable to uncleared swaps. While a Fund is not directly subject to these requirements, where a Fund’s counterparty is subject
to the requirements, uncleared swaps between a Fund and that counterparty are required to be marked-to-market on a daily basis, and collateral is required to be exchanged to account for any changes in the value of such swaps. The rules impose a
number of requirements as to these exchanges of margin, including as to the timing of transfers, the type of collateral (and valuations for such collateral) and other matters that may be different than what a Fund would agree with its counterparty
in the absence of such regulation. In all events, where a Fund is required to post collateral to its swap counterparty, such collateral will be posted to an independent bank custodian, where access to the collateral by the swap counterparty will
generally not be permitted unless a Fund is in default on its obligations to the swap counterparty.
In addition to the variation margin
requirements, regulators have adopted “initial” margin requirements applicable to uncleared swaps. Where applicable, these rules require parties to an uncleared swap to post, to a custodian that is independent from the parties to the
swap, collateral (in addition to any “variation margin” collateral noted above) in an amount that is either (i) specified in a schedule in the rules or (ii) calculated by the regulated party in accordance with a model that has been
approved by that party’s regulator(s). At this time, the initial margin rules do not apply to a Fund’s swap trading relationships. However, the rules are being implemented on a phased basis, and it is possible that in the future, the
rules could apply to the Funds. In the event that the rules apply, they would impose significant costs on a Fund’s ability to engage in uncleared swaps and, as such, could adversely affect Rafferty’s ability to manage a Fund, may impair
a Fund’s ability to achieve its investment objective and/or may result in reduced returns to a Fund’s investors.
Comprehensive swaps regulation.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and related regulatory developments have imposed comprehensive new regulatory requirements on swaps and swap market
participants. The regulatory framework includes: (1) registration and regulation of swap dealers and major swap participants; (2) requiring central clearing and execution of standardized swaps; (3) imposing margin requirements on swap transactions;
(4) regulating and monitoring swap transactions through position limits and large trader reporting requirements; and (5) imposing record keeping and centralized and public reporting requirements, on an anonymous basis, for most swaps. The CFTC is
responsible for the regulation of most swaps. The SEC has jurisdiction over a small segment of the market referred to as “security-based swaps,” which includes swaps on single securities or credits, or narrow-based indices of securities
or credits.
Uncleared
swaps.
In an
uncleared swap,
the swap counterparty is typically a brokerage firm, bank or other financial institution. A Fund
customarily enters into uncleared swaps based on the standard terms and conditions of an International Swaps and Derivatives Association (“ISDA”) Master Agreement.
ISDA is a voluntary industry
association of participants in the OTC derivatives markets that has developed standardized contracts used by such participants that have agreed to be bound by such standardized contracts. In the event that one party to a swap transaction defaults
and the transaction is terminated prior to its scheduled termination date, one of the parties may be required to make an early termination payment to the other. An early termination payment may be payable by either the defaulting or non-defaulting
party, depending upon which of them is
“in-the-money” with respect to the swap at the time of its termination. Early termination payments may be calculated in various ways, but are intended to
approximate the amount the “in-the-money” party would have to pay to replace the swap as of the date of its termination. During the term of an uncleared swap, a Fund will be required to pledge to the swap counterparty, from time to time,
an amount of cash and/or other assets equal to the total net amount (if any) that would be payable by a Fund to the counterparty if all outstanding swaps between the parties were terminated on the date in question, including any early termination
payments (variation margin). Periodically, changes in the amount
pledged are made to recognize changes in value of
the contract resulting from, among other things, interest on the notional value of the contract, market value changes in the underlying investment, and/or dividends paid by the issuer of the underlying instrument. Likewise, the counterparty will be
required to pledge cash or other assets to cover its obligations to a Fund. However, the amount pledged may not always be equal to or more than the amount due to the other party. Therefore, if a counterparty defaults in its obligations to a Fund,
the amount pledged by the counterparty and available to a Fund may not be sufficient to cover all the amounts due to a Fund and the Fund may sustain a loss. Currently, a Fund does not typically provide initial margin in connection with uncleared
swaps. However, rules requiring initial margin to be posted by certain market participants for uncleared swaps have been adopted and are being phased in over time. When these rules take effect with respect to the Funds, if a Fund is deemed to have
material swaps exposure under applicable swap regulations, it will be required to post initial margin in addition to variation margin.
Cleared swaps.
Certain standardized swaps are subject to mandatory central clearing and exchange-trading. The Dodd-Frank Act and implementing rules will ultimately require the clearing and exchange-trading of many swaps. Mandatory
exchange-trading and clearing will occur on a phased-in basis based on the type of market participant, CFTC approval of contracts for central clearing and public trading facilities making such cleared swaps available to trade. To date, the CFTC has
designated only certain of the most common types of credit default index swaps and interest rate swaps as subject to mandatory clearing and certain public trading facilities have made certain of those cleared swaps available to trade, but it is
expected that additional categories of swaps will in the future be designated as subject to mandatory clearing and trade execution requirements. Central clearing is intended to reduce counterparty credit risk and increase liquidity, but central
clearing does not eliminate these risks and may involve additional costs and risks not involved with uncleared swaps. For more information, see “Risks of cleared swaps” below.
In a cleared swap, a Fund’s
ultimate counterparty is a central clearinghouse rather than a brokerage firm, bank or other financial institution. Cleared swaps are submitted for clearing through each party’s FCM, which must be a member of the clearinghouse that serves as
the central counterparty. Transactions executed on a swap execution facility may increase market transparency and liquidity but may require a Fund to incur increased expenses to access the same types of swaps that it has used in the past. When a
Fund enters into a cleared swap, it must deliver to the central counterparty (via the FCM) an amount referred to as “initial margin.” Initial margin requirements are determined by the central counterparty, and are typically calculated as
an amount equal to the volatility in market value of the cleared swap over a fixed period, but an FCM may require additional initial margin above the amount required by the central counterparty. During the term of the swap agreement, a
“variation margin” amount may also be required to be paid by a Fund or may be received by a Fund in accordance with margin controls set for such accounts. If the value of the Fund’s cleared swap declines, the Fund will be required
to make additional “variation margin” payments to the FCM to settle the change in value. Conversely, if the market value of a Fund’s position increases, the FCM will post additional “variation margin” to the
Fund’s account. At the conclusion of the term of the swap agreement, if a Fund has a loss equal to or greater than the margin amount, the margin amount is paid to the FCM along with any loss in excess of the margin amount. If a Fund has a loss
of less than the margin amount, the excess margin is returned to a Fund. If a Fund has a gain, the full margin amount and the amount of the gain is paid to a Fund.
Risks of swaps generally.
The use of swap transactions is a highly specialized activity, which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. Whether a Fund will be
successful in using swap agreements to achieve its investment goal depends on the ability of the Adviser to correctly predict which types of investments are likely to produce greater returns. If the Adviser, in using swap agreements, is incorrect in
its forecasts of market values, interest rates, inflation, currency exchange rates or other applicable factors, the investment performance of a Fund will be less than its performance would have been if it had not used the swap agreements. The risk
of loss to a Fund for swap transactions that are entered into on a net basis depends on which party is obligated to pay the net amount to the other party. If the counterparty is obligated to pay the net amount to a Fund, the risk of loss to the Fund
is loss of the entire amount that the Fund is entitled to receive. If a Fund is obligated to pay the net amount, the Fund’s risk of loss is generally limited to that net amount. If the swap agreement involves the exchange of the entire
principal value of a security, the entire principal value of that security is subject to the risk that the other party to the swap will default on its contractual delivery obligations. In addition, a Fund’s risk of loss also includes any
margin at risk in the event of default by the counterparty (in an uncleared swap) or the central counterparty or FCM (in a cleared swap), plus any transaction costs.
Because bilateral swap agreements are
structured as two-party contracts and may have terms of greater than seven days, these swaps may be considered to be illiquid and, therefore, subject to a Fund’s limitation on investments in illiquid securities. If a swap transaction is
particularly large or if the relevant market is illiquid, a Fund may not be able to establish or liquidate a position at an advantageous time or price, which may result in significant losses. Participants in the swap markets are not required to make
continuous markets in the swap contracts they trade. Participants could refuse to quote prices for swap contracts or quote prices with an unusually wide spread between the price at which they are prepared to buy and the price at which they are
prepared to sell. Some swap agreements entail complex terms and may require a greater degree of subjectivity in their valuation. However, the swap markets have grown substantially in recent years, with a large number of financial institutions acting
both as principals and agents, utilizing standardized swap documentation. As a result, the
swap markets have become increasingly liquid. In
addition, central clearing and the trading of cleared swaps on public facilities are intended to increase liquidity.
Rafferty, under the supervision of
the Board of Trustees, is responsible for determining and monitoring the liquidity of a Fund’s swap transactions. Rules adopted under the Dodd-Frank Act require centralized reporting of detailed information about many swaps, whether cleared or
uncleared. This information is available to regulators and also, to a more limited extent and on an anonymous basis, to the public. Reporting of swap data is intended to result in greater market transparency. This may be beneficial to funds that use
swaps in their trading strategies. However, public reporting imposes additional recordkeeping burdens on these funds, and the safeguards established to protect anonymity are not yet tested and may not provide protection of a Fund’s identity as
intended. Certain IRS positions may limit a Fund’s ability to use swap agreements in a desired tax strategy. It is possible that developments in the swap markets and/or the laws relating to swap agreements, including potential government
regulation, could adversely affect the Fund’s ability to benefit from using swap agreements, or could have adverse tax consequences. For more information about potentially changing regulation, see “Developing government regulation of
derivatives” below.
Risks
of uncleared swaps.
Uncleared swaps are typically executed bilaterally with a swap dealer rather than traded on exchanges. As a result, swap participants may not be as protected as participants on organized
exchanges. Performance of a swap agreement is the responsibility only of the swap counterparty and not of any exchange or clearinghouse. As a result, a Fund is subject to the risk that a counterparty will be unable or will refuse to perform under
such agreement, including because of the counterparty’s bankruptcy or insolvency. A Fund risks the loss of the accrued but unpaid amounts under a swap agreement, which could be substantial, in the event of a default, insolvency or bankruptcy
by a swap counterparty. In such an event, a Fund will have contractual remedies pursuant to the swap agreements, but bankruptcy and insolvency laws could affect the Fund’s rights as a creditor. If the counterparty’s creditworthiness
declines, the value of a swap agreement would likely decline, potentially resulting in losses. The Adviser will only approve a swap agreement counterparty for a Fund if the Adviser deems the counterparty to be creditworthy. However, in unusual or
extreme market conditions, a counterparty’s creditworthiness and ability to perform may deteriorate rapidly, and the availability of suitable replacement counterparties may become limited.
Risks of cleared swaps.
As noted above, under recent financial reforms, certain types of swaps are, and others eventually are expected to be, required to be cleared through a central counterparty, which may affect counterparty risk and other
risks faced by a Fund.
Central clearing is designed to
reduce counterparty credit risk and increase liquidity compared to uncleared swaps because central clearing interposes the central clearinghouse as the counterparty to each participant’s swap, but it does not eliminate those risks completely
and may involve additional costs and risks not involved with uncleared swaps. There is also a risk of loss by a Fund of the initial and variation margin deposits in the event of bankruptcy of the FCM with which a Fund has an open position, or the
central counterparty in a swap contract. The assets of a Fund may not be fully protected in the event of the bankruptcy of the FCM or central counterparty because a Fund might be limited to recovering only a pro rata share of all available funds and
margin segregated on behalf of an FCM’s customers. If the FCM does not provide accurate reporting, a Fund is also subject to the risk that the FCM could use the Fund’s assets, which are held in an omnibus account with assets belonging to
the FCM’s other customers, to satisfy its own financial obligations or the payment obligations of another customer to the central counterparty. Credit risk of cleared swap participants is concentrated in a few clearinghouses, and the
consequences of insolvency of a clearinghouse are not clear.
With cleared swaps, a Fund may not be
able to obtain terms as favorable as it would be able to negotiate for a bilateral, uncleared swap. In addition, an FCM may unilaterally amend the terms of its agreement with the Fund, which may include the imposition of position limits or
additional margin requirements with respect to a Fund’s investment in certain types of swaps. Central counterparties and FCMs can require termination of existing cleared swap transactions upon the occurrence of certain events, and can also
require increases in margin above the margin that is required at the initiation of the swap agreement. Currently, depending on a number of factors, the margin required under the rules of the clearinghouse and FCM may be in excess of the collateral
required to be posted by a Fund to support its obligations under a similar uncleared swap. However, regulators have proposed and are expected to adopt rules imposing certain margin requirements on uncleared swaps in the near future, which are likely
to impose higher margin requirements on uncleared swaps.
Finally, a Fund is subject to the
risk that, after entering into a cleared swap with an executing broker, no FCM or central counterparty is willing or able to clear the transaction. In such an event, a Fund may be required to break the trade and make an early termination payment to
the executing broker.
Developing government regulation of
derivatives.
The regulation of cleared and uncleared swaps, as well as other derivatives, is a rapidly changing area of law and is subject to modification by government and judicial action. In addition, the
SEC,
CFTC and the exchanges are authorized to take extraordinary actions in the event of a market emergency, including, for example, the implementation or reduction of speculative position limits, the
implementation of higher margin requirements, the establishment of daily price limits and the suspension of trading. It is not possible to predict fully the effects of current or future regulation. However, it is possible that developments in
government regulation of various types of derivative instruments, such as speculative position limits on certain types of derivatives, or limits or restrictions on the counterparties
with which a Fund engages in derivative
transactions, may limit or prevent the Fund from using or limit the Fund’s use of these instruments effectively as a part of its investment strategy, and could adversely affect the Fund’s ability to achieve its investment goal(s). The
Adviser will continue to monitor developments in the area, particularly to the extent regulatory changes affect a Fund’s ability to enter into desired swap agreements. New requirements, even if not directly applicable to a Fund, may increase
the cost of a Fund’s investments and cost of doing business.
Other Investment Companies
Each Fund may invest in the securities of other
investment companies, including open- and closed-end funds and ETFs. Investments in the securities of other investment companies may involve duplication of advisory fees and certain other expenses. By investing in another investment company, a Fund
becomes a shareholder of that investment company. As a result, Fund shareholders indirectly will bear a Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses Fund shareholders
bear in connection with a Fund’s own operations.
Each Fund intends
to limit its investments in securities issued by other investment companies in accordance with the 1940 Act. Section 12(d)(1) of the 1940 Act precludes a Fund from acquiring (i) more than 3% of the total outstanding shares of another investment
company; (ii) shares of another investment company having an aggregate value in excess of 5% of the value of the total assets of the Fund; or (iii) shares of another registered investment company and all other investment companies having an
aggregate value in excess of 10% of the value of the total assets of the Fund. In addition, the Fund is subject to Section 12(d)(1)(C), which provides that the Fund may not acquire shares of a closed-end fund if, immediately after such acquisition,
the Fund and other investment companies having the same adviser as the Fund would hold more than 10% of the closed-end fund’s total outstanding voting stock.
Section 12(d)(1)(F) of the 1940 Act
provides that the provisions of paragraph 12(d)(1)(A) and (B) shall not apply to securities purchased or otherwise acquired by a Fund if (i) immediately after such purchase or acquisition not more than 3% of the total outstanding shares of such
investment company is owned by the Fund and all affiliated persons of the Fund; and (ii) the Fund has not offered or sold, and is not proposing to offer or sell its shares through a principal underwriter or otherwise at a public or offering price
that includes a sales load of more than 1 1/2%. If a Fund invests in investment companies pursuant to Section 12(d)(1)(F), it must comply with the following voting restrictions: when the Fund exercises voting rights, by proxy or otherwise, with
respect to investment companies owned by the Fund, the Fund will either seek instruction from the Funds' shareholders with regard to the voting of all proxies and vote in accordance with such instructions, or vote the shares held by a Fund in the
same proportion as the vote of all other holders of such security. In addition, an investment company purchased by a Fund pursuant to Section 12(d)(1)(F) shall not be required to redeem its shares in an amount exceeding 1% of such investment
company’s total outstanding shares in any period of less than thirty days. Also, to the extent that an ETF has exemptive relief under Section 12(d)(1)(J), a Fund may rely on that exemptive relief to exceed the limits imposed by Section
12(d)(1)(A).
Shares of
another investment company or ETF that has received exemptive relief from the SEC to permit other funds to invest in its shares without these limitations are excluded from such restrictions to the extent that a Fund has complied with the
requirements of such orders. To the extent that a Fund invests in open-end or closed-end investment companies that invest primarily in the securities of companies located outside the United States, see the risks related to foreign securities set
forth above.
Exchange-Traded Products
. Each Fund may invest in Exchange Traded Products (“ETPs”), which include ETFs, partnerships, commodity pools or trusts that are bought
and sold on a securities exchange. A Fund may also invest in exchange-traded notes (“ETNs”), which are structured debt securities, whereby the issuer of the ETN promises to pay ETN holders the return on an index or market segment over a
certain period of time and then return the principal of the investment at maturity. Whereas ETPs’ liabilities are secured by their portfolio securities, ETNs’ liabilities are unsecured general obligations of the issuer. Therefore, ETNs
are subject to the credit risk of the issuer of the ETN, which is different than other ETPs. The value of an ETN security should also be expected to fluctuate with the credit rating of the issuer. Most ETPs and ETNs are designed to track a
particular market segment or index, although an ETP or ETN may be actively managed. ETPs and ETNs share expenses associated with their operation, typically including advisory fees and other management expenses. When a Fund invests in an ETP or ETN,
in addition to directly bearing expenses associated with its own operations, it will bear its pro rata portion of the ETP’s or ETN’s expenses. ETPs and ETNs trade like stocks on a securities exchange at market prices rather than NAV and
as a result ETP or ETN shares may trade at a price greater than NAV (premium) or less than NAV (discount). The risks of owning an ETP or ETN generally reflect the risks of owning the underlying securities the ETP or ETN is designed to track,
although lack of liquidity in an ETP or ETN could result in it being more volatile than the underlying portfolio of securities. In addition, because of ETP or ETN expenses, compared to owning the underlying securities directly, it may be more costly
to own an ETP or ETN.
Additionally, a Fund may invest in swap
agreements referencing ETFs. If a Fund invests in ETFs or swap agreements referencing ETFs, the underlying ETFs may not necessarily track the same index as a Fund.
Money Market Funds
. Money market funds are open-end registered investment companies which have historically traded at a stable $1.00 per share price. In October 2016, the
SEC implemented amendments to money market fund regulations
(“Amendments” ) intended to address
perceived systemic risks associated with money market funds and to improve transparency for money market fund investors. In general, the Amendments require money market funds that do not meet the definitions of a retail money market fund or
government money market fund to transact at a floating NAV per share (similar to all other non-money market mutual funds), instead of at a $1 stable share price, as has traditionally been the case. The Amendments also permit all money market funds
to impose liquidity fees and redemption gates for use in times of market stress. The SEC also implemented additional diversification, stress testing, and disclosure measures. The Amendments represented significant departures from the traditional
operation of money market funds. Any impact on the trading and value of money market instruments may negatively affect a Fund’s yield and return potential.
Each Fund is not actively managed
and Rafferty does not attempt to take defensive positions under any market conditions, including declining markets.
A Fund may make investments in
the securities of real estate companies, which are regarded as those which derive at least 50% of their respective revenues from the ownership, construction, financing, management or sale of commercial, industrial, or residential real estate, or
have at least 50% of their respective assets in such real estate. Such investments include common stocks (including real estate investment trust shares, see “Real Estate Investment Trusts” below), rights or warrants to purchase common
stocks, securities convertible into common stocks where the conversion feature represents, in Rafferty’s view, a significant element of the securities’ value, and preferred stocks.
Real Estate Investment Trusts
(“REITs”)
A Fund may make investments in
REITs. REITs include equity, mortgage and hybrid REITs. Equity REITs own real estate properties, and their revenue comes principally from rent. Mortgage REITs loan money to real estate owners, and their revenue comes principally from interest earned
on their mortgage loans. Hybrid REITs combine characteristics of both equity and mortgage REITs. The value of an equity REIT may be affected by changes in the value of the underlying property, while a mortgage REIT may be affected by the quality of
the credit extended. The performance of both types of REITs depends upon conditions in the real estate industry, management skills and the amount of cash flow. The risks associated with REITs include defaults by borrowers, self-liquidation, failure
to qualify as a pass-through entity under the federal tax law, failure to qualify as an exempt entity under the 1940 Act and the fact that REITs are not diversified.
A Fund may enter into repurchase
agreements with banks that are members of the Federal Reserve System or securities dealers who are members of a national securities exchange or are primary dealers in U.S. government securities. Repurchase agreements generally are for a short period
of time, usually less than a week. Under a repurchase agreement, a Fund purchases a U.S. government security and simultaneously agrees to sell the security back to the seller at a mutually agreed-upon future price and date, normally one day or a few
days later. The resale price is greater than the purchase price, reflecting an agreed-upon market interest rate during a Fund’s holding period. While the maturities of the underlying securities in repurchase agreement transactions may be more
than one year, the term of each repurchase agreement always will be less than one year. Repurchase agreements with a maturity of more than seven days are considered to be illiquid investments. A Fund may not enter into such a repurchase agreement
if, as a result, more than 15% of the value of its net assets would then be invested in such repurchase agreements and other illiquid investments. See “Illiquid Investments and Restricted Securities” above.
A Fund will always receive, as
collateral, securities whose market value, including accrued interest, at all times will be at least equal to 100% of the dollar amount invested by a Fund in each repurchase agreement. In the event of default or bankruptcy by the seller, a Fund will
liquidate those securities (whose market value, including accrued interest, must be at least 100% of the amount invested by a Fund) held under the applicable repurchase agreement, which securities constitute collateral for the seller’s
obligation to repurchase the security. If the seller defaults, a Fund might incur a loss if the value of the collateral securing the repurchase agreement declines and might incur disposition costs in connection with liquidating the collateral. In
addition, if bankruptcy or similar proceedings are commenced with respect to the seller of the security, realization upon the collateral by a Fund may be delayed or limited.
Reverse Repurchase Agreements
A Fund may borrow by entering
into reverse repurchase agreements with the same parties with whom it may enter into repurchase agreements. Under a reverse repurchase agreement, a Fund sells securities and agrees to repurchase them at
a mutually agreed to price. At the time a Fund
enters into a reverse repurchase agreement, it will establish and maintain a segregated account with an approved custodian containing liquid high-grade securities, marked-to-market daily, having a value not less than the repurchase price (including
accrued interest). Reverse repurchase agreements involve the risk that the market value of securities retained in lieu of sale by a Fund may decline below the price of the securities a Fund has sold but is obliged to repurchase. If the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce a Fund’s obligation to repurchase the securities.
During that time, a Fund’s use of the proceeds of the reverse repurchase agreement effectively may be restricted. Reverse repurchase agreements create leverage, a speculative factor, and are considered borrowings for the purpose of a
Fund’s limitation on borrowing.
Each Fund may lend portfolio
securities to certain borrowers that Rafferty determines to be creditworthy. The borrowers provide collateral that is maintained in an amount at least equal to the current market value of the securities loaned, marked to market daily. Borrowers
continuously secure their obligations to return securities on loan from a Fund by depositing any combination of short-term U.S. government securities and cash as collateral with a Fund. No securities loan will be made on behalf of a Fund if, as a
result, the aggregate value of all securities loaned by a Fund exceeds one-third of the value of the Fund's total assets (including the value of the collateral received) or such lower limit as set by Rafferty or the Board. A Fund may terminate a
loan at any time and obtain the return of the securities loaned. Each Fund receives, by way of substitute payment, the value of any interest or cash or non-cash distributions paid on the loaned securities that it would have received if the
securities were not on loan. Any gain or loss in the market price of the borrowed securities that occurs during the term of the loan inures to the lending Fund and that Fund’s shareholders.
With respect to loans that are
collateralized by cash, the borrower may be entitled to receive a fee based on the amount of cash collateral. The Funds are typically compensated by the difference between the amount earned on the reinvestment of cash collateral and the fee paid to
the borrower. In the case of collateral other than cash, a Fund is typically compensated by a fee paid by the borrower equal to a percentage of the market value of the loaned securities. A Fund may also receive such fees on “special”
loans that are cash-collateralized. Any cash collateral may be reinvested in money market funds. Such money market fund shares will not be subject to a sales load, redemption fee, distribution fee or service fee. However, such investments are
subject to investment risk.
Securities lending involves exposure
to certain risks, including operational risk (
i.e.
, the risk of losses resulting from problems in the settlement and accounting process), “gap” risk (
i.e.
,
the risk of a mismatch between the return of cash collateral reinvestments and the fees a Fund has agreed to pay a borrower), and credit, legal, counterparty and market risk. If a securities lending counterparty were to default, a Fund would be
subject to the risk of a possible delay in receiving collateral or in recovering the loaned securities, or to a possible loss of rights in the collateral. In the event a borrower does not return a Fund’s securities as agreed, the Fund could
experience losses if the proceeds received from liquidating the collateral do not at least equal the value of the loaned security at the time the collateral is liquidated, plus the transaction costs incurred in purchasing replacement securities.
This event could trigger adverse tax consequences for a Fund. A Fund could lose money if its investment of cash collateral declines in value over the period of the loan. Substitute payments for dividends received by a Fund while its securities are
loaned out will not be considered qualified dividend income.
A Fund may engage
in short sale transactions under which a Fund sells a security it does not own. To complete such a transaction, a Fund must borrow the security to make delivery to the buyer. A Fund then is obligated to replace the security borrowed by purchasing
the security at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by a Fund. Until the security is replaced, a Fund is required to pay to the lender amounts equal to
any dividends that accrue during the period of the loan. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet the margin requirements, until the short position is closed out. A Fund will also incur
transactions costs when conducting short sales.
Until a Fund closes its short
position or replaces the borrowed stock, a Fund will: (1) maintain an account containing cash or liquid assets at such a level that (a) the amount deposited in the account plus the amount deposited with the broker as collateral will equal the
current value of the stock sold short and (b) the amount deposited in the account plus the amount deposited with the broker as collateral will not be less than the market value of the stock at the time the stock was sold short; or (2) otherwise
cover a Fund’s short position.
A Fund will incur a loss as a result
of a short sales or short exposure to reference assets utilizing derivatives if the price of the security or reference asset increases between the date of the short sale or exposure and the date on which a Fund replaces the borrowed security or
terminates the derivatives providing short exposure. A Fund will realize a gain if the price of a security or reference asset declines in price between those dates. The amount of any gain will be decreased, and
the amount of any
loss will be increased, by the amount of the premium, dividends or interest a Fund may be required to pay, if any, in connection with a short sale or derivatives that provide short exposure.
U.S. Government Securities
A Fund may invest in securities
issued or guaranteed by the U.S. government or its agencies or instrumentalities (“U.S. government securities”) in pursuit of its investment objective, in order to deposit such securities as initial or variation margin, as
“cover” for the investment techniques it employs, as part of a cash reserve or for liquidity purposes.
U.S. government securities are
high-quality instruments issued or guaranteed as to principal or interest by the U.S. Treasury Department (“U.S. Treasury”) or by an agency or instrumentality of the U.S. government. Not all U.S. government securities are backed by the
full faith and credit of the United States. Some are backed by the right of the issuer to borrow from the U.S. Treasury; others are backed by discretionary authority of the U.S. government to purchase the agencies’ obligations; while others
are supported only by the credit of the instrumentality. In the case of securities not backed by the full faith and credit of the United States, the investor must look principally to the agency issuing or guaranteeing the obligation for ultimate
repayment.
Yields on short-,
intermediate- and long-term U.S. government securities are dependent on a variety of factors, including the general conditions of the money and bond markets, the size of a particular offering and the maturity of the obligation. Debt securities with
longer maturities tend to produce higher capital appreciation and depreciation than obligations with shorter maturities and lower yields. The market value of U.S. government securities generally varies inversely with changes in the market interest
rates. An increase in interest rates, therefore, generally would reduce the market value of a Fund’s portfolio investments in U.S. government securities, while a decline in interest rates generally would increase the market value of a
Fund’s portfolio investments in these securities. U.S. government securities include U.S. Treasury obligations, which includes U.S. Treasury Bills (which mature within one year of the date they are issued), U.S. Treasury Notes (which have
maturities of one to ten years) and U.S. Treasury Bonds (which generally have maturities of more than 10 years). All such U.S. Treasury obligations are backed by the full faith and credit of the United States.
U.S. government securities also
include obligations issued by U.S. government agencies and instrumentalities (“GSEs”) that are backed by the full faith and credit of the U.S. government (such as securities issued or guaranteed by the Federal Housing Administration,
Ginnie Mae
®
, the Export-Import Bank of the United States, the General Services Administration and the Maritime Administration and certain securities
issued by the Small Business Administration).
Also, U.S.
government securities include securities that are guaranteed by U.S. government-sponsored entities that are not backed by the full faith and credit of the U.S. government (such as Fannie Mae
®
, Freddie Mac
®
, or the Federal Home Loan Banks).
These U.S. government-sponsored entities, although chartered and sponsored by the U.S. Congress, are not guaranteed, nor insured, by the U.S. government. They are supported only by the credit of the issuing agency, instrumentality or
corporation.
Since 2008, Fannie
Mae
®
and Freddie Mac
®
have been in
conservatorship and have received significant capital support through U.S. Treasury preferred stock purchases, as well as U.S. Treasury and Federal Reserve purchases of their mortgage backed securities (“MBS”). The FHFA and the U.S.
Treasury (through its agreement to purchase Fannie Mae
®
and Freddie Mac
®
preferred stock) have imposed strict limits on the size of their mortgage portfolios. The MBS purchase programs technically ended in 2010 but the U.S.
Treasury has continued its support for the entities’ capital as necessary to prevent a negative net worth through at least 2012 and other governmental entities have provided significant support to Fannie Mae
®
and Freddie Mac
®
. There is no guarantee, however,
that they will continue to do so. An FHFA stress test suggested that in a “severely adverse scenario” additional Treasury support of between $42.1 billion and $77.6 billion (depending on the treatment of deferred tax assets) might be
required. Since then Congress has permanently reduced the corporate income tax rate from 35% to 21% starting January 1, 2018. This reduction could cause a substantial net loss and net worth deficit for the year in which the legislation is enacted.
Should they experience such a net worth deficit, they could be required to draw additional funds from the U.S. Treasury to avoid being placed in receivership. Accordingly, no assurance can be given that Fannie Mae
®
and Freddie Mac
®
will remain successful in
meeting their obligations with respect to the debt and MBSs that they issue.
In addition, the problems faced by
Fannie Mae
®
and Freddie Mac
®
, resulting in
their being placed into federal conservatorship and receiving significant U.S. government support, have sparked serious debate among federal policy makers regarding the continued role of the U.S. government in providing liquidity for mortgage loans.
In December 2011, Congress enacted the Temporary Payroll Tax Cut Continuation Act (“TCCA”) of 2011 which, among other provisions, requires that Fannie Mae
®
and Freddie Mac
®
increase their single-family
guaranty fees by at least 10 basis points and remit this increase to Treasury with respect to all loans acquired by Fannie Mae
®
or Freddie Mac
®
on or after April 1, 2012 and before January 1, 2022. Nevertheless, discussions among policymakers have continued as to whether Fannie Mae
®
and Freddie Mac
®
should be nationalized,
privatized, restructured, or eliminated altogether. Fannie Mae reported in the third quarter of 2018 that there was “significant uncertainty regarding the future of our company.” Freddie Mac faces similar uncertainty about its future
role. Fannie Mae
®
and Freddie Mac
®
also are the
subject of several continuing legal actions and investigations related to certain accounting, disclosure, or corporate governance matters, which (along with any resulting financial restatements)
may continue to have an adverse effect on the
guaranteeing entities. Congress is currently considering several pieces of legislation that would reform GSEs, proposing to address their structure, mission, portfolio limits, and guarantee fees, among other issues.
U.S. Government Sponsored Enterprises
(“GSEs”)
GSE securities are securities
issued by the U.S. government or its agencies or instrumentalities. Some obligations issued by GSEs are supported by the discretionary authority of the U.S. government to purchase certain obligations of the agency or instrumentality and others only
by the credit of the agency or instrumentality. Those securities bear fixed, floating or variable rates of interest. Interest may fluctuate based on generally recognized reference rates or the relationship of rates. While the U.S. government
currently provides financial support to such GSEs or instrumentalities, no assurance can be given that it will always do so, since it is not so obligated by law.
Certain U.S. government debt
securities, such as securities of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury. Others, such as securities issued by Fannie Mae
®
and Freddie Mac
®
, are supported only by the
credit of the corporation. In the case of securities not backed by the full faith and credit of the United States, a fund must look principally to the agency issuing or guaranteeing the obligation in the event the agency or instrumentality does not
meet its commitments. The U.S. government may choose not to provide financial support to GSEs or instrumentalities if it is not legally obligated to do so. A fund will invest in securities of such instrumentalities only when Rafferty is satisfied
that the credit risk with respect to any such instrumentality is comparatively minimal.
A Fund may enter into firm
commitment agreements for the purchase of securities on a specified future date. A Fund may purchase, for example, new issues of fixed-income instruments on a when-issued basis, whereby the payment obligation, or yield to maturity, or coupon rate on
the instruments may not be fixed at the time of transaction. A Fund will not purchase securities on a when-issued basis if, as a result, more than 15% of its net assets would be so invested. If a Fund enters into a firm commitment agreement,
liability for the purchase price and the rights and risks of ownership of the security accrue to a Fund at the time it becomes obligated to purchase such security, although delivery and payment occur at a later date. Accordingly, if the market price
of the security should decline, the effect of such an agreement would be to obligate a Fund to purchase the security at a price above the current market price on the date of delivery and payment. During the time a Fund is obligated to purchase such
a security, it will be required to segregate assets with an approved custodian in an amount sufficient to settle the transaction.
Zero-Coupon, Payment-In-Kind and Strip
Securities
A Fund
may invest in zero-coupon, payment-in-kind and strip securities of any rating or maturity. Zero-coupon securities make no periodic interest payment but are sold at a deep discount from their face value, otherwise known as “original issue
discount” or “OID.” The buyer earns a rate of return determined by the gradual appreciation of the security, which is redeemed at face value on a specified maturity date. The OID varies depending on the time remaining until
maturity, as well as market interest rates, liquidity of the security, and the issuer’s perceived credit quality. If the issuer defaults, a Fund may not receive any return on its investment. Because zero-coupon securities bear no interest and
compound semi-annually at the rate fixed at the time of issuance, their value generally is more volatile than the value of other fixed-income securities. Since zero-coupon security holders do not receive interest payments, when interest rates rise,
zero-coupon securities fall more dramatically in value than securities paying interest on a current basis. When interest rates fall, zero-coupon securities rise more rapidly in value because the securities reflect a fixed rate of return.
Payment-in-kind securities allow the issuer, at its option, to make current interest payments either in cash or in additional debt obligations of the issuer. Both zero-coupon securities and payment-in-kind securities allow an issuer to avoid the
need to generate cash to meet current interest payments.
An investment in zero-coupon
securities and delayed interest securities (which do not make interest payments until after a specified time) may cause a Fund to recognize income and be required to make distributions thereof to shareholders before it receives any cash payments on
its investment. Moreover, even though payment-in-kind securities do not pay current interest in cash, a Fund nonetheless is required to accrue interest income on these investments and to distribute the interest income at least annually to
shareholders. See “Dividends, Other Distributions and Taxes
–
Income from Zero Coupon and Payment-in-Kind Securities.” Thus, a Fund could be required at
times to liquidate other investments to satisfy distribution requirements.
A Fund may also invest in strips,
which are debt securities whose interest coupons are taken out and traded separately after the securities are issued but otherwise are comparable to zero-coupon securities. Like zero-coupon securities and payment-in-kind securities, strips are
generally more sensitive to interest rate fluctuations than interest paying securities of comparable term and quality.
Other Investment Risks and Practices
Borrowing
. A Fund may borrow money for investment purposes, which is a form of leveraging. Leveraging investments, by purchasing securities with borrowed money, is a
speculative technique that increases investment risk while increasing investment opportunity. Leverage will magnify changes in a Fund’s NAV and on a Fund’s investments. Although the principal of such borrowings will be fixed, a
Fund’s assets may change in value during the time the borrowing is outstanding. Leverage also creates interest expenses for a Fund. To the extent the income derived from securities purchased with borrowed funds exceeds the interest a Fund will
have to pay, that Fund’s net income will be greater than it would be if leverage were not used. Conversely, if the income from the assets obtained with borrowed funds is not sufficient to cover the cost of leveraging, the net income of a Fund
will be less than it would be if leverage were not used, and therefore the amount available for shareholders will be reduced.
A Fund may borrow money to facilitate
management of a Fund’s portfolio by enabling a Fund to meet redemption requests when the liquidation of portfolio instruments would be inconvenient or disadvantageous. Such borrowing is not for investment purposes and will be repaid by the
borrowing Fund promptly.
As
required by the 1940 Act, a Fund must maintain continuous asset coverage (total assets, including assets acquired with borrowed funds, less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If at any time the value of the
required asset coverage declines as a result of market fluctuations or other reasons, a Fund may be required to sell some of its portfolio investments within three days to reduce the amount of its borrowings and restore the 300% asset coverage, even
though it may be disadvantageous from an investment standpoint to sell portfolio instruments at that time.
Under current pronouncements, certain
obligations under futures contracts, forward contracts and swap agreements to the extent that a “covers” its obligations as discussed in the “Futures Contracts, Options, and Other Derivatives Strategies” section will not be
considered a “senior security” and, therefore, will not be subject to the 300% asset coverage requirements otherwise applicable to borrowings.
Portfolio Turnover
. The Trust anticipates that each Fund’s annual portfolio turnover will vary. A Fund’s portfolio turnover rate is calculated by the value of
the securities purchased or securities sold, excluding all securities whose terms-to-maturity at the time of acquisition were less than 397 days, divided by the average monthly value of such securities owned during the year. Based on this
calculation, instruments with remaining terms-to-maturity of less than 397 days are excluded from the portfolio turnover rate. Such instruments generally would include futures contracts and options, since such contracts generally have remaining
terms-to-maturity of less than 397 days. In any given period, all of a Fund’s investments may have remaining terms-to-maturity of less than 397 days; in that case, the portfolio turnover rate for that period would be equal to zero. However,
each Fund’s portfolio turnover rate calculated with all securities whose terms-to-maturity were less than 397 days is anticipated to be unusually high.
High portfolio turnover involves
correspondingly greater expenses to a Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities. Such sales also may result in adverse tax consequences to a
Fund’s shareholders resulting from its distributions of increased net capital gains, if any, recognized as a result of the sales. The trading costs and tax effects associated with portfolio turnover may adversely affect a Fund’s
performance.
Correlation and Tracking Risk
Several factors may affect a
Fund's ability to track the performance of its underlying index. Among these factors are: (1) Fund expenses, including brokerage expenses and commissions and financing costs related to derivatives (which may be increased by high portfolio turnover);
(2) less than all of the securities in the underlying index being held by a Fund and securities not included in the underlying index being held by a Fund; (3) an imperfect correlation between the performance of instruments held by a Fund, such as
other investment companies, including ETFs, futures contracts and options, and the performance of the underlying securities in the cash market comprising an index; (4) bid-ask spreads; (5) a Fund holding instruments that are illiquid or the market
for which becomes disrupted; (6) the need to conform a Fund’s portfolio holdings to comply with the Fund’s investment restrictions or policies, or regulatory or tax law requirements; disruptions and illiquidity in the markets for
securities or derivatives held by a Fund.
While index futures and options
contracts closely correlate with the applicable indices over long periods, shorter-term deviation, such as on a daily basis, does occur with these instruments. As a result, a Fund’s short-term performance will reflect such deviation from its
underlying index. A Fund may use a combination of swaps on its underlying index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The
reference ETF may not closely track the performance of its underlying index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that a Fund invests in swaps that use an ETF as a reference asset, a Fund may be subject
to greater correlation risk and may not achieve as high a degree of correlation with its underlying index as it would if a Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using
derivatives may also reduce a Fund’s return.
Since the use of technology has
become more prevalent in the course of business, the Funds may be more susceptible to operational risks through breaches in cybersecurity. A cybersecurity incident may refer to either intentional or unintentional events that allow an unauthorized
party to gain access to fund assets, customer data, or proprietary information, or cause a Fund or a Fund service provider to suffer data corruption or lose operational functionality. A cybersecurity incident could, among other things, result in the
loss or theft of customer data or funds, customers or employees being unable to access electronic systems (“denial of services”), loss or theft of proprietary information or corporate data, physical damage to a computer or network
system, or remediation costs associated with system repairs. Any of these results could have a substantial impact on the Funds. For example, if a cybersecurity incident results in a denial of service, Fund shareholders could lose access to their
electronic accounts for an unknown period of time, and employees could be unable to access electronic systems to perform critical duties for the Funds, such as trading, NAV calculation, shareholder accounting or fulfillment of Fund share purchases
and redemptions. Cybersecurity incidents could cause a Fund or the Funds' Adviser or distributor to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures, or financial loss of a significant
magnitude. They may also cause a Fund to violate applicable privacy and other laws. The Funds' service providers have established risk management systems that seek to reduce the risks associated with cybersecurity, and business continuity plans in
the event there is a cybersecurity breach. However, there is no guarantee that such efforts will succeed, especially since a Fund does not directly control the cybersecurity systems of the issuers of securities in which each Fund invests or the
Funds' third party service providers (including the Funds' transfer agent and custodian).
The Trust, on behalf of each
Fund, has adopted the following investment policies which are fundamental policies that may not be changed without the affirmative vote of a majority of the outstanding voting securities of the Fund. As defined by the 1940 Act, a “vote of a
majority of the outstanding voting securities of the Fund” means the affirmative vote of the lesser of (1) more than 50% of the outstanding shares of the Fund or (2) 67% or more of the shares present at a shareholders’ meeting, if more
than 50% of the outstanding shares are represented at the meeting in person or by proxy.
For purposes of the following
limitations, all percentage limitations apply immediately after a purchase or initial investment. Except with respect to borrowing money, if a percentage limitation is adhered to at the time of the investment, a later increase or decrease in the
percentage resulting from any change in value or net assets will not result in a violation of such restrictions. If at any time a Fund’s borrowings exceed its limitations due to a decline in net assets, such borrowings will be reduced within
three days (not including Sundays and holidays), or such longer period as may be permitted by the 1940 Act, to the extent necessary to comply with the one-third limitation.
Each Fund may not:
1.
|
Borrow money, except to
the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
2.
|
Issue senior securities,
except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
3.
|
Make loans, except to the
extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
4.
|
Purchase or sell real
estate, except that, to the extent permitted by applicable law, each Fund may (a) invest in securities or other instruments directly secured by real estate, and (b) invest in securities or other instruments issued by issuers that invest in real
estate.
|
5.
|
Purchase or sell
commodities or commodity contracts unless acquired as a result of ownership of securities or other instruments issued by persons that purchase or sell commodities or commodities contracts; but this shall not prevent a Fund from purchasing, selling
and entering into financial futures contracts (including futures contracts on indices of securities, interest rates and currencies), and options on financial futures contracts (including futures contracts on indices of securities, interest rates and
currencies), warrants, swaps, forward contracts, foreign currency spot and forward contracts and other financial instruments.
|
6.
|
Underwrite
securities issued by others, except to the extent that a Fund may be considered an underwriter within the meaning of the 1933 Act in the disposition of restricted securities or other investment company securities.
|
7.
|
Except for any Fund
that is “concentrated” in an industry or group of industries within the meaning of the 1940 Act, purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, 25% or more of the Fund’s total assets would be invested in the securities of companies whose principal business activities are in the same industry. However, each Fund that tracks an underlying index will
only concentrate its investment in a particular industry or group of industries to approximately the same extent as its underlying index is so concentrated.
|
Portfolio Transactions and Brokerage
Subject to the general
supervision by the Trustees, Rafferty is responsible for decisions to buy and sell securities for each Fund, the selection of broker-dealers to effect the transactions, and the negotiation of brokerage commissions, if any. Rafferty expects that a
Fund may execute brokerage or other agency transactions through registered broker-dealers, for a commission, in conformity with the 1940 Act, the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.
When selecting a broker or dealer to
execute portfolio transactions, Rafferty considers many factors, including the rate of commission or the size of the broker-dealer’s “spread,” the size and difficulty of the order, the nature of the market for the security,
operational capabilities of the broker-dealer and the research, statistical and economic data furnished by the broker-dealer to Rafferty.
In effecting portfolio transactions
for a Fund, Rafferty seeks to receive the closing prices of securities that are in line with those of the securities included in a Fund's underlying index and seeks to execute trades of such securities at the lowest commission rate reasonably
available. With respect to agency transactions, Rafferty may execute trades at a higher rate of commission if reasonable in relation to brokerage and research services provided to a Fund or Rafferty. Such services may include the following:
information as to the availability of securities for purchase or sale; statistical or factual information or opinions pertaining to investment; wire services; and appraisals or evaluations of portfolio securities. Each Fund believes that the
requirement to always seek the lowest possible commission cost could impede effective portfolio management and preclude a Fund and Rafferty from obtaining a high quality of brokerage and research services. In seeking to determine the reasonableness
of brokerage commissions paid in any transaction, Rafferty relies upon its experience and knowledge regarding commissions generally charged by various brokers and on its judgment in evaluating the brokerage and research services received from the
broker effecting the transaction.
Rafferty may use research and
services provided to it by brokers in servicing a Fund; however, not all such services may be used by Rafferty in connection with a Fund. While the receipt of such information and services is useful in varying degrees and may reduce the amount of
research or services otherwise provided to a Fund by Rafferty, the receipt of such information and these services does not reduce the investment advisory fee paid by a Fund.
Purchases and sales of U.S.
government securities normally are transacted through issuers, underwriters or major dealers in U.S. government securities acting as principals. Such transactions are made on a net basis and do not involve payment of brokerage commissions. The cost
of securities purchased from an underwriter usually includes a commission paid by the issuer to the underwriters; transactions with dealers normally reflect the spread between bid and asked prices.
Aggregate brokerage commissions paid
by each of the Funds for the fiscal periods shown are set forth in the tables below:
Direxion
All Cap Insider Sentiment Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$1,055,879
|
Year
Ended October 31, 2017
|
$894,036
|
Year
Ended October 31, 2016
|
$626,905
|
Direxion
NASDAQ-100
®
Equal Weighted Index Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$12,896
|
Year
Ended October 31, 2017
|
$12,026
|
Year
Ended October 31, 2016
|
$11,880
|
Portfolio Holdings Information
A Fund’s
portfolio holdings are disclosed on the Funds' website at www.direxioninvestments.com each day the Funds are open for business. In addition, disclosure of a Fund’s complete holdings is required to be made quarterly within 60 days of the end of
each fiscal quarter in the Annual Report and Semi-Annual Report to Fund shareholders and in the quarterly holdings report on Form N-Q. These reports are available, free of charge, on the EDGAR database on the SEC’s website at
www.sec.gov.
The
portfolio composition file (“PCF”), which contains portfolio holdings information and the IOPV, which contains certain pricing information related to a Fund’s portfolio holdings, are also made available daily, including to the
Funds' service providers to facilitate the provision of services to the Funds and to certain other entities as necessary for transactions in Creation Units. Such entities include: (i) National Securities Clearing Corporation (“NSCC”)
members; (ii) subscribers to various fee-based services, including entities that publish and/or analyze such information in connection with the process of purchasing or redeeming Creation Units or trading shares of Funds in the secondary market;
(iii) investors that have entered into an “Authorized Participant Agreement” with the Distributor and the transfer agent or purchase Creation Units through a
dealer that has entered into such an agreement
(“Authorized Participants”); and (iv) certain personnel of service providers that are involved in portfolio management and providing administrative, operational, or other support to portfolio management including personnel of the Adviser
and the Funds' distributor, administrator, custodian and fund accountant who are involved in functions which may require such information to conduct business in the ordinary course.
In addition, the Funds' Chief
Compliance Officer (“CCO”) may grant exceptions to permit additional disclosure of the complete portfolio holdings information at differing times and with differing lag times to rating agencies and to the parties noted above, provided
that (1) a Fund has a legitimate business purpose for doing so; (2) it is in the best interests of shareholders; (3) the recipient is subject to a confidentiality agreement; and (4) the recipient is subject to a duty not to trade on the nonpublic
information. In this regard, from time to time, rating and ranking organizations such as Standard & Poor’s
®
and Morningstar
®
, Inc. may request such information. The CCO shall report any disclosures made pursuant to this exception to the Board.
The Board of Trustees
The Trust is governed by its Board
of Trustees (the “Board”). The Board is responsible for and oversees the overall management and operations of the Trust and the Funds, which includes the general oversight and review of the Funds' investment activities, in accordance
with federal law and the law of the State of Delaware, as well as the stated policies of the Funds. The Board oversees the Trust’s officers and service providers, including Rafferty, which is responsible for the management of the day-to-day
operations of the Funds based on policies and agreements reviewed and approved by the Board. In carrying out these responsibilities, the Board regularly interacts with and receives reports from senior personnel of service providers, including
personnel from Rafferty and U.S. Bancorp Fund Services, LLC (“USBFS”). The Board also is assisted by the Trust’s independent auditor (who reports directly to the Trust’s Audit Committee), independent counsel and other
professionals as appropriate.
Risk
Oversight
Consistent with
its responsibility for oversight of the Trust and the Funds, the Board oversees the management of risks relating to the administration and operation of the Trust and the Funds. Rafferty, as part of its responsibilities for the day-to-day operations
of the Funds, is responsible for day-to-day risk management for the Funds. The Board, in the exercise of its reasonable business judgment performs its risk management oversight directly and, as to certain matters, through its committees (described
below) and through the Board members who are not “interested persons” of the Funds as defined in Section 2(a)(19) of the 1940 Act (“Independent Trustees.”) The following provides an overview of the principal, but not all,
aspects of the Board’s oversight of risk management for the Trust and the Funds.
The Board has adopted, and
periodically reviews, policies and procedures designed to address risks to the Trust and the Funds. In addition, under the general oversight of the Board, Rafferty and other service providers to the Funds have themselves adopted a variety of
policies, procedures and controls designed to address particular risks to the Funds. Different processes, procedures and controls are employed with respect to different types of risks.
The Board also oversees risk
management for the Trust and the Funds through review of regular reports, presentations and other information from officers of the Trust and other persons. The Trust’s CCO and senior officers of Rafferty regularly report to the Board on a
range of matters, including those relating to risk management. The Board also regularly receives reports from Rafferty and USBFS with respect to the Funds' investments. In addition to regular reports from these parties, the Board also receives
reports regarding other service providers to the Trust, either directly or through Rafferty, USBFS or the CCO, on a periodic or regular basis. At least annually, the Board receives a report from the CCO regarding the effectiveness of the Funds'
compliance program. Also, on an annual basis, the Board receives reports, presentations and other information from Rafferty in connection with the Board’s consideration of the renewal of each of the Trust’s agreements with Rafferty and
the Trust’s distribution plan under Rule 12b-1 under the 1940 Act.
The CCO reports regularly to the
Board on Fund valuation matters. The Audit Committee receives regular reports from the Trust’s independent registered public accounting firm on internal control and financial reporting matters. On at least a quarterly basis, the Independent
Trustees meet with the CCO to discuss matters relating to the Funds' compliance program.
Board Structure and Related Matters
Independent Trustees constitute
two-thirds of the Board. The Trustees discharge their responsibilities collectively as a Board, as well as through Board committees, each of which operates pursuant to a charter approved by the Board that delineates the specific responsibilities of
that committee. The Board has established three standing committees: the Audit Committee, the Nominating and Governance Committee and the Qualified Legal Compliance Committee. For example, the Audit Committee is responsible for specific matters
related to oversight of the Funds' independent auditors, subject to approval of the Audit Committee’s recommendations by the Board. The members and responsibilities of each Board committee are summarized below.
The Board
periodically evaluates its structure and composition as well as various aspects of its operations. The Chairman of the Board is not an Independent Trustee and the Board has chosen not to have a lead Independent Trustee. However, the Board believes
that its leadership structure, including its Independent Trustees and Board committees, is appropriate for the Trust in light of, among other factors, the asset size and nature of the Funds, the number of series overseen by the Board, the
arrangements for the conduct of the Funds' operations, the number of Trustees, and the Board’s responsibilities. On an annual basis, the Board conducts a self-evaluation that considers, among other matters, whether the Board and its committees
are functioning effectively and whether, given the size and composition of the Board and each of its committees, the Trustees are able to oversee effectively the number of series in the complex.
The Trust is part of the Direxion
Family of Investment Companies, which is comprised of the 120 portfolios within the Trust, 15 portfolios within the Direxion Funds and no portfolios within the Direxion Insurance Trust. The same persons who constitute the Board also constitute the
Board of Trustees of the Direxion Funds and the Direxion Insurance Trust.
The Board holds four regularly
scheduled in-person meetings each year. The Board may hold special meetings, as needed, either in person or by telephone, to address matters arising between regular meetings. During a portion of each in-person meeting, the Independent Trustees meet
outside of management’s presence. The Independent Trustees may hold special meetings, as needed, either in person or by telephone.
The Trustees of
the Trust are identified in the tables below, which provide information regarding their age, business address and principal occupation during the past five years including any affiliation with Rafferty, the length of service to the Trust, and the
position, if any, that they hold on the board of directors of companies other than the Trust as of the date of this SAI. Each of the Trustees of the Trust also serve on the Board of the Direxion Funds and Direxion Insurance Trust, the other
registered investment companies in the Direxion mutual fund complex. Rafferty is also the sole owner of Direxion Advisors, LLC ("Direxion"), investment adviser to certain series of the Trust. Unless otherwise noted, an individual’s business
address is 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019.
Interested Trustee
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(2)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
Daniel
D. O’Neill
(1)
Age: 50
|
Chairman
of the Board of Trustees
|
Lifetime
of Trust until removal or resignation;
Since 2008
|
Managing
Director of Rafferty Asset Management, LLC, January 1999 –
January 2019 and Direxion Advisors, LLC, November 2017
–
January 2019.
|
135
|
None.
|
Independent Trustees
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(3)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
Gerald
E. Shanley III
Age: 75
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2008
|
Retired,
since 2002; Business Consultant, 1985-present; Trustee of Trust Under Will of Charles S. Payson, 1987-present; C.P.A., 1979-present.
|
135
|
None.
|
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(3)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
John
A. Weisser
Age: 77
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2008
|
Retired,
since 1995; Salomon Brothers, Inc., 1971-1995, most recently as Managing Director.
|
135
|
Director
until December 2016: The MainStay Funds Trust, The MainStay Funds, MainStay VP Fund Series, Mainstay Defined Term Municipal Opportunities Fund; Private Advisors Alternative Strategy Fund; Private Advisors Alternative Strategies Master Fund.
|
David
L. Driscoll
Age: 49
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2014
|
Partner,
King Associates, LLP, since 2004; Board Advisor, University Common Real Estate, since 2012; Principal, Grey Oaks LLP since 2003; Member, Kendrick LLC, since 2006.
|
135
|
None.
|
Jacob
C. Gaffey
Age: 71
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2014
|
Managing
Director of Loomis & Co. since 2012; Partner, Bay Capital Advisors, LLC
2008
–
2012.
|
135
|
None.
|
Henry
W. Mulholland
Age: 55
|
Trustee
|
Lifetime
of Trust until removal or resignation; Since 2017
|
Grove
Hill Partners LLC, since 2016 as Managing Partner; Bank of America Merrill Lynch, 1990-2015, most recently as Managing Director and Head of Equities for Americas.
|
135
|
None.
|
(1)
|
Mr. O’Neill is
affiliated with Rafferty and Direxion. Mr. O’Neill owns a beneficial interest in Rafferty.
|
(2)
|
The Direxion Family of
Investment Companies consists of the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 93 of the 120 funds registered with the SEC, the Direxion Funds which, as of the date of this SAI, offers for sale to the
public 15 funds registered with the SEC and the Direxion Insurance Trust which, as of the date of this SAI, does not have any funds registered with the SEC.
|
In addition to the information set
forth in the tables above and other relevant qualifications, experience, attributes or skills applicable to a particular Trustee, the following provides further information about the qualifications and experience of each Trustee.
Daniel D.
O’Neill: Mr. O’Neill has extensive experience in the investment management business, including as managing director of Rafferty and Direxion. Mr. O’Neill was the Managing Director of Rafferty from 1999 through January 2019 and
Managing Director of Direxion from its inception in November 2017 through January 2019.
Gerald E. Shanley III: Mr. Shanley
has extensive audit experience and spent ten years in the tax practice of an international public accounting firm. He is a certified public accountant and has a JD degree. He has extensive business experience as the president of a closely held
manufacturing company, a director of several closely held companies, a business and tax consultant and a trustee of a private investment trust. He has served on the boards of several charitable and not for profit organizations. He also has multiple
years of service as a Trustee.
John A. Weisser: Mr. Weisser has
extensive experience in the investment management business, including as managing director of an investment bank and a director of other registered investment companies. He also has multiple years of service as a Trustee.
David L. Driscoll: Mr. Driscoll has
extensive experience with risk assessment and strategic planning as a partner and manager of various real estate partnerships and companies.
Jacob C. Gaffey: Mr. Gaffey has
extensive experience with providing investment banking and valuation services to various companies. Mr. Gaffey has been a director and a member of an audit committee of a public company since 2011.
Henry W. Mulholland: Mr. Mulholland has
extensive experience with equity trading, risk management, equity market structure as well as managing regulatory and compliance matters.
Board Committees
The Trust has an
Audit Committee, consisting of Messrs. Weisser, Shanley, Driscoll, Gaffey and Mulholland. The members of the Audit Committee are Independent Trustees. The primary responsibilities of the Trust’s Audit Committee are, as set forth in its
charter, to make recommendations to the Board Members as to: the engagement or discharge of the Trust’s independent registered public accounting firm (including the audit fees charged by the auditors); the supervision of investigations into
matters relating to audit matters; the review with the independent registered public accounting firm of the results of audits; and addressing any other matters regarding audits. The Audit Committee met three times during the Trust’s most
recent fiscal year.
The Trust also has a Nominating and
Governance Committee, consisting of Messrs. Weisser, Shanley, Driscoll, Gaffey and Mulholland each of whom is an Independent Trustee. The primary responsibilities of the Nominating and Governance Committee are to make recommendations to the Board on
issues related to the composition and operation of the Board, and communicate with management on those issues. The Nominating and Governance Committee also evaluates and nominates Board member candidates. The Nominating and Governance Committee will
consider nominees recommended by shareholders. Such recommendations should be in writing and addressed to a Fund with attention to the Nominating and Governance Committee Chair. The recommendations must include the following Preliminary Information
regarding the nominee: (1) name; (2) date of birth; (3) education; (4) business professional or other relevant experience and areas of expertise; (5) current business and home addresses and contact information; (6) other board positions or prior
experience; and (7) any knowledge and experience relating to investment companies and investment company governance. The Nominating and Governance Committee met three times during the Trust’s most recent fiscal year.
The Trust has a Qualified Legal
Compliance Committee, consisting of Messrs. Weisser, Shanley, Driscoll, Gaffey and Mulholland. The members of the Qualified Legal Compliance Committee are Independent Trustees of the Trust. The primary responsibility of the Trust’s Qualified
Legal Compliance Committee is to receive, review and take appropriate action with respect to any report (“Report”) made or referred to the Committee by an attorney of evidence of a material violation of applicable U.S. federal or state
securities law, material breach of a fiduciary duty under U.S. federal or state law or a similar material violation by the Trust or by any officer, director, employee or agent of the Trust. The Qualified Legal Compliance Committee did not meet
during the Trust’s most recent fiscal year.
Principal Officers of the Trust
The officers of the Trust conduct
and supervise its daily business. Unless otherwise noted, an individual’s business address is 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019. As of the date of this SAI, the officers of the Trust, their ages,
their business address and their principal occupations during the past five years are as follows:
Name,
Address
and Age
|
Position(s)
Held with
Fund
|
Term
of
Office and
Length of
Time Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in the
Direxion
Family of
Investment
Companies
Overseen
by Trustee
(1)
|
Other
Trusteeships/
Directorships Held
by Trustee During
Past Five Years
|
Robert
D. Nestor
Age: 50
|
President
|
One
Year;
Since 2018
|
President,
Rafferty Asset Management, LLC and Direxion Advisors, LLC, since April 2018; Blackrock, Inc. (May 2007-April 2018), most recently as Managing Director.
|
N/A
|
N/A
|
Patrick
J. Rudnick
Age: 45
|
Principal
Executive
Officer
Principal Financial
Officer
|
One
Year;
Since 2018
One Year;
Since 2010
|
Senior
Vice President, since March 2013, Rafferty Asset Management, LLC; Senior Vice President, since November 2017, Direxion Advisors, LLC.
|
N/A
|
N/A
|
Angela
Brickl
Age: 42
|
Chief
Compliance
Officer
Secretary
|
One
Year;
Since 2018
One Year;
Since 2011
|
General
Counsel, Rafferty Asset Management LLC, since October 2010 and Direxion Advisors, LLC, since November 2017; Chief Compliance Officer, Rafferty Asset Management, LLC, since September 2012 and Direxion Advisors, LLC, since November 2017.
|
N/A
|
N/A
|
(1)
|
The Direxion Family of
Investment Companies consists of the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 93 of the 120 funds registered with the SEC, the Direxion Funds which, as of the date of this SAI, offers for sale to the
public 15 funds registered with the SEC and the Direxion Insurance Trust which, as of the date of this SAI, does not have any funds registered with the SEC.
|
The following table shows the amount
of equity securities owned in each of the Funds and the Direxion Family of Investment Companies by the Trustees as of the calendar year ended December 31, 2018:
Dollar
Range of Equity Securities Owned:
|
Interested
Trustee:
|
Independent
Trustees:
|
|
Daniel
D.
O’Neill
|
Gerald
E.
Shanley III
|
John
Weisser
|
David
L.
Driscoll
|
Jacob
C.
Gaffey
|
Henry
W.
Mulholland
|
Direxion
All Cap Insider Sentiment Shares
|
Over
$100,000
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
NASDAQ-100
®
Equal Weighted Index Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Aggregate
Dollar Range of Equity Securities in the Direxion Family of Investment Companies
(1)
|
Over
$100,000
|
$0
|
$1-$10,000
|
$0
|
$0
|
$0
|
(1)
|
The Direxion Family of
Investment Companies consists of the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 93 of the 120 funds registered with the SEC, the Direxion Funds which, as of the date of this SAI, offers for sale to the
public 15 funds registered with the SEC and the Direxion Insurance Trust which, as of the date of this SAI, does not have any funds registered with the SEC.
|
The Trust’s Trust Instrument
provides that the Trustees will not be liable for errors of judgment or mistakes of fact or law. However, they are not protected against any liability to which they would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of their office.
No officer,
director or employee of Rafferty receives any compensation from the Funds for acting as a Trustee or officer of the Trust. The following table shows the compensation earned by each Trustee for the Trust’s fiscal year ended October 31,
2018:
Name
of Person,
Position
|
Aggregate
Compensation
From the
Trust
(1)
|
Pension
or
Retirement Benefits
Accrued As Part of
the Trust’s
Expenses
|
Estimated
Annual Benefits
Upon Retirement
|
Aggregate
Compensation
From the Direxion
Family of
Investment
Companies Paid
to the Trustees
(2)
|
Interested
Trustee
|
Daniel
D. O’Neill
|
$0
|
$0
|
$0
|
$0
|
Independent
Trustees
|
Gerald
E. Shanley III
|
$93,438
|
$0
|
$0
|
$124,583
|
John
A. Weisser
|
$93,438
|
$0
|
$0
|
$124,583
|
David
L. Driscoll
|
$92,188
|
$0
|
$0
|
$122,917
|
Jacob
C. Gaffey
|
$92,188
|
$0
|
$0
|
$122,917
|
Henry
W. Mulholland
(3)
|
$85,938
|
$0
|
$0
|
$114,583
|
(1)
Trustee compensation is
allocated across the operational Funds of the Trust based on the proportion of the Fund’s net assets to the total net assets of the operational Funds of the Trust.
(2)
For the fiscal year ended
October 31, 2018, Trustees’ fees and expenses in the amount of $457,190 were incurred by the Trust.
(3)
Mr. Mulholland was
elected as a Trustee December 1, 2017.
Principal Shareholders, Control Persons and
Management Ownership
A principal shareholder is any
person who owns of record or beneficially 5% or more of the outstanding shares of a Fund. A control person is a shareholder that owns beneficially or through controlled companies more than 25% of the voting securities of a company or acknowledges
the existence of control. Shareholders owning voting securities in excess of 25% may determine the outcome of any matter affecting and voted on by shareholders of a Fund.
As of February 1,
2019, the following shareholders were considered to be either a principal shareholder or control person of the Funds:
Direxion All Cap Insider Sentiment
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
The
Charles Schwab Corporation
|
DE
|
29.43%
|
Record
|
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Morgan
Stanley & Co.
Harbourside Financial Center Plaza 3, 1st Floor
Jersey City, NJ 07311
|
N/A
|
N/A
|
9.79%
|
Record
|
American
Enterprise Investment Services
719 Griswold Street Suite 1700
Detroit, MI 48226
|
N/A
|
N/A
|
9.06%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
7.24%
|
Record
|
LPL
Financial Corp.
9785 Towne Centre Drive
San Diego, CA 92121
|
N/A
|
N/A
|
6.57%
|
Record
|
Pershing
LLC
1 Pershing Plaza
Jersey City, NJ 07399
|
N/A
|
N/A
|
5.24%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
5.04%
|
Record
|
Direxion NASDAQ-100
®
Equal Weighted Index Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
The
Charles Schwab Corporation
|
DE
|
47.78%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
10.36%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
7.17%
|
Record
|
Raymond
James Financial
880 Carillon Parkway
St. Petersburg, FL 33716
|
N/A
|
N/A
|
6.75%
|
Record
|
Pershing
LLC
1 Pershing Plaza
Jersey City, NJ 07399
|
N/A
|
N/A
|
5.22%
|
Record
|
In addition,
as of February 1, 2019, the Trustees and Officers as a group owned less than 1% of the outstanding shares of each Fund.
Rafferty, 1301 Avenue of the
Americas (6th Avenue), 28th Floor, New York, New York 10019, provides investment advice to the Funds. Rafferty was organized as a New York limited liability company in June 1997. Lawrence C. Rafferty controls Rafferty through his ownership in
Rafferty Holdings, LLC and Daniel D. O'Neill controls Rafferty through his ownership in Minakian Partners, LLC.
Under an Investment Advisory
Agreement (“Advisory Agreement”) between Rafferty and the Trust, on behalf of each Fund dated August 13, 2008, Rafferty provides a continuous investment program for each Fund’s assets in accordance with its investment objectives,
policies and limitations, and oversees the day-to-day operations of each Fund, subject to the supervision of the Trustees. Rafferty bears all costs associated with providing these advisory services and the expenses of the Trustees who are affiliated
with or interested persons of Rafferty. The Trust bears all other expenses that are not assumed by Rafferty as described in the Prospectus. The Trust also is liable for nonrecurring expenses as may arise, including litigation to which a Fund may be
a party. The Trust also may have an obligation to indemnify its Trustees and officers with respect to any such litigation.
The Advisory
Agreement was initially approved by the Trustees (including all Independent Trustees) and Rafferty, as sole shareholder of each Fund in compliance with the 1940 Act. After an initial approval period of two years, the Advisory Agreement is renewable
at least annually with respect to each Fund, so long as its continuance is approved (1) by the vote, cast in person at a meeting called for that purpose, of a majority of the Independent Trustees of the Trust; and (2) by the
majority vote of either the full Board or the vote of a
majority of the outstanding shares of a Fund. The Advisory Agreement automatically terminates on assignment and is terminable upon a 60-day written notice either by the Trust or Rafferty.
Pursuant to the
Advisory Agreement, each Fund pays Rafferty the following fee at an annualized rate based on a percentage of each Fund’s average daily net assets:
Fund
|
Advisory
Fee Charged
|
Direxion
All Cap Insider Sentiment Shares
|
0.40%*
|
Direxion
NASDAQ-100
®
Equal Weighted Index Shares
|
0.30%
|
* The
contractual advisory fee on net assets equal to or greater than $500 million will be 0.31%.
The tables below show
the advisory fees incurred by each of the Funds and the amount of fees waived and/or reimbursed by Rafferty for the fiscal years ended October 31.
Direxion
All Cap Insider Sentiment Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$923,903
|
$220,951
|
$702,952
|
Year
Ended October 31, 2017
|
$1,008,139
|
$224,008
|
$784,131
|
Year
Ended October 31, 2016
|
$691,424
|
$180,393
|
$511,031
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $3,618.
|
Direxion
NASDAQ-100
®
Equal Weighted Index Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$498,776
|
$231,625
|
$267,151
|
Year
Ended October 31, 2017
|
$380,350
|
$209,738
|
$170,612
|
Year
Ended October 31, 2016
|
$217,426
|
$144,620
|
$72,806
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $1,009.
|
Pursuant to a separate Management
Services Agreement, Rafferty performs certain administrative services on behalf of the Funds, such as negotiating, coordinating and implementing the Trust’s contractual obligations with the Funds' service providers; monitoring, overseeing and
reviewing the performance of such service providers to ensure adherence to applicable contractual obligations; and preparing or coordinating reports and presentations to the Board of Trustees with respect to such service providers as requested or as
deemed necessary; and other services that are described in the Management Services Agreement. For these services, the Trust pays to Rafferty a fee at the annual rate of 0.026% on the first $10 billion of the aggregate average daily net assets of the
Funds in the Trust and 0.024% on the aggregate net assets above $10 billion. This Management Services Fee may be waived under the Operating Expense Limitation Agreement that Rafferty has entered into with each Fund. This arrangement may be
terminated at any time by the Board.
Each Fund is responsible for its own
operating expenses. Rafferty has entered into an Operating Expense Limitation Agreement with each Fund. Under this Operating Expense Limitation Agreement, Rafferty has contractually agreed to cap all or a portion of its advisory and management
services fees and/or reimburse each Fund for Other Expenses (excluding, as applicable, among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses,
brokerage commissions and extraordinary expenses) through September 1, 2020 to the extent that each Fund’s Total Annual Fund Operating Expenses exceed the amount listed in the table below of each Fund’s average daily net assets. Any
expense waiver or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the
time. This agreement may be terminated or revised at any time at the discretion of the Board upon notice to the Adviser and without the approval of Fund shareholders.
Fund
|
Expense
Cap
|
Direxion
All Cap Insider Sentiment Shares
|
0.59%
|
Direxion
NASDAQ-100
®
Equal Weighted Index Shares
|
0.35%
|
Rafferty
shall not be liable to the Trust or any Fund for anything done or omitted by it, except acts or omissions involving willful misfeasance, bad faith, negligence or reckless disregard of the duties imposed upon it by its agreement with the Trust or for
any losses that may be sustained in the purchase, holding or sale of any security.
Pursuant to Section 17(j) of the 1940
Act and Rule 17j-1 thereunder, the Trust, Rafferty and the Funds' distributor have adopted Codes of Ethics. These codes permit portfolio managers and other access persons of a Fund to invest in securities that may be owned by a Fund, subject to
certain restrictions.
Paul Brigandi and
Tony Ng are jointly and primarily responsible for the day-to-day management of the Funds. An investment trading team of Rafferty employees assists Mr. Brigandi and Mr. Ng in the day-to-day management of the Funds subject to their primary
responsibility and oversight. The Portfolio Managers work with the investment trading team to decide the target allocation of each Fund’s investments and on a day-to-day basis, an individual portfolio trader executes transactions for the Funds
consistent with the target allocation. The members of the investment trading team rotate periodically among the various series of the Trust, including the Funds, so that no single individual is assigned to a specific Fund for extended periods of
time.
In addition to the Funds,
Mr. Brigandi and Mr. Ng manage the following other accounts as of October 31, 2018:
Accounts
|
Total
Number
of Accounts
|
Total
Assets
(In Billions)
|
Total
Number of
Accounts with
Performance
Based Fees
|
Total
Assets
of Accounts
with Performance
Based Fees
|
Registered
Investment Companies
|
89
|
$12.4
|
0
|
$0
|
Other
Pooled Investment Vehicles
|
0
|
$
0
|
0
|
$0
|
Other
Accounts
|
0
|
$
0
|
0
|
$0
|
Rafferty
manages no other accounts with investment objectives similar to those of the Funds. In addition, two or more funds advised by Rafferty may invest in the same securities but the nature of each investment (long or short) may be opposite and in
different proportions. Generally, due to the nature of the various Funds advised by Rafferty, if a Fund with a leveraged investment objective increases in value, the performance of a Fund with an inverse or an inverse leveraged investment objective
will decrease in value and vice versa. Rafferty ordinarily executes transactions for a Fund “market-on-close,” in which funds purchasing or selling the same security receive the same closing price.
Rafferty has not identified any
additional material conflicts between a Fund and other accounts managed by the investment team. However, other actual or apparent conflicts of interest may arise in connection with the day-to-day management of a Fund and other accounts. The
management of a Fund and other accounts may result in unequal time and attention being devoted to a Fund and other accounts. Rafferty’s management fees for the services it provides to other accounts varies and may be higher or lower than the
advisory fees it receives from a Fund. This could create potential conflicts of interest in which the portfolio manager may appear to favor one investment vehicle over another resulting in an account paying higher fees or one investment vehicle out
performing another.
The
investment team’s compensation is paid by Rafferty. Their compensation primarily consists of a fixed base salary and a bonus. The investment team’s salary is reviewed annually and increases are determined by factors such as performance
and seniority. Bonuses are determined by the individual performance of an employee including factors such as attention to detail, process, and efficiency, and are impacted by the overall performance of the firm. The investment team’s salary
and bonus are not based on a Fund’s performance and as a result, no benchmarks are used. Along with all other employees of Rafferty, the investment team may participate in the firm’s 401(k) retirement plan where Rafferty may make
matching contributions up to a defined percentage of their salary.
Mr. Brigandi and Mr.
Ng did not own any shares of the Funds as of October 31, 2018.
Proxy Voting Policies and Procedures
The Board has
adopted policies and procedures with respect to voting proxies (the “Proxy Policy”) related to portfolio securities of the Funds. Pursuant to these policies and procedures the Board of the Trust has delegated responsibility for voting
such proxies to the Adviser, subject to the Board’s continuing oversight.
The Proxy Policy is intended to
protect shareholder interests and comply with applicable state and federal corporate and securities laws. It applies to any voting rights with respect to securities held in accounts of the Funds. To assist the Adviser in its responsibility for
voting proxies and administering the overall proxy voting process, the Adviser has retained Institutional Shareholder Services (“ISS”) as an expert in the proxy voting and corporate governance area. ISS is a subsidiary of Vestar Capital
Partners VI, L.P.; a leading U.S. middle market private equity firm. The services provided by ISS include in-depth research, global issuer analysis, and voting recommendations as well as vote execution, reporting and record keeping. ISS issues
monthly reports which are reviewed by the Adviser to assure proxies are being voted properly. The Adviser and ISS also perform checks on a quarterly basis to match the voting activity with available shareholder meeting information. ISS’
management meets on a regular basis to discuss its approach to new developments and amendments to existing proxy voting guidelines (the “Guidelines”). Information on such developments and amendments are then provided to the
Adviser.
The Guidelines are
maintained and implemented by ISS and are an extensive list of common proxy voting issues with recommended voting actions based on the overall goal of achieving maximum shareholder value and protection of shareholder interests
and rights. Generally, proxies are voted in
accordance with the voting recommendations contained in the Guidelines. If necessary, the Adviser will be consulted by ISS on non-routine issues. Proxy issues and factors considered when resolving proxy issues in the Guidelines include, but are not
limited to:
•
|
Election of Directors
–
considering all factors such as director qualifications, term of office and age limits.
|
•
|
Proxy Contests
–
considering factors such as voting nominees in contested elections and reimbursement of expenses.
|
•
|
Election of Auditors
–
considering factors such as independence and reputation of the auditing firm.
|
•
|
Proxy Contest Defenses
–
considering factors such as board structure and cumulative voting.
|
•
|
Tender Offer Defenses
–
considering factors such as poison pills (stock purchase rights plans) and fair price provisions.
|
•
|
Miscellaneous Governance
Issues
–
considering factors such as confidential voting and equal access.
|
•
|
Capital Structure
–
considering factors such as common stock authorization and stock distributions.
|
•
|
Executive and Director
Compensation
–
considering factors such as performance goals and employee stock purchase plans.
|
•
|
State of Incorporation
–
considering factors such as state takeover statutes and voting on reincorporation proposals.
|
•
|
Mergers and Corporate
Restructuring
–
considering factors such as spin-offs and asset sales.
|
•
|
Mutual Fund Proxy Voting
–
considering factors such as election of directors and proxy contests.
|
•
|
Social
and Corporate Responsibility Issues
–
considering factors such as social, environmental, and labor issues.
|
A full description of the Guidelines and
voting policy is maintain by the Adviser, and a complete copy of the Guidelines is available without charge, upon request by calling the Adviser at 866-476-7523.
Conflicts
of Interest
From time
to time, proxy issues may pose a material conflict of interest between the Funds' shareholders and the Adviser, the Distributor or any affiliates thereof. Due to the limited nature of the Adviser’s activities
(
e.g.
, no underwriting business, no publicly-traded affiliates, no investment banking activities, and no research recommendations), conflicts of interest are likely to be infrequent. Nevertheless, it shall be
the duty of the Adviser to monitor potential conflicts of interest. In the event a conflict of interest arises, the Adviser will direct ISS to use its independent judgment to vote affected proxies in accordance with approved guidelines.
Proxy
Voting Recordkeeping
The Adviser, with the assistance of
ISS, maintains for a period of at least five years, a record of each proxy statement received and materials that were considered when the proxy was voted during the calendar year. Information on how the Funds voted proxies relating to portfolio
securities for the 12-month (or shorter) period ended June 30 is available without charge, upon request, by calling the Adviser at 866-476-7523 or on the SEC’s website at
http://www.sec.gov
.
Fund Administrator, Fund Accounting Agent, Transfer
Agent and Custodian
U.S. Bancorp Fund Services, LLC,
615 East Michigan Street, Milwaukee, Wisconsin 53202, serves as the Funds' administrator. The Bank of New York Mellon, 101 Barclay Street, New York, New York 10286, serves as the Funds' transfer agent, and custodian. Rafferty also performs certain
administrative services for the Funds.
Pursuant to a Fund Administration
Servicing Agreement between the Trust and USBFS, USBFS provides the Trust with administrative and management services (other than investment advisory services). As compensation for these services, the Trust pays USBFS a fee based on the
Trust’s total average daily net assets. USBFS also is entitled to certain out-of-pocket expenses. The amount of fees paid by the Trust to USBFS pursuant to the Fund Administration Servicing Agreement for the fiscal years indicated is set forth
in the table below.
|
Fees
paid to the Administrator
|
Year
Ended October 31, 2018
|
$2,046,515
|
Year
Ended October 31, 2017
|
$2,402,024
|
Year
Ended October 31, 2016
|
$2,302,972
|
Pursuant to a Fund Accounting
Agreement between the Trust and BNYM, BNYM provides the Trust with accounting services, including portfolio accounting services, tax accounting services and furnishing financial reports. As compensation for these accounting services, the Trust pays
BNYM a fee based on the Trust’s total average daily net assets and a minimum annual per fund fee, subject to certain negotiated fee waivers. BNYM also is entitled to certain out-of-pocket expenses for the services mentioned above, including
pricing expenses. The amount of fees paid by the Trust pursuant to the Fund Accounting Agreement for the fiscal years indicated is set forth in the table below.
|
Fees
paid to the Fund Accounting Agent
|
Year
Ended October 31, 2018
|
$1,876,840
|
Year
Ended October 31, 2017
|
$1,629,992
|
Year
Ended October 31, 2016
|
$1,651,529
|
Pursuant to a Custody Agreement, BNYM
serves as the custodian of a Fund’s assets. The custodian holds and administers the assets in a Fund’s portfolios. Pursuant to the Custody Agreement, the custodian receives an annual fee based on the Trust’s total average daily net
assets and certain settlement charges. The custodian also is entitled to certain out-of-pocket expenses. The amount of fees paid by the Trust pursuant to the Custody Agreement for the fiscal years indicated is set forth in the table below.
|
Fees
paid to the Custodian
|
Year
Ended October 31, 2018
|
$1,132,612
|
Year
Ended October 31, 2017
|
$1,016,661
|
Year
Ended October 31, 2016
|
$1,057,934
|
Pursuant to a Transfer Agency and
Service Agreement between the Trust and BNYM, BNYM provides the Trust with transfer agency services, which includes Creation and Redemption Unit order processing. As compensation for these transfer agency services, the Trust pays BNYM a fee based on
the Trust’s total average daily net assets and a minimum annual complex fee. BNYM also is entitled to certain out-of-pocket expenses for the services mentioned above. The amount of fees paid by the Trust pursuant to the Transfer Agency and
Service Agreement for the fiscal years indicated is set forth in the table below.
|
Fees
paid to the Transfer Agent
|
Year
Ended October 31, 2018
|
$1,171,567
|
Year
Ended October 31, 2017
|
$1,116,750
|
Year
Ended October 31, 2016
|
$1,136,219
|
Effective August 25, 2017, each Fund
has entered into a Securities Lending Authorization Agreement with BNYM (the “Securities Lending Agreement”) whereby BNYM will be the Lending Agent for each Fund. Each Fund retains a portion of the securities lending income and remits
the remaining portion to BNYM as compensation for its services as securities lending agent. Securities lending income is generally equal to the net income earned from the reinvestment of cash collateral after payment of cash collateral fees, and any
fees or other payments from borrowers of securities.
BNYM acts as agent to the Trust to
lend available securities with any person on its list of approved borrowers. BNYM determines whether a loan shall be made and negotiates and establishes the terms and conditions of the loan with the borrower. BNYM ensures that all substitute
interest, dividends, and other distributions paid with respect to loan securities is credited to a Fund’s relevant account on the date such amounts are delivered by the borrower to BNYM. BNYM receives and holds, on a Fund’s behalf,
collateral from borrowers to secure obligations of borrowers with respect to any loan of available securities. BNYM marks loaned securities and collateral to their market value each business day based upon the market value of the collateral and
loaned securities at the close of business employing the most recently available pricing information and receives and delivers collateral in order to maintain the value of the collateral at no less than 102% of the market value of the loaned
securities. At the termination of the loan, BNYM returns the collateral to the borrower upon the return of the loaned securities to BNYM. BNYM invests cash collateral in accordance with the Securities Lending Agreement. BNYM maintains such records
as are reasonably necessary to account for loans that are made and the income derived therefrom and makes available to a Fund a monthly statement describing the loans made, and the income derived from the loans, during the period. Each Fund shall
receive the net securities lending revenue based on the securities lent from its holdings. A Fund may also pay custodial fees and other expenses associated with a loan.
As of October 31, 2018, the dollar
amounts of gross and net income from securities lending activities received and the related fees and/or compensation paid by each Fund were as follows:
Fees
and/or Compensation for Securities Lending Activities and Related Services
|
Fund
Name
|
Gross
Income
from
Securities
Lending
Activities
|
Fees
Paid
to
Securities
Lending
Agent
from the
Revenue
Split
|
Fees
Paid for
any Cash
Collateral
Manage-
ment
Service
(Including
Fees
Deducted
from a
Pooled
Cash
Collateral
Reinvest-
ment
Vehicle)
that are
not
Included
in the
Revenue
Split
|
Admin-
istrative
Fees not
Included
in the
Revenue
Split
|
Indem-
nification
Fees
not
Included
in the
Revenue
Split
|
Borrower
Rebates
|
Other
Fees not
Included
in the
Revenue
Split
(specify)
|
Aggregate
Fees/
Comp-
ensation
for Securities
Lending
Activities
|
Net
Income
from
Securities
Lending
Activities
|
Direxion
All Cap Insider Sentiment Shares
|
$87,878
|
$19,733
|
$-
|
$-
|
$-
|
$22,275
|
$-
|
$42,008
|
$45,870
|
Direxion
NASDAQ-100
®
Equal Weighted Index Shares
|
$76,953
|
$19,000
|
$-
|
$-
|
$-
|
$13,392
|
$-
|
$32,392
|
$44,561
|
Foreside Fund
Services, LLC, located at 3 Canal Plaza, Suite 100, Portland, Maine 04101, serves as the distributor (“Distributor”) in connection with the continuous offering of each Fund’s shares. The Distributor is a broker-dealer registered
with the SEC under the Securities Exchange Act of 1934 and a member of the Financial Industry Regulatory Authority. The Trust offers Shares of the Funds for sale through the Distributor in Creation Units, as described below. The Distributor will not
sell or redeem Shares in quantities less than Creation Units. The Distributor will deliver a Prospectus to persons purchasing Creation Units and will maintain records of Creation Unit orders placed and confirmations furnished by it. Pursuant to a
written agreement, the Adviser pays the Distributor for distribution-related services. For the fiscal year ended October 31, 2018, the Distributor received $1,046,468 as compensation from Rafferty for distribution services provided to the Trust,
including the Funds. For the fiscal year ended October 31, 2018, Foreside did not receive any underwriting commission or discounts, compensation on redemptions and repurchases, or brokerage commissions from the Funds.
The Adviser may pay certain
broker-dealers, banks and other financial intermediaries for participating in activities that are designed to make registered representatives and other professionals more knowledgeable about exchange traded products, including each Fund, or for
other activities such as participating in marketing activities and presentations, educational training programs, conferences, the development of technology platforms and reporting systems. The Adviser had arrangements to make payments based on an
annual fee for its services, as well as based on the average daily assets held by Schwab customers in certain funds managed by the Adviser, for services other than for the educational programs and marketing activities described above, only to
Charles Schwab & Co., Inc. (“Schwab”). Pursuant to the arrangement with Schwab, Schwab has agreed to promote select funds managed by the Adviser, to Schwab’s customers and not to charge certain of its customers any commissions
when those customers purchase or sell shares of those funds. Payments to a broker-dealer or intermediary may create potential conflicts of interest between the broker-dealer or intermediary and its clients. These amounts, which may be significant,
are paid by the Adviser from its own resources and not from the assets of funds managed by the Adviser. Although a portion of the Adviser’s revenue comes directly or indirectly in part from fees paid by each Fund, other ETFs advised by the
Adviser or other exchange-traded products, these payments do not increase the price paid by investors for the purchase of shares of, or the cost of owning, a Fund or other funds managed by the Adviser.
Rule 12b-1 under the 1940 Act, as
amended, (the “Rule”) provides that an investment company may bear expenses of distributing its shares only pursuant to a plan adopted in accordance with the Rule. The Trustees have adopted a Rule 12b-1 Distribution Plan (“Rule
12b-1 Plan”) pursuant to which each Fund may pay certain expenses incurred in the distribution of its shares and the servicing and maintenance of existing shareholder accounts. The Distributor, as the Funds' principal underwriter, and Rafferty
may have a direct or indirect financial interest in the Rule 12b-1 Plan or any related agreement. Pursuant to the Rule 12b-1 Plan, each Fund may pay a fee of up to 0.25% of the Fund’s average daily net assets. No Rule 12b-1 fee is currently
being charged to the Funds.
The Rule 12b-1 Plan was approved by
the Board, including a majority of the Independent Trustees of the Funds. In approving the Rule 12b-1 Plan, the Trustees determined that there is a reasonable likelihood that the Rule 12b-1 Plan will benefit each Fund and its shareholders. The
Trustees will review quarterly and annually a written report provided by the Treasurer of the amounts expended under the Rule 12b-1 Plan and the purpose for which such expenditures were made.
The Rule 12b-1 Plan permits payments
to be made by each Fund to the Distributor or other third parties for expenditures incurred in connection with the distribution of Fund shares to investors and the provision of certain shareholder services. The Distributor or other third parties are
authorized to engage in advertising, the preparation and distribution of sales literature and other promotional activities on behalf of each Fund. In addition, the Rule 12b-1 Plan authorizes payments by each Fund to the Distributor or other third
parties for the cost related to selling or servicing efforts, preparing, printing and distributing Fund prospectuses, statements of additional information, and shareholder reports to investors.
Independent Registered Public Accounting Firm
Ernst & Young
LLP (“EY”), 220 South Sixth Street, Suite 1400, Minneapolis, Minnesota 55402, is the independent registered public accounting firm for the Trust. The Financial Statements of the Funds for the fiscal year ended October 31, 2018, audited
by EY, have been included in reliance on their report given on their authority as experts in accounting and auditing.
The Trust has selected K&L Gates
LLP, 1601 K Street, N.W., Washington, DC 20006, as its legal counsel.
Determination of Net Asset Value
A fund’s share price is
known as its NAV. Each Fund’s share price is calculated as of the close of regular trading on the NYSE, usually 4:00 p.m. Eastern Time (“Valuation Time”), each day the NYSE is open for business (“Business Day”). The
NYSE is open for business Monday through Friday, except in observation of the following holidays: New Year’s Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The NYSE may close early on the business day before each of these holidays and on the day after Thanksgiving Day. NYSE holiday schedules are subject to change without notice.
If the exchange or market on which a
Fund’s investments are primarily traded closes early, the NAV may be calculated prior to its normal calculation time. Creation/redemption transaction order time cutoffs would also be accelerated. The value of a Fund’s assets that trade
in markets outside the United States or in currencies other than the U.S. Dollar may fluctuate when foreign markets are open but a Fund is not open for business.
A security listed
or traded on an exchange, domestic or foreign, is valued at its last sales price or settlement price on the principal exchange on which it is traded prior to the time when assets are valued. If no sale is reported at that time, the mean of the last
bid and asked prices is used. Securities primarily traded on the NASDAQ Global Market
®
(“NASDAQ
®
”) for which market quotations are readily available shall be valued using the NASDAQ
®
Official Closing Price (“NOCP”) provided by NASDAQ
®
each Business Day. The NOCP is the most recently reported price as of 4:00:02 p.m. Eastern Time, unless that price is outside the range of the
“inside” bid and asked prices’ in that case, NASDAQ
®
will adjust the price to equal the inside bid or asked price, whichever is
closer. If the NOCP is not available, such securities shall be valued at the last sale price on the day of valuation, or if there has been no sale on such day, at the mean between the bid and asked prices.
For purposes of determining NAV per
share of a Fund, options and futures contracts are valued based on market quotations, the last sales or settlement price of the exchange on which an asset trades. The value of a futures contract equals the unrealized gain or loss on the contract
that is determined by marking the contract to the last sale price for a like contract acquired on the day on which the futures contract is being valued. The value of options on futures contracts is determined based upon the last sale price for a
like option acquired on the day on which the option is being valued. A last sale price may not be used for the foregoing purposes if the market makes a limited move with respect to a particular instrument.
For valuation purposes, quotations of
foreign securities or other assets denominated in foreign currencies are translated to U.S. Dollar equivalents using the net foreign exchange rate in effect at the close of the stock exchange in the country where the security is issued. Short-term
debt instruments having a maturity of 60 days or less are valued at amortized cost, which approximates market value. If the Board determines that the amortized cost method does not represent the fair value of the short-term debt instrument, the
investment will be valued at fair value as determined by procedures as adopted by the Board. U.S. government securities are valued at the mean between the closing bid and asked price provided by an independent third party pricing service
(“Pricing Service”).
OTC securities held by a Fund will be
valued at the last sales price or, if no sales price is reported, the mean of the last bid and asked price is used. The portfolio securities of a Fund that are listed on national exchanges are valued at the last sales price of such securities; if no
sales price is reported, the mean of the last bid and asked price is used.
Swaps are valued based upon prices from
third party vendor models or quotations from market makers to the extent available.
Dividend income and other distributions
are recorded on the ex-distribution date.
Illiquid securities, securities for
which reliable quotations or pricing services are not readily available, all other assets not valued in accordance with the foregoing principles or for which pricing information is deemed unreliable, or to the Adviser’s knowledge, does not
reflect a significant event occurring in the market, the security or asset will be valued at their respective fair value as determined in good faith by, or under procedures established by, the Trustees, which procedures may include the delegation of
certain responsibilities regarding valuation to Rafferty or the officers of the Trust. The officers of the Trust report, as necessary, to the Trustees regarding portfolio valuation determinations. The Trustees, from time to time, will review these
methods of valuation and will recommend changes that may be necessary to assure that the investments of a Fund are valued at fair value.
Additional Information Concerning Shares
Organization and Description of
Shares of Beneficial Interest
The Trust is a Delaware statutory
trust and registered investment company. The Trust was organized on April 23, 2008, and has authorized capital of unlimited Shares of beneficial interest of no par value which may be issued in more than one class or series. Currently, the Trust
consists of multiple separately managed series. The Board may designate additional series of beneficial interest and classify Shares of a particular series into one or more classes of that series.
All Shares of the Trust are freely
transferable. The Shares do not have preemptive rights or cumulative voting rights, and none of the Shares have any preference to conversion, exchange, dividends, retirements, liquidation, redemption, or any other feature. Shares have equal voting
rights, except that, in a matter affecting a particular series or class of Shares, only Shares of that series of class may be entitled to vote on the matter. Trust shareholders are entitled to require the Trust to redeem Creation Units of their
Shares. The Trust Instrument confers upon the Broad of Trustees the power, by resolution, to alter the number of Shares constituting a Creation Unit or to specify that Shares of the Trust may be individually redeemable. The Trust reserves the right
to adjust the stock prices of Shares of the Trust to maintain convenient trading ranges for investors. Any such adjustments would be accomplished through stock splits or reverse stock splits which would have no effect on the net assets of the
applicable Fund.
Under Delaware
law, the Trust is not required to hold an annual shareholders meeting if the 1940 Act does not require such a meeting. Generally, there will not be annual meetings of Trust shareholders. Trust shareholders may remove Trustees from office by votes
cast at a meeting of Trust shareholders or by written consent. If requested by shareholders of at least 10% of the outstanding Shares of the Trust, the Trust will call a meeting of a Fund’s shareholders for the purpose of voting upon the
question of removal of a Trustee of the Trust and will assist in communications with other Trust shareholders.
The Trust Instrument disclaims
liability of the shareholders of the officers of the Trust for acts or obligations of the Trust which are binding only on the assets and property of the Trust. The Trust Instrument provides for indemnification from the Trust’s property for all
loss and expense of any Fund shareholder held personally liable for the obligations of the Trust. The risk of a Trust shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Funds would not
be able to meet the Trust’s obligations and this risk, thus, should be considered remote.
If a Fund does not grow to a size to
permit it to be economically viable, the Fund may cease operations. In such an event, investors may be required to liquidate or transfer their investments at an inopportune time.
Book Entry Only System
The Depository Trust Company
(“DTC”) acts as securities depositary for the Shares. Shares of each Fund are represented by global securities registered in the name of DTC or its nominee and deposited with, or on behalf of, DTC. Except as provided below, certificates
will not be issued for Shares.
DTC has advised the Trust as follows:
it is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing
agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities of its participants (“DTC Participants”) and to facilitate the clearance and settlement of securities transactions
among the DTC Participants in such securities through electronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the NYSE, the AMEX and the
Financial Industry Regulatory Authority. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or
indirectly (“Indirect Participants”). DTC agrees with and represents to DTC Participants that it will administer its book-entry system in accordance with its rules and by-laws and requirements of law. Beneficial ownership of Shares is
limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants.
Ownership of beneficial interests in Shares (owners
of such beneficial interests are referred to herein as “Beneficial owners”) is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records of DTC
Participants (with respect to Indirect Participants and Beneficial owners that are not DTC Participants). Beneficial owners will receive from or through the DTC Participant a written confirmation relating to their purchase of Shares. The laws of
some jurisdictions may require that certain purchasers of securities take physical delivery of such securities in definitive form. Such laws may impair the ability of certain investors to acquire beneficial interests in Shares.
Beneficial owners of Shares are not
entitled to have Shares registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive form and are not considered the registered holder thereof. Accordingly, each Beneficial owner must rely on
the procedures of DTC, the DTC Participant and any Indirect Participant through which such Beneficial owner holds its interests, to exercise any rights of a holder of Shares. The Trust understands that under existing industry practice, in the event
the Trust requests any action of holders of Shares, or a Beneficial owner desires to take any action that DTC, as the record owner of all outstanding Shares, is entitled to take, DTC would authorize the DTC Participants to take such action and that
the DTC Participants would authorize the Indirect Participants and Beneficial owners acting through such DTC Participants to take such action and would otherwise act upon the instructions of Beneficial owners owning through them. As described above,
the Trust recognizes DTC or its nominee as the owner of all Shares for all purposes. Conveyance of all notices, statements and other communications to Beneficial owners is effected as follows. Pursuant to the Depositary Agreement between the Trust
and DTC, DTC is required to make available to the Trust upon request and for a fee to be charged to the Trust a listing of Share holdings of each DTC Participant. The Trust shall inquire of each such DTC Participant as to the number of Beneficial
owners holding Shares, directly or indirectly, through such DTC Participant. The Trust shall provide each such DTC Participant with copies of such notice, statement or other communication, in such form, number and at such place as such DTC
Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or indirectly, to such Beneficial owners. In addition, the Trust shall pay to each such DTC Participant a
fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements.
Distributions of Shares shall be
made to DTC or its nominee, Cede & Co., as the registered holder of all Shares. DTC or its nominee, upon receipt of any such distributions, shall credit immediately DTC Participants’ accounts with payments in amounts proportionate to their
respective beneficial interests in Shares as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial owners of Shares held through such DTC Participants will be governed by standing
instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in a “street name,” and will be the responsibility of such DTC Participants. The Trust has no
responsibility or liability for any aspects of the records relating to or notices to Beneficial owners, or payments made on account of beneficial ownership interests in such Shares, or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants and the Indirect Participants and Beneficial owners owning through such DTC
Participants.
DTC may determine
to discontinue providing its service with respect to Shares at any time by giving reasonable notice to the Trust and discharging its responsibilities with respect thereto under applicable law. Under such circumstances, the Trust shall take action
either to find a replacement for DTC to perform its functions at a comparable cost or, if such a replacement is unavailable, to issue and deliver printed certificates representing ownership of Shares, unless the Trust makes other arrangements with
respect thereto satisfactory to the Exchange. The Trust will not make the DTC book-entry Dividend Reinvestment Service available for use by Beneficial Owners for reinvestment of their cash proceeds but certain brokers may make a dividend
reinvestment service available to their clients. Brokers offering such services may require investors to adhere to specific procedures and timetables in order to participate. Investors interested in such a service should contact their broker for
availability and other necessary details.
Purchases and Redemptions
The Trust issues
and redeems Shares of each Fund only in aggregations of Creation Units. The number of Shares of a Fund that constitute a Creation Unit and the value of such Creation Unit as of each Fund’s inception were 50,000 and $2,000,000,
respectively.
See
“Purchase and Issuance of Creation Units” and “Redemption of Creation Units” below for more information about transacting in the Shares. The Board reserves the right to declare a split or a consolidation in the number of
Shares outstanding of any Fund, and may make a corresponding change in the number of Shares constituting a Creation Unit, in the event that the per Shares price in the secondary market rises (or declines) to an amount that falls outside the range
deemed desirable by the Board for any other reason.
Purchase and Issuance of Creation Units
The Trust issues and sells
Shares only in Creation Units on a continuous basis through the Distributor, without a sales load, at their NAV next determined after receipt, on any Business Day (as defined above), of an order in proper form.
Creation Units of Shares may be
purchased only by or through an Authorized Participant by depositing a basket of securities and/or cash with a Fund. The consideration for purchase of a Creation Unit of Shares of a Fund consists of either cash or the Deposit Securities (defined
below) that may be a representative sample of the securities in a Fund’s underlying index, the “Balancing Amount”, and the appropriate Transaction Fee (collectively, the “Portfolio Deposit”). The Balancing Amount will
be the amount equal to the differential, if any, between the total aggregate market value of the Deposit Securities and the NAV of the Creation Unit(s) being purchased and will be paid to, or received from, the Trust after the NAV has been
calculated. BNYM or Rafferty makes available through the NSCC on each Business Day, either immediately prior to the opening of business on the Exchange or the night before, the list of the names and the required number of shares of each security
(“Deposit Securities”) to be included in a current Creation Unit purchase (based on information at the end of the previous Business Day) for a Fund. The identity and number of shares of the Deposit Securities required for a Creation Unit
will change from time to time. Each Fund reserves the right to permit or require the substitution of an amount of cash
–
i.e.
, a
“cash in lieu” amount
–
to be added to the Balancing Amount to replace any Deposit Security that may not be available in sufficient quantity for delivery,
eligible for transfer through the clearing process (discussed below) or the Federal Reserve System or eligible for trading by an Authorized Participant or the investor for which it is acting. For such custom orders, “cash in lieu” may be
added to the Balancing Amount. You must also pay a Transaction Fee, described in the Prospectus, in cash.
The identity and number of shares of
the Deposit Securities required for a Fund changes as rebalancing adjustments and corporate action events are reflected from time to time by Rafferty with a view to the investment objective of a Fund. The composition of the Deposit Securities may
also change in response to adjustments to the weighting or composition of the securities constituting the relevant securities index or may be a representative sample of the securities in a Fund's underlying index. In addition, the Trust reserves the
right to permit or require the substitution of an amount of cash (
i.e
., a “cash in lieu” amount) to be added to the Balancing Amount to replace any Deposit Security which may not be available in
sufficient quantity for delivery or for other similar reasons. The adjustments described above will reflect changes, known to Rafferty on the date of announcement to be in effect by the time of delivery of the Portfolio Deposit, in the composition
of the subject index being tracked by a Fund, or resulting from stock splits and other corporate actions. In addition to the list of names and numbers of securities constituting the current Deposit Securities of a Creation Unit, on each Business
Day, the Balancing Amount effective through and including the previous Business Day, per outstanding Share of a Fund, will be made available.
An Authorized Participant will agree
pursuant to the terms of such Authorized Participant Agreement on behalf of itself or any investor on whose behalf it will act, as the case may be, to certain conditions, including that such Authorized Participant will make available an amount of
cash sufficient to pay the Balancing Amount and the Transaction Fee described in the Prospectus. The Authorized Participant may require the investor to enter into an agreement with such Authorized Participant with respect to certain matters,
including payment of the Balancing Amount. Investors who are not Authorized Participants must make appropriate arrangements with an Authorized Participant. Investors should be aware that their particular broker may not be a DTC Participant or may
not have executed an Authorized Participant Agreement, and that therefore orders to purchase Creation Units of Shares may have to be placed by the investor’s broker through an Authorized Participant. As a result, purchase orders placed through
an Authorized Participant may result in additional charges to such investor.
An Authorized
Participant may place an order to purchase Creation Units (i) through the Continuous Net Settlement clearing processes of NSCC as such processes have been enhanced to effect purchases of Creation Units, such processes being referred to herein as the
“Enhanced Clearing Process,” or (ii) outside the Enhanced Clearing Process, being referred to herein as the Manual Clearing Process.
A purchase order must be received in
good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent’s automated system, telephone, facsimile or other means permitted under the Authorized Participant Agreement, in order to
receive that day's NAV per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day.
All questions as to the number of
shares of each security in the Deposit Securities and the validity, form, eligibility and acceptance for deposit of any securities to be delivered shall be determined by the Trust, and the Trust’s determination shall be final and
binding.
Purchases through the Enhanced Clearing
Process
To purchase
or redeem through the Enhanced Clearing Process, an Authorized Participant must be a member of NSCC that is eligible to use the Continuous Net Settlement system. For purchase orders placed through the Enhanced Clearing Process, in the Authorized
Participant Agreement the Participant authorizes the transfer agent to transmit to the NSCC, on behalf
of an Authorized Participant, such trade
instructions as are necessary to effect the Authorized Participant’s purchase order. Pursuant to such trade instructions to the NSCC, the Authorized Participant agrees to deliver the Portfolio Deposit and such additional information as may be
required by the Transfer Agent or the Distributor.
Purchases through the Manual Clearing Process
An Authorized Participant
that wishes to place an order to purchase Creation Units outside the Enhanced Clearing Process must state that it is not using the Enhanced Clearing Process and that the purchase instead will be effected through a transfer of securities and/or cash
either through the Federal Reserve System (for cash and U.S. government securities) or directly through DTC. Purchases (and redemptions) of Creation Units of the Funds settled outside the Enhanced Clearing Process will be subject to a higher
Transaction Fee than those settled through the Enhanced Clearing Process. Purchase orders effected outside the Enhanced Clearing Process are likely to require transmittal by the Authorized Participant earlier on the Transmittal Date than orders
effected using the Enhanced Clearing Process. Those persons placing orders outside the Enhanced Clearing Process should ascertain the deadlines applicable to DTC and the Federal Reserve System (for cash and U.S. government securities) by contacting
the operations department of the broker or depository institution effectuating such transfer of the Portfolio Deposit.
Shares may be issued in advance of
receipt by the Trust of all or a portion of the applicable Deposit Securities as described below. In these circumstances, the initial deposit will have a greater value than the NAV of the Shares on the date the order is placed in proper form since,
in addition to the available Deposit Securities, cash must be deposited in an amount equal to the sum of (i) the Balancing Amount, plus (ii) 115% of the market value of the undelivered Deposit Securities (the “Additional Cash Deposit”).
An additional amount of cash shall be required to be deposited with the Trust, pending delivery of the missing Deposit Securities to the extent necessary to maintain the Additional Cash Deposit with the Trust in an amount at least equal to 115% of
the daily marked to market value of the missing Deposit Securities. The Authorized Participant Agreement will permit the Trust to buy the missing Deposit Securities any time. Authorized Participants will be liable to the Trust for the costs incurred
by the Trust in connection with any such purchases. These costs will be deemed to include the amount by which the actual purchase price of the Deposit Securities exceeds the market value of such Deposit Securities on the day the purchase order was
deemed received by the Distributor plus the brokerage and related transaction costs associated with such purchases. The Trust will return any unused portion of the Additional Cash Deposit once all of the missing Deposit Securities have been properly
received by the custodian bank or purchased by the Trust and deposited into the Trust. In addition, a transaction fee, as listed below, will be charged in all cases. The delivery of Shares so purchased will occur no later than the third Business Day
following the day on which the purchase order is deemed received by the Distributor. Due to the schedule of holidays in certain countries, however, the delivery of Shares may take longer than three Business Days following the day on which the
purchase order is received. In such cases, the local market settlement procedures will not commence until the end of local holiday periods. A list of local holidays in the foreign countries or markets relevant to the international funds is set forth
under “Regular Foreign Holidays” below.
Rejection of Purchase Orders
The Trust reserves the absolute
right to reject a purchase order transmitted to it by the Distributor in respect of any Fund if (a) the purchaser or group of purchasers, upon obtaining the shares ordered, would own 80% or more of the currently outstanding Shares of any Fund; (b)
the Deposit Securities delivered are not as specified by Rafferty and Rafferty has not consented to acceptance of an in-kind deposit that varies from the designated Deposit Securities; (c) acceptance of the purchase transaction order would have
certain adverse tax consequences to the a Fund; (d) the acceptance of the purchase transaction order would, in the opinion of counsel, be unlawful; (e) the acceptance of the purchase transaction order would otherwise, in the discretion of the Trust
or Rafferty, have an adverse effect on the Trust or the rights of beneficial owners; (f) the value of a “Cash Purchase Amount”, or the value of the Balancing Amount to accompany an in-kind deposit exceed a purchase authorization limit
extended to an Authorized Participant by the custodian and the Authorized Participant has not deposited an amount in excess of such purchase authorization with the custodian by 4:00 p.m. Eastern Time on the Transmittal Date; or (g) in the event that
circumstances outside the control of the Trust, the Distributor and Rafferty make it impractical to process purchase orders. The Trust shall notify a prospective purchaser of its rejection of the order. The Trust and the Distributor are under no
duty, however, to give notification of any defects or irregularities in the delivery of purchase transaction orders nor shall either of them incur any liability for the failure to give any such notification.
Redemption of Creation Units
Shares may be redeemed only in
Creation Units at their NAV next determined after receipt of a redemption request in proper form by the Distributor on any Business Day. The Trust will not redeem Shares in amounts less than Creation Units. Beneficial owners also may sell Shares in
the secondary market, but must accumulate enough Shares to constitute a Creation Unit in order to have such Shares redeemed by the Trust. There can be no assurance, however, that there will be sufficient
liquidity in the public trading market at any time
to permit assembly of a Creation Unit of Shares. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of Shares to constitute a redeemable Creation Unit.
Generally, Creation Units of Shares
are redeemed by or through an Authorized Participant. Such Authorized Participant will agree pursuant to the terms of such Authorized Participant Agreement on behalf of itself or any investor on whose behalf it will act, as the case may be, to
certain conditions, including that such Authorized Participant will make available an amount of cash sufficient to pay the Balancing Amount and the Transaction Fee described above. The Authorized Participant may require the investor to enter into an
agreement with such Authorized Participant with respect to certain matters, including payment of the Balancing Amount. Investors who are not Authorized Participants must make appropriate arrangements with an Authorized Participant. Investors should
be aware that their particular broker may not be a DTC Participant or may not have executed an Authorized Participant Agreement, and that therefore orders to purchase Creation Units of Shares may have to be placed by the investor’s broker
through an Authorized Participant. As a result, redemption orders placed through an Authorized Participant may result in additional charges to such investor.
In certain instances, Authorized
Participants may create and redeem Creation Unit aggregations of the same Fund on the same trade date. In this instance, the Trust reserves the right to settle these transactions on a net basis.
The redemption proceeds for a
Creation Unit consist of either cash or Redemption Securities on any Business Day, plus the Balancing Amount. BNYM or Rafferty makes available through the NSCC on each Business Day, either immediately prior to the opening of business on the Exchange
or the night before, the list of the names and the required number of shares of each security (“Redemption Securities”) to be included in a current Creation Unit redemption (based on information at the end of the previous Business Day)
for a Fund. The identity and number of shares of the Redemption Securities required for a Creation Unit redemption will change from time to time. For such custom orders, “cash in lieu” may be added to the Balancing Amount. You must also
pay a Transaction Fee, described in the Prospectus, in cash. The redemption Transaction Fee is deducted from such redemption proceeds. The Redemption Securities may, at times, not be identical to Deposit Securities which are applicable to a purchase
of Creation Units. In addition, an investor may request a redemption in cash which a Fund may, in its sole discretion, permit. A Fund may also, in its sole discretion, upon request of a shareholder, provide such redeemer a portfolio of securities
which differs from the exact composition of a Fund securities but does not differ in NAV.
A Fund may in its discretion exercise
its option to redeem such Shares in cash, and the redeeming shareholder will be required to receive its redemption proceeds in cash. In addition, an investor may request a redemption in cash which the Fund may, in its sole discretion, permit. A Fund
may also, in its sole discretion, upon request of a shareholder, provide such redeemer a portfolio of securities that differs from the exact composition of the Fund securities but does not differ in NAV.
The right of redemption may be
suspended or the date of payment postponed with respect to each Fund (1) for any period during which the NYSE is closed (other than customary weekend and holiday closings); (2) for any period during which trading on the NYSE is suspended or
restricted; (3) for any period during which an emergency exists as a result of which disposal of the shares of a Fund’s portfolio securities or determination of its NAV is not reasonably practicable; or (4) in such other circumstance as is
permitted by the SEC.
An
Authorized Participant may place an order to redeem Creation Units (i) through the Continuous Net Settlement clearing processes of NSCC as such processes have been enhanced to effect redemptions of Creation Units, such processes being referred to
herein as the “Enhanced Clearing Process,” or (ii) outside the Enhanced Clearing Process, being referred to herein as the Manual Clearing Process.
Placement of Redemption Orders Using Enhanced
Clearing Process
Orders to redeem Creation Units
of each Fund through the Enhanced Clearing Process must be delivered through an Authorized Participant that is a member of NSCC that is eligible to use the Continuous Net Settlement System. A redemption order must be received in good order by the
transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent's automated system, telephone, facsimile or other means permitted under the Authorized Participant Agreement, in order to receive that day's NAV per
Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day.
Placement of Redemption Orders outside Enhanced
Clearing Process
Orders to redeem Creation Units
of each Fund outside the Enhanced Clearing Process must be delivered through a DTC Participant that has executed the Authorized Participant Agreement. A DTC Participant who wishes to place an order for redemption of Creation Units of a Fund to be
effected outside the Enhanced Clearing Process need not be an Authorized Participant, but such orders must state that the DTC Participant is not using the Enhanced Clearing Process and that redemption of Creation Units will instead be effected
through transfer of Shares directly through DTC or the Federal Reserve System (for cash and U.S. government securities). A redemption order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail,
through the transfer agent’s automated system, telephone, facsimile or other means permitted under the Authorized Participant Agreement, in order to receive that day's NAV per Share. All
other procedures set forth in the Authorized
Participant Agreement must be followed in order for you to receive the NAV determined on that day. The order must be accompanied or preceded by the requisite number of Shares of a Fund specified in such order, which delivery must be made through DTC
or the Federal Reserve System to the Custodian by the third Business Day following such Transmittal Date (“DTC Cut-Off Time”); and (iii) all other procedures set forth in the Authorized Participant Agreement must be properly
followed.
After the Transfer
Agent has deemed an order for redemption of a Fund’s shares outside the Enhanced Clearing Process received and is approved, the transfer agent will initiate procedures to transfer the requisite Redemption Securities, which are expected to be
delivered within three Business Days, and the Balancing Amount minus the Transaction Fee. In addition, with respect to Fund redemptions honored in cash, the redeeming party will receive the Cash Redemption Amount by the third Business Day following
the Transmittal Date on which such redemption order is deemed received by the Transfer Agent. Due to the schedule of holidays in certain countries, however, the receipt of the Cash Redemption Amount may take longer than three Business Days following
the Transmittal Date. In such cases, the local market settlement procedures will not commence until the end of local holiday periods.
Each Fund generally intends to
effect deliveries of Creation Units and portfolio securities on a basis of “T” plus two Business Days (
i.e.
, days on which the national securities exchange is open). A Fund may effect deliveries of
Creation Units and portfolio securities on a basis other than T plus two in order to accommodate local holiday schedules, to account for different treatment among foreign and U.S. markets of dividend record dates and ex-dividend dates or under
certain other circumstances. The ability of the Trust to effect in-kind creations and redemptions within two Business Days of receipt of an order in good form is subject, among other things, to the condition that, within the time period from the
date of the order to the date of delivery of the securities, there are no days that are holidays in the applicable foreign market. For every occurrence of one or more intervening holidays in the applicable foreign market that are not holidays
observed in the U.S. equity market, the redemption settlement cycle will be extended by the number of such intervening holidays. In addition to holidays, other unforeseeable closings in a foreign market due to emergencies may also prevent the Trust
from delivering securities within normal settlement periods. The securities delivery cycles currently practicable for transferring portfolio securities to redeeming Authorized Participants, coupled with foreign market holiday schedules, will require
a delivery process longer than seven calendar days for the international funds, in certain circumstances. The applicable holidays for certain foreign markets are listed in the table below. The proclamation of new holidays, the treatment by market
participants of certain days as “informal holidays” (
e.g.
, days on which no or limited securities transactions occur, as a result of substantially shortened trading hours), the elimination of
existing holidays or changes in local securities delivery practices could affect the information set forth herein at some time in the future.
The dates from
January 1, 2019 to December 31, 2019 in which the regular holidays affecting the relevant securities markets of the below listed countries are as follows:
Australia
|
|
Austria
|
|
Belgium
|
|
Brazil
|
|
Canada
|
|
Chile
|
|
China
|
January
1
January 28
April 19
April 22
April 25
June 10
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
May 1
June 10
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
May 1
May 30
June 10
August 15
November 1
December 24
December 25
December 26
December 31
|
|
January
1
January 25
March 4
March 5
March 6
April 19
May 1
June 20
July 9
November 15
November 20
December 25
|
|
January
1
January 2
February 18
April 19
May 20
June 24
July 1
August 5
September 2
October 14
November 11
December 25
December 26
|
|
January
1
April 19
May 1
May 21
July 16
August 15
September 18
September 19
September 20
October 31
November 1
December 25
December 31
|
|
January
1
January 21
February 4
February 5
February 6
February 7
February 8
February 18
April 5
April 19
April 22
May 1
May 13
May 27
June 7
July 1
July 4
September 2
September 13
October 1
October 2
October 3
October 4
October 7
October 14
November 11
November 28
December 25
December 26
|
Colombia
|
|
Czech
Republic
|
|
Denmark
|
|
Egypt
|
|
Finland
|
|
France
|
|
Germany
|
January
1
January 7
March 25
April 18
April 19
May 1
June 3
June 24
July 1
August 7
August 19
October 14
November 4
November 11
December 25
|
|
January
1
April 19
April 22
May 1
May 8
July 5
October 28
December 24
December 25
December 26
|
|
January
1
April 18
April 19
April 22
May 1
May 17
May 30
May 31
June 5
June 10
December 24
December 25
December 26
December 31
|
|
January
1
January 7
April 25
April 28
April 29
May 1
June 4
June 5
July 1
July 23
August 11
August 12
October 6
|
|
January
1
April 19
April 22
May 1
May 30
June 21
December 6
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
May 1
May 30
June 10
August 15
November 1
November 11
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
May 1
May 30
June 10
June 20
August 15
October 3
October 31
November 1
November 20
December 24
December 25
December 26
December 31
|
Greece
|
|
Hong
Kong
|
|
Hungary
|
|
India
|
|
Indonesia
|
|
Ireland
|
|
Israel
|
January
1
March 11
March 25
April 19
April 22
April 26
April 29
May 1
June 17
August 15
October 28
December 24
December 25
December 26
|
|
January
1
February 4
February 5
February 6
February 7
April 5
April 19
April 22
May 1
May 13
June 7
July 1
October 1
October 7
December 24
December 25
December 26
December 31
|
|
January
1
March 15
April 19
April 22
May 1
June 10
August 10
August 19
August 20
October 23
November 1
December 7
December 14
December 24
December 25
December 26
December 27
December 31
|
|
February
19
March 4
March 21
April 1
April 17
April 19
May 1
June 5
August 12
August 15
September 2
September 10
October 2
October 8
October 28
November 12
December 25
|
|
January
1
February 5
March 7
April 3
April 19
May 1
May 30
June 3
June 4
June 5
June 6
June 7
December 24
December 25
December 31
|
|
January
1
January 21
February 18
March 18
April 19
April 22
May 1
May 6
May 27
June 3
July 4
August 5
August 26
September 2
October 14
October 28
November 11
November 28
December
24
December 25
December 26
December 31
|
|
March
21
April 21
April 22
April 23
April 24
April 25
April 26
May 8
May 9
June 9
August 11
September 29
September 30
October 1
October 8
October 9
October 13
October 14
October
15
October 16
October 17
October 20
October 21
|
Italy
|
|
Japan
|
|
Korea
|
|
Malaysia
|
|
Mexico
|
|
Morocco
|
|
The
Netherlands
|
January
1
April 19
April 22
May 1
August 15
December 24
December 25
December 26
December 31
|
|
January
1
January 2
January 3
January 14
February 11
March 21
April 29
April 30
May 1
May 2
May 3
May 6
July 15
August 12
September 16
September 23
October 14
October 22
November 4
December 31
|
|
January
1
February 4
February 5
February 6
March 1
May 1
May 6
June 6
August 15
September 12
September 13
October 3
October 9
December 25
December 31
|
|
January
1
January 21
February 1
February 4
February 5
February 6
May 1
May 20
May 22
June 4
June 5
June 6
August 12
September 2
September 9
September 16
October 28
December 25
|
|
January
1
February 4
March 18
April 18
April 19
May 1
September 16
November 18
December 12
December 25
|
|
January
1
January 11
May 1
June 4
June 5
July 30
August 12
August 13
August 14
August 20
August 21
September 2
November 6
November 11
November 12
November 18
|
|
January
1
April 19
April 22
May 1
May 30
June 10
November 1
December 24
December 25
December 26
December 31
|
New
Zealand
|
|
Norway
|
|
Peru
|
|
Philippines
|
|
Poland
|
|
Portugal
|
|
Russia
|
January
1
January 2
January 21
January 28
February 6
April 19
April 22
April 25
June 3
October 28
December 25
December 26
|
|
January
1
April 17
April 18
April 19
April 22
May 1
May 17
May 30
June 10
December 24
December 25
December 26
December 31
|
|
January
1
April 18
April 19
May 1
July 29
August 30
October 8
November 1
December 25
|
|
January
1
February 5
February 25
April 9
April 18
April 19
May 1
June 12
August 21
August 26
November 1
December 24
December 25
December 30
December 31
|
|
January
1
April 19
April 22
May 1
May 3
June 20
August 15
November 1
November 11
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
April 25
May 1
June 10
June 13
June 20
August 15
November 1
December 25
December 26
|
|
January
1
January 2
January 3
January 4
January 7
January 8
March 8
May 1
May 2
May 3
May 9
May 10
June 12
November 4
|
Singapore
|
|
South
Africa
|
|
Spain
|
|
Sweden
|
|
Switzerland
|
|
Taiwan
|
|
Thailand
|
January
1
February 4
February 5
February 6
April 19
May 1
May 20
June 5
August 9
August 12
October 28
December 25
|
|
January
1
March 21
April 19
April 22
May 1
June 17
August 9
September 24
December 16
December 25
December 26
|
|
January
1
March 19
April 18
April 19
April 22
May 1
August 15
November 1
December 6
December 25
December 26
|
|
January
1
April 18
April 19
April 22
April 30
May 1
May 29
May 30
November 1
December 24
December 25
December 26
December 31
|
|
January
1
January 2
April 8
April 19
April 22
May 1
May 30
June 10
August 1
September 9
December 24
December 25
December 26
December 31
|
|
January
1
January 31
February 1
February 4
February 5
February 6
February 7
February 8
February 28
March 1
April 4
April 5
May 1
June 7
September 13
October 10
October 11
|
|
January
1
February 19
April 8
April 15
April 16
May 1
May 20
July 16
July 29
August 12
October 14
October 23
December 5
December 10
December 31
|
Turkey
|
|
United
Kingdom
|
January
1
April 23
May 1
June 3
June 4
June 5
June 6
July 15
August 12
August 13
August 14
August 30
October 28
October 29
|
|
January
1
January 21
February 18
April 19
April 22
May 1
May 6
May 27
July 4
August 26
September 2
October 14
November 11
November 28
December 24
December 25
December 26
December 31
|
The longest redemption cycle for a Fund
is a function of the redemption cycles of the countries whose stocks are held by the Fund.
Transaction fees are imposed as
set forth in the table in the Prospectus. Transaction Fees payable to the Trust are imposed to compensate the Trust for the transfer and other transaction costs of a Fund associated with the issuance and redemption of Creation Units of Shares. There
is a fixed and a variable component to the total Transaction Fee. A fixed Transaction Fee is applicable to each creation or redemption transaction, regardless of the number of Creation Units purchased or redeemed. In addition, a variable Transaction
Fee based upon the value of each Creation Unit also is applicable to each redemption transaction. The Transaction Fee applicable to the redemption of Creation Units will not exceed 2% of the value of the redemption proceeds.
Purchasers of Creation Units of a
Fund for cash may be required to pay an additional charge to compensate the Fund for brokerage and market impact expenses relating to investing in portfolios securities. Where the Trust permits an in-kind purchaser to substitute cash in lieu of
depositing a portion of the Deposit Securities, the purchaser may be assessed an additional charge for cash purchases.
Purchasers of Shares in Creation
Units are responsible for the costs of transferring the securities constituting the Deposit Securities to the account of the Trust. Investors will also bear the costs of transferring securities from a Fund to their account or on their order.
Investors who use the services of a broker or other such intermediary may be charged a fee for such services. In addition, Rafferty may, from time to time, at its own expense, compensate purchasers of Creation Units who have purchased substantial
amounts of Creation Units and other financial institutions for administrative or marketing services.
The method by which Creation
Units of Shares are created and traded may raise certain issues under applicable securities laws. Because new Creation Units of Shares are issued and sold by the Trust on an ongoing basis, at any point a “distribution,” as such term is
used in the Securities Act, may occur. Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants in a distribution in a manner which could render
them statutory underwriters and subject them to the prospectus delivery and liability provisions of the Securities Act. For example, a broker-dealer firm or its client may be deemed a statutory underwriter if it takes Creation Units after placing an
order with the Distributor, breaks them down into constituent Shares, and sells some or all of the Shares comprising such Creation Units directly to its customers; or if it chooses to couple the creation of a supply of new Shares with an active
selling effort involving solicitation of secondary market demand for Shares. A determination of whether a person is an underwriter for the purposes of the Securities Act depends upon all the facts and circumstances pertaining to that person’s
activities. Thus, the examples mentioned above should not be considered a complete description of all the activities that could lead to a categorization as an underwriter. Broker-dealer firms should also note that dealers who are effecting
transactions in Shares, whether or not participating in the distribution of Shares, are generally required to deliver a prospectus. This is because the prospectus delivery exemption in Section 4(3) of the Securities Act is not available in respect
of such transactions as a result of Section 24(d) of the 1940 Act. Broker-dealer firms should note that dealers who are not “underwriters” but are participating in a distribution (as contrasted to ordinary secondary market transaction),
and thus dealing with Shares that are part of an “unsold allotment” within the meaning of section 4(3)(C) of the Securities Act, would be unable to take advantage of the prospectus delivery exemption provided by section 4(3) of the
Securities Act. Firms that incur a prospectus-delivery obligation with respect to Shares are reminded that under Securities Act Rule 153 a prospectus delivery obligation under Section 5(b)(2) of the Securities Act owed to a national securities
exchange member in connection with a sale on the national securities exchange is satisfied by the fact that the Fund’s prospectus is available at the national securities exchange on which the Shares of such Fund trade upon request. The
prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions on a national securities exchange and not with respect to “upstairs” transactions.
Dividends, Other Distributions and Taxes
The Tax Cuts and
Jobs Act (the “Tax Act”) makes significant changes to the U.S. Federal income tax rules for taxation of individuals and corporations, generally effective for taxable years beginning after December 31, 2017. Many of the changes applicable
to individuals are not permanent and only apply to taxable years beginning after December 31, 2017 and before January 1, 2026. While there are minor changes to the RIC rules, the Tax Act makes changes to the tax rules affecting shareholders and each
Fund, including various investments that each Fund may make. Potential investors are urged to consult their own tax advisors for more detailed information.
Dividends and other Distributions
As stated in the Prospectus, each
Fund declares and distributes dividends to its shareholders from its net investment income at least annually; for these purposes, net investment income includes dividends, accrued interest, and accretion of OID and market discount, less amortization
of market premium and estimated expenses, and is calculated immediately prior to the determination of a Fund’s NAV per share. Each Fund also distributes the excess of its net short-term capital gain over net long-term capital loss
(“short-term gain”), if any, annually but may make more frequent distributions thereof if necessary to avoid federal income or excise taxes. Each Fund may realize net capital gain (
i.e.
, the excess
of net long-term capital gain over net short-term capital loss) and thus anticipates making annual distributions thereof. The Trustees may revise this distribution policy, or postpone the payment of distributions, if a Fund has or anticipates any
large unexpected expense, loss or fluctuation in net assets that, in the Trustees’ opinion, might have a significant adverse effect on its shareholders.
Investors should be aware that if
shares are purchased shortly before the record date for any dividend or capital gain distribution, the shareholder will pay full price for the shares and receive some portion of the purchase price back as a taxable distribution (with the tax
consequences described in the Prospectus).
Taxes
Regulated Investment Company Status
. Each Fund is treated as a separate entity for federal tax purposes and intends to continue to qualify for treatment as a RIC. If a Fund
so qualifies and satisfies the Distribution Requirement (defined below) for a taxable year, it will not be subject to federal income tax on the part of its investment company taxable income (generally consisting of net investment income, short-term
gain, and net gains and losses from certain foreign currency transactions, all determined without regard to any deduction for dividends paid) and net capital gain it distributes to its shareholders for that year.
To qualify for treatment as a RIC, a
Fund must distribute to its shareholders for each taxable year at least the sum of 90% of its investment company taxable income (“Distribution Requirement”) and 90% of its net exempt interest income and
must meet several
additional requirements. For each Fund, these requirements include the following: (1) the Fund must derive at least 90% of its gross income each taxable year from the following sources (collectively, “Qualifying Income”): (a) dividends,
interest, payments with respect to certain securities loans, and gains from the sale or other disposition of securities or foreign currencies, or other income (including gains from options, futures, or forward contracts) derived with respect to its
business of investing in securities or those currencies, and (b) net income from an interest in a “qualified publicly traded partnership” (“QPTP”) (“Income Requirement”); and (2) at the close of each quarter of
the Fund’s taxable year, (a) at least 50% of the value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with those other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the value of the Fund’s total assets and that does not represent more than 10% of the issuer’s outstanding voting securities (equity securities of QPTPs being considered voting
securities for these purposes), and (b) not more than 25% of the value of its total assets may be invested in (i) securities (other than U.S. government securities or the securities of other RICs) of any one issuer, (ii) securities (other than
securities of other RICs) of two or more issuers the Fund controls that are determined to be engaged in the same, similar or related trades or businesses, or (iii) securities of one or more QPTPs (collectively, “Diversification
Requirements”). The Internal Revenue Service (“Service”) has ruled that income from a derivative contract on a commodity index generally is not Qualifying Income.
Although each Fund intends to
continue to satisfy all the foregoing requirements, there is no assurance that a Fund will be able to do so. The investment by a Fund primarily in options and futures positions entails some risk that it might fail to satisfy one or both of the
Diversification Requirements. There is some uncertainty regarding the valuation of such positions for purposes of those requirements; accordingly, it is possible that the method of valuation a Fund uses, pursuant to which each of them would expect
to be treated as satisfying the Diversification Requirements, would not be accepted in an audit by the Service, which might apply a different method resulting in disqualification of one or more funds.
If a Fund failed to qualify for
treatment as a RIC for any taxable year, (1) its taxable income, including net capital gain, would be taxed at corporate income tax rates (up to 21%), (2) it would not receive a deduction for the distributions it makes to its shareholders, and (3)
the shareholders would treat all those distributions, including distributions of net capital gain, as dividends (that is, ordinary income, except for the part of those dividends that is “qualified dividend income” (described in the
Prospectus) (“QDI”)) if certain holding period and other requirements are met) to the extent of the Fund’s earnings and profits; those dividends would be eligible for the dividends-received deduction available to corporations under
certain circumstances. In addition, the Fund would be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying for RIC treatment. However, the Regulated Investment Company
Modernization Act of 2010 (“RIC Mod Act”) provides certain savings provisions that enable a RIC to cure a failure to satisfy any of the Income and Diversification Requirements as long as the failure “is due to reasonable cause and
not due to willful neglect” and the RIC pays a deductible tax calculated in accordance with those provisions and meets certain other requirements.
Excise Tax
. Each Fund will be subject to a nondeductible 4% excise tax (“Excise Tax”) to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net income for the one-year period ending on October 31 of that year, plus certain other amounts.
Income from Foreign Securities
. Dividends and interest a Fund receives, and gains it realizes, on foreign securities may be subject to income, withholding, or other taxes
imposed by foreign countries and U.S. possessions that would reduce the yield and/or total return on its securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by foreign investors.
Gains or losses (1) from the
disposition of foreign currencies, including forward currency contracts, (2) on the disposition of each foreign-currency-denominated debt security that are attributable to fluctuations in the value of the foreign currency between the dates of
acquisition and disposition of the security, and (3) that are attributable to fluctuations in exchange rates that occur between the time a Fund accrues dividends, interest, or other receivables, or expenses or other liabilities, denominated in a
foreign currency and the time the Fund actually collects the receivables or pays the liabilities, generally will be treated as ordinary income or loss. These gains or losses will increase or decrease the amount of a Fund’s investment company
taxable income to be distributed to its shareholders.
Each Fund may invest in the stock of
“passive foreign investment companies” (“PFICs”). A PFIC is any foreign corporation (with certain exceptions) that, in general, meets either of the following tests for a taxable year: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held for the production of, passive income. Under certain circumstances, a Fund will be subject to federal income tax on a portion of any “excess distribution” it
receives on the stock of a PFIC or of any gain on its disposition of the stock (collectively, “PFIC income”), plus interest thereon, even if the Fund distributes the PFIC income as a dividend to its shareholders. The balance of the PFIC
income will be included in the Fund’s investment company taxable income and, accordingly, will not be taxable to it to the extent it distributes that income to its shareholders. Fund distributions thereof will not be eligible for the maximum
federal income tax rates applicable to QDI.
If a Fund invests in a PFIC and
elects to treat the PFIC as a “qualified electing fund” (“QEF”), then, in lieu of the foregoing tax and interest obligation, the Fund would be required to include in income each taxable year its pro rata share of the
QEF’s annual ordinary earnings and net capital gain -- which the Fund probably would have to distribute to satisfy the Distribution Requirement and avoid imposition of the Excise Tax -- even if the Fund did not receive those earnings and gain
from the QEF. In most instances it will be very difficult, if not impossible, to make this election because of certain requirements thereof.
Each Fund may elect to “mark to
market” its stock in any PFIC. “Marking-to-market,” in this context, means including in gross income each taxable year (and treating as ordinary income) the excess, if any, of the fair market value of the PFIC’s stock over a
Fund’s adjusted basis therein as of the end of that year. Pursuant to the election, a Fund also would be allowed to deduct (as an ordinary, not a capital, loss) the excess, if any, of its adjusted basis in PFIC stock over the fair market value
thereof as of the taxable year-end, but only to the extent of any net mark-to-market gains with respect to that stock the Fund included in income for prior taxable years under the election. A Fund’s adjusted basis in each PFIC’s stock
with respect to which it makes this election would be adjusted to reflect the amounts of income included and deductions taken thereunder.
Derivatives Strategies
. The use of derivatives strategies, such as writing (selling) and purchasing options and futures contracts and entering into forward contracts,
involves complex rules that will determine for income tax purposes the amount, character, and timing of recognition of the gains and losses a Fund realizes in connection therewith. Gains from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and gains from options, futures, and forward contracts a Fund derives with respect to its business of investing in securities or foreign currencies, will be treated as Qualifying Income.
Each Fund will monitor its transactions, make appropriate tax elections, and make appropriate entries in its books and records when it acquires any foreign currency, option, futures contract, forward contract, or hedged investment to mitigate the
effect of these rules, seek to prevent its disqualification as a RIC, and minimize the imposition of federal income and excise taxes.
Some futures contracts, foreign
currency contracts that are traded in the interbank market, and “nonequity” options (
i.e.
, certain listed options, such as those on a “broad-based” securities index)
—
except any “securities futures contract” that is not a “dealer securities futures contract” (both as defined in the Code) and any interest rate
swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement
—
in
which a Fund invests may be subject to Code section 1256 (collectively “section 1256 contracts”). Section 1256 contracts that a Fund holds at the end of its taxable year must be “marked to market” (that is, treated as having
been sold at that time for their fair market value) for federal income tax purposes, with the result that unrealized gains or losses will be treated as though they were realized. Sixty percent of any net gain or loss recognized on these deemed
sales, and 60% of any net realized gain or loss from any actual sales of section 1256 contracts, will be treated as long-term capital gain or loss, and the balance will be treated as short-term capital gain or loss. These rules may operate to
increase the amount that a Fund must distribute to satisfy the Distribution Requirement (
i.e.
, with respect to the portion treated as short-term capital gain), which will be taxable to its shareholders as
ordinary income when distributed to them, and to increase the net capital gain a Fund recognizes, without in either case increasing the cash available to it. A Fund may elect not to have the foregoing rules apply to any “mixed straddle”
(that is, a straddle, which the Fund clearly identifies in accordance with applicable regulations, at least one (but not all) of the positions of which are section 1256 contracts), although doing so may have the effect of increasing the relative
proportion of short-term capital gain (taxable as ordinary income) and thus increasing the amount of dividends it must distribute. Section 1256 contracts also may be marked-to-market for purposes of the Excise Tax.
Code section 1092
(dealing with straddles) also may affect the taxation of options, futures, and forward contracts in which a Fund may invest. That section defines a “straddle” as offsetting positions with respect to actively traded personal property; for
these purposes, options, futures, and forward contracts are positions in personal property. Under that section, any loss from the disposition of a position in a straddle may be deducted only to the extent the loss exceeds the unrecognized gain on
the offsetting position(s) of the straddle. In addition, these rules may postpone the recognition of loss that otherwise would be recognized under the mark-to-market rules discussed above. The regulations under section 1092 also provide certain
“wash sale” rules, which apply to transactions where a position is sold at a loss and a new offsetting position is acquired within a prescribed period, and “short sale” rules applicable to straddles. If a Fund makes certain
elections, the amount, character, and timing of recognition of gains and losses from the affected straddle positions would be determined under rules that vary according to the elections made. Because only a few of the regulations implementing the
straddle rules have been promulgated, the tax consequences to a Fund of straddle transactions are not entirely clear.
If a call option written by a Fund
lapses (
i.e.
, terminates without being exercised), the amount of the premium it received for the option will be short-term capital gain. If a Fund enters into a closing purchase transaction with respect to a
written call option, it will have a short-term capital gain or loss based on the difference between the premium it received for the option it wrote and the premium it pays for the option it buys. If such an option is exercised and a Fund thus sells
the securities or futures contract subject to the option, the premium the Fund received will be added to the exercise price to determine the gain or loss on the sale. If a call option purchased by a Fund lapses, it will realize short-term or
long-term capital loss, depending on its holding period for the option. If a Fund exercises a purchased call option, the premium it paid for the option will be added to the basis in the subject securities or futures contract.
If a Fund has an “appreciated
financial position” - generally, an interest (including an interest through an option, futures, or forward contract or short sale) with respect to any stock, debt instrument (other than “straight debt”), or partnership interest the
fair market value of which exceeds its adjusted basis - and enters into a “constructive sale” of the position, the Fund will be treated as having made an actual sale thereof, with the result that it will recognize gain at that time. A
constructive sale generally consists of a short sale, an offsetting notional principal contract, or a futures or forward contract a Fund or a related person enters into with respect to the same or substantially identical property. In addition, if
the appreciated financial position is itself a short sale or such a contract, acquisition of the underlying property or substantially identical property will be deemed a constructive sale. The foregoing will not apply, however, to a Fund’s
transaction during any taxable year that otherwise would be treated as a constructive sale if the transaction is closed within 30 days after the end of that year and the Fund holds the appreciated financial position unhedged for 60 days after that
closing (
i.e.
, at no time during that 60-day period is the Fund’s risk of loss regarding that position reduced by reason of certain specified transactions with respect to substantially identical or
related property, such as having an option to sell, being contractually obligated to sell, making a short sale, or granting an option to buy substantially identical stock or securities).
Income from Zero-Coupon and Payment-in-Kind Securities
. A Fund may acquire zero-coupon or other securities (such as strips) issued with OID. As a holder of those securities,
a Fund must include in its gross income the OID that accrues on the securities during the taxable year, even if it receives no corresponding payment on them during the year. Similarly, a Fund must include in its gross income securities it receives
as “interest” on payment-in-kind securities. With respect to “market discount bonds” (
i.e.
, bonds purchased at a price less than their issue price plus the portion of OID previously
accrued thereon), a Fund may elect to accrue and include in income each taxable year a portion of the bonds’ market discount. Because each Fund annually must distribute substantially all of its investment company taxable income, including any
accrued OID and other non-cash income, to satisfy the Distribution Requirement and avoid imposition of the Excise Tax, a Fund may be required in a particular year to distribute as a dividend an amount that is greater than the total amount of cash it
actually receives. Those distributions will be made from a Fund’s cash assets or from the proceeds of sales of portfolio securities, if necessary. A Fund may realize capital gains or losses from those sales, which would increase or decrease
its investment company taxable income and/or net capital gain.
Income from REITs
. A Fund may invest in REITs that (1) hold residual interests in real estate mortgage investment conduits (“REMICs”) or (2) engage in mortgage
securitization transactions that cause the REITs to be taxable mortgage pools (“TMPs”) or have a qualified REIT subsidiary that is a TMP. A portion of the net income allocable to REMIC residual interest holders may be an “excess
inclusion.” The Code authorizes the issuance of regulations dealing with the taxation and reporting of excess inclusion income of REITs and RICs that hold residual REMIC interests and of REITs, or qualified REIT subsidiaries that are TMPs.
Although those regulations have not yet been issued, the U.S. Treasury Department and the Service issued a notice in 2006 (“Notice”) announcing that, pending the issuance of further guidance, the Service would apply the principles in the
following paragraphs to all excess inclusion income, whether from REMIC residual interests or TMPs.
The Notice provides that a REIT must
(1) determine whether it or its qualified REIT subsidiary (or a part of either) is a TMP and, if so, calculate the TMP’s excess inclusion income under a “reasonable method,” (2) allocate its excess inclusion income to its
shareholders generally in proportion to dividends paid, (3) inform shareholders that are not “disqualified organizations” (
i.e.
, governmental units and tax-exempt entities that are not subject to
the unrelated business income tax) of the amount and character of the excess inclusion income allocated thereto, (4) pay tax (at the highest federal income tax rate imposed on corporations) on the excess inclusion income allocable to its
shareholders that are disqualified organizations, and (5) apply the withholding tax provisions with respect to the excess inclusion part of dividends paid to foreign persons without regard to any treaty exception or reduction in tax rate. Excess
inclusion income allocated to certain tax-exempt entities (including qualified retirement plans, individual retirement accounts, and public charities) constitutes unrelated business taxable income to them.
A RIC with excess inclusion income is
subject to rules identical to those in clauses (2) through (5) (substituting “who are nominees” for “that are not ‘disqualified organizations’” in clause (3) and inserting “record” after
“its” in clause (4)). The Notice further provides that a RIC is not required to report the amount and character of the excess inclusion income allocated to its shareholders that are not nominees, except that (1) a RIC with excess
inclusion income from all sources that exceeds 1% of its gross income must do so and (2) any other RIC must do so by taking into account only excess inclusion income allocated to the RIC from a REIT the excess inclusion income of which exceeded 3%
of the REIT’s dividends. A Fund will not invest directly in REMIC residual interests, and does not intend to invest in REITs that, to its knowledge, invest in those interests or are TMPs or have a qualified REIT subsidiary that is a TMP.
Each Fund may
invest in REITs. REIT dividends and capital gain distributions are generally effective for taxable years beginning after December 31, 2017, the Code generally allows individuals and certain other non-corporate entities a deduction for 20% of (1)
qualified REIT dividends and (2) qualified publicly traded partnership income. Recently issued proposed regulations allow a RIC to pass the character of its qualified REIT dividends through to its shareholders provided certain holding period
requirements are met. As a result, an investor who invests directly in REITs will be able to receive the benefit of such deductions, while a shareholder in a Fund that invests in REITs will not.
Taxation
of Shareholders
.
Basis Election and Reporting
. A shareholder’s basis in Shares of a Fund that he or she acquires after December 31, 2011 (“Covered Shares”), will be determined in accordance with the Fund’s default method, which is average
basis, unless the shareholder affirmatively elects in writing (which may be electronic) to use a different acceptable basis determination method, such as a specific identification method. The basis determination method a Fund shareholder elects (or
the default method) may not be changed with respect to a redemption of Covered Shares after the settlement date of the redemption.
In addition to the requirement to
report the gross proceeds from redemptions of shares, each Fund (or its administrative agent) must report to the Service and furnish to its shareholders the basis information for Covered Shares and indicate whether they had a short-term (one year or
less) or long-term (more than one year) holding period. Fund shareholders should consult with their tax advisers to decide the best Service-accepted basis determination method for their tax situation and to obtain more information about how the
basis reporting law applies to them.
Foreign Account
Tax Compliance Act (“FATCA”)
. As mentioned in the Prospectus, under FATCA “foreign financial institutions” (“FFIs”) or “non-financial foreign entities”
(“NFFEs”) that are Fund shareholders may be subject to a generally nonrefundable 30% withholding tax on income dividends. That withholding tax generally can be avoided, however, as discussed below.
An FFI can avoid FATCA withholding by
becoming a “participating FFI,” which requires the FFI to enter into a tax compliance agreement with the Service. Under such an agreement, a participating FFI agrees to (1) verify and document whether it has U.S. accountholders, (2)
report certain information regarding their accounts to the Service, and (3) meet certain other specified requirements.
The U.S. Treasury has negotiated
intergovernmental agreements (“IGAs”) with certain countries and is in various stages of negotiations with other foreign countries with respect to one or more alternative approaches to implement FATCA; entities in those countries may be
required to comply with the terms of the IGA instead of Treasury regulations. An FFI resident in a country that has entered into a Model I IGA with the United States must report to that country’s government (pursuant to the terms of the
applicable IGA and applicable law), which will, in turn, report to the Service. An FFI resident in a Model II IGA country generally must comply with U.S. regulatory requirements, with certain exceptions, including the treatment of recalcitrant
accountholders. An FFI resident in one of those countries that complies with whichever of the foregoing applies will be exempt from FATCA withholding.
An NFFE that is the beneficial owner
of a payment from a Fund can avoid FATCA withholding generally by certifying its status as such and, in certain circumstances that it does not have any substantial U.S. owners or by providing the name, address, and taxpayer identification number of
each such owner. The NFFE will report to the Fund or other applicable withholding agent, which will, in turn, report information to the Service.
Those non-U.S. shareholders also may
fall into certain exempt, excepted, or deemed compliant categories established by Treasury regulations, IGAs, and other guidance regarding FATCA. An FFI or NFFE that invests in a Fund will need to provide the Fund with documentation properly
certifying the entity’s status under FATCA to avoid FATCA withholding. The requirements imposed by FATCA are different from, and in addition to, the tax certification rules to avoid backup withholding described above. Foreign investors are
urged to consult their tax advisers regarding the application of these requirements to their own situation and the impact thereof on their investment in a Fund.
* * * * *
The foregoing is only a general
summary of some of the important federal tax considerations generally affecting the Funds. No attempt is made to present a complete explanation of the federal tax treatment of the Funds’ activities, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors are urged to consult their own tax advisers for more detailed information and for information regarding any state, local, or foreign taxes applicable to a Fund and to
distributions therefrom.
Capital Loss Carryforwards
. As of October 31, 2018, the Funds had capital loss carryforwards available to offset future capital gains in the respective amounts, through the
year indicated below:
|
Utilized
in
Current Year
|
Expiring
October 31, 2019
|
Unlimited
Short-Term
|
Unlimited
Long-Term
|
Funds
|
|
|
|
|
Direxion
All Cap Insider Sentiment Shares
|
$—
|
$—
|
$—
|
$—
|
Direxion
NASDAQ-100
®
Equal Weighted Index Shares
|
$1,057,880
|
$—
|
$—
|
$2,298,241
|
For federal income tax purposes, a
Fund is generally permitted to carry forward a net capital loss in any year to offset net capital gains, if any, during its taxable years following the year of the loss. The carryforward of capital losses realized in taxable years beginning prior to
December 23, 2010, however, is limited to an eight-year period following the year of realization. Thereafter, capital losses carried forward will retain their character as either short-term or long-term capital losses rather than being considered
all short-term as under previous law. A Fund must use losses that do not expire before it uses losses that do expire and a Fund’s ability to utilize capital losses in a given year or in total may be limited. To the
extent subsequent net capital gains are offset by such
losses, they would not result in federal income tax liability to a Fund and as noted above, would not be distributed as such to shareholders.
The Funds' financial
statements for the fiscal year ended October 31, 2018, are incorporated herein by reference from the Funds' Annual Report to Shareholders dated October 31, 2018.
To receive a copy of the Prospectus or
Annual or Semi-Annual Report to shareholders, without charge, write to or call the Trust at the contact information listed below:
Write
to:
|
Direxion
Shares ETF Trust
1301 Avenue of the Americas (6th Avenue), 28th Floor
New York, New York 10019
|
Call:
|
866-476-7523
|
By
Internet:
|
www.direxioninvestments.com
|
APPENDIX A
Description of Corporate Bond Ratings
Moody’s
Investors Service and S&P Global Ratings are two prominent independent rating agencies that rate the quality of bonds. Following are expanded explanations of the ratings shown in the Prospectus and this SAI.
Moody’s Investors Service
–
Global Long-Term Ratings
Ratings assigned
on Moody’s global long-term rating scale are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and
public sector entities. Long-term ratings are assigned to issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a default or impairment on contractual financial obligations and the expected
financial loss suffered in the event of default or impairment. Such ratings have been published by Moody’s Investors Service, Inc. and Moody’s Analytics Inc.
Aaa
:
Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
Aa
:
Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A
:
Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
Baa
:
Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.
Ba
:
Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
B
:
Obligations rated B are considered speculative and are subject to high credit risk.
Caa
:
Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
Ca
:
Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C
:
Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody’s appends numerical
modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of that generic rating category. Additionally, a “(hyb)” indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms.*
* By their terms, hybrid securities
allow for the omission of scheduled dividends, interest, or principal payments, which can potentially result in impairment if such an omission occurs. Hybrid securities may also be subject to contractually allowable write-downs of principal that
could result in impairment. Together with the hybrid indicator, the long-term obligation rating assigned to a hybrid security is an expression of the relative credit risk associated with that security.
Moody’s Investors Service
–
National Scale Long-Term Ratings
Moody’ s long-term National
Scale Ratings (NSRs) are opinions of the relative creditworthiness of issuers and financial obligations within a particular country. NSRs are not designed to be compared among countries; rather, they address relative credit risk within a given
country. Moody’s assigns national scale ratings in certain local capital markets in which investors have found the global rating scale provides inadequate differentiation among credits or is inconsistent with a rating scale already in common
use in the country. In each specific country, the last two characters of the rating indicate the country in which the issuer is located (
e.g.
, Aaa.br for Brazil).
Aaa.n
:
Issuers or issues rated Aaa.n demonstrate the strongest creditworthiness relative to other domestic issuers.
Aa.n
:
Issuers or issues rated Aa.n demonstrate very strong creditworthiness relative to other domestic issuers.
A.n
:
Issuers or issues rated A.n present above-average creditworthiness relative to other domestic issuers.
Baa.n
:
Issuers or issues rated Baa.n represent average creditworthiness relative to other domestic issuers.
Ba.n
:
Issuers or issues rated Ba.n demonstrate below-average creditworthiness relative to other domestic issuers.
B.n
:
Issuers or issues rated B.n demonstrate weak creditworthiness relative to other domestic issuers.
Caa.n
:
Issuers or issues rated Caa.n demonstrate very weak creditworthiness relative to other domestic issuers.
Ca.n
:
Issuers or issues rated Ca.n demonstrate extremely weak creditworthiness relative to other domestic issuers.
C.n
:
Issuers or issues rated C.n demonstrate the weakest creditworthiness relative to other domestic issuers.
Note: Moody’s appends numerical
modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of that generic rating category. National scale long-term ratings of D.ar and E.ar may also be applied to Argentine obligations.
S&P Global Ratings
–
Long-Term Issue Credit Ratings*
An S&P Global Ratings issue
credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note
programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The
opinion reflects S&P Global Ratings' view of the obligor's capacity and willingness to meet its financial commitments as they come due, and this opinion may assess terms, such as collateral security and subordination, which could affect ultimate
payment in the event of default. Issue credit ratings can be either long-term or short-term. Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. Short-term ratings are also used to indicate
the creditworthiness of an obligor with respect to put features on long-term obligations. Medium-term notes are assigned long-term ratings.
Issue credit ratings are based, in
varying degrees, on S&P Global Ratings' analysis of the following considerations:
•
|
The likelihood of
payment--the capacity and willingness of the obligor to meet its financial commitments on an obligation in accordance with the terms of the obligation;
|
•
|
The nature and provisions
of the financial obligation, and the promise we impute; and
|
•
|
The
protection afforded by, and relative position of, the financial obligation in the event of a bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
|
Issue ratings are an assessment of
default risk, but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above.
(Such differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)
AAA
: An obligation rated 'AAA' has the highest rating assigned by S&P Global Ratings. The obligor's capacity to meet its financial commitments on the obligation is extremely strong.
AA
: An
obligation rated 'AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitments on the obligation is very strong.
A
: An
obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitments on the
obligation is still strong.
BBB
: An
obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments on the obligation.
BB; B; CCC; CC; and C
: Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposure to adverse conditions.
BB
:
An obligation rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to the obligor's inadequate
capacity to meet its financial commitments on the obligation.
B
: An
obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitments on the obligation. Adverse business, financial, or economic conditions will likely impair
the obligor's capacity or willingness to meet its financial commitments on the obligation.
CCC
:
An obligation rated 'CCC' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation. In the event of adverse business,
financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitments on the obligation.
CC
: An
obligation rated 'CC' is currently highly vulnerable to nonpayment. The 'CC' rating is used when a default has not yet occurred, but S&P Global Ratings expects default to be a virtual certainty, regardless of the anticipated time to
default.
C
: An obligation rated 'C' is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared with obligations that are rated
higher.
D
: An obligation rated 'D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the 'D' rating category is used when payments on an obligation are not made on the date due, unless S&P
Global Ratings believes that such payments will be made within five business days in the absence of a stated grace period or within the earlier of the stated grace period or 30 calendar days. The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligation's rating is lowered to 'D' if it is subject to a distressed exchange
offer.
NR
: This
indicates that no rating has been requested, or that there is insufficient information on which to base a rating, or that S&P Global Ratings does not rate a particular obligation as a matter of policy.
*The ratings from 'AA' to 'CCC' may be
modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
Moody’s Investors Service
–
Short Term Obligation Ratings
The Municipal Investment Grade (MIG)
scale is used to rate US municipal bond anticipation notes of up to three years maturity. Municipal notes rated on the MIG scale may be secured by either pledged revenues or proceeds of a take-out financing received prior to note maturity. MIG
ratings expire at the maturity of the obligation, and the issuer’s long-term rating is only one consideration in assigning the MIG rating. MIG ratings are divided into three levels
—
MIG 1 through MIG 3
—
while speculative grade short-term obligations are designated SG.
MIG 1
:
This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
MIG 2
:
This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
MIG 3
:
This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.
SG
: This
designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
S&P Global Ratings
–
Municipal Short-Term Note Ratings
An S&P Global
Ratings U.S. municipal note rating reflects S&P Global Ratings opinion about the liquidity factors and market access risks unique to the notes. Notes due in three years or less will likely receive a note rating. Notes with an original maturity
of more than three years will most likely receive a long-term debt rating. In determining which type of rating, if any, to assign, S&P Global Ratings analysis will review the following considerations:
•
|
Amortization
schedule--the larger the final maturity relative to other maturities, the more likely it will be treated as a note; and
|
•
|
Source
of payment--the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
|
SP-1
:
Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.
SP-2
:
Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
SP-3
:
Speculative capacity to pay principal and interest.
Moody’s Investors Service
–
Global Short Term Rating Scale
Ratings assigned
on Moody’s global short-term rating scale are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and
public sector entities. Short-term ratings are assigned to obligations with an original maturity of thirteen months or less and reflect both on the likelihood of a default or impairment on contractual financial obligations and the expected financial
loss suffered in the event of default or impairment.
P-1
:
Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
P-2
:
Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
P-3
:
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
NP
:
Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
S&P Global Ratings
–
Short-Term Issue Credit Ratings
A-1
:
A short-term obligation rated 'A-1' is rated in the highest category by S&P Global Ratings. The obligor's capacity to meet its financial commitments on the obligation is strong. Within this category, certain obligations are designated with a
plus sign (+). This indicates that the obligor's capacity to meet its financial commitments on these obligations is extremely strong.
A-2
:
A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial
commitments on the obligation is satisfactory.
A-3
: A
short-term obligation rated 'A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments on the
obligation.
B
: A
short-term obligation rated 'B' is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties that could lead to the
obligor's inadequate capacity to meet its financial commitments.
C
: A
short-term obligation rated 'C' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation.
D
: A
short-term obligation rated 'D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the 'D' rating category is used when payments on an obligation are not made on the date due, unless S&P Global Ratings believes
that such payments will be made within any stated grace period. However, any stated grace period longer than five business days will be treated as five business days. The 'D' rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action and where default on an obligation is a virtual certainty, for example, due to automatic stay provisions. An obligation’s rating is lowered to ‘D’ if it is subject to a distressed exchange
offer.
Dual ratings may
be assigned to debt issues that have a put option or demand feature. The first component of the rating addresses the likelihood of repayment of principal and interest as due, and the second component of the rating addresses only the demand feature.
The first component of the rating can relate to either a short-term or long-term transaction and accordingly use either short-term or long-term rating symbols. The second component of the rating relates to the put option and is assigned a short-term
rating symbol (for example, 'AAA/A-1+' or 'A-1+/A-1'). With U.S. municipal short-term demand debt, the U.S. municipal short-term note rating symbols are used for the first component of the rating (for example, 'SP-1+/A-1+').
Direxion Shares ETF Trust
1301
Avenue of the Americas (6th Avenue), 28th Floor
|
New York,
New York 10019
|
866-476-7523
|
www.direxioninvestments.com
Direxion Zacks MLP High Income Index Shares (ZMLP)
February 28, 2019
The shares offered in this prospectus (the “Fund”)
are listed and traded on the NYSE Arca, Inc.
There is no
assurance that the Fund will achieve its investment objective and an investment in the Fund could lose money. No single Fund is a complete investment program.
IMPORTANT NOTE: Beginning on January 1, 2021, as permitted
by regulations adopted by the Securities and Exchange Commission, paper copies of the Fund’s annual and semi-annual shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the shareholder reports
from your financial intermediary, such as a broker-dealer or bank. Instead, annual and semi-annual shareholder reports will be available on a website, and you will be notified by mail each time a report is posted and provided with a website link to
access the report.
You may elect to receive all future
annual and semi-annual shareholder reports in paper free of charge. To elect to continue to receive paper copies of shareholder reports through the mail or to otherwise change your delivery method, contact your financial intermediary or follow the
instructions included with this disclosure. Your election to receive shareholder reports in paper will apply to all funds that you hold through the financial intermediary. If you already elected to receive shareholder reports electronically, you
will not be affected by this change and you need not take any action.
These securities have not been approved or disapproved by
the U.S. Securities and Exchange Commission (“SEC”) or the U.S. Commodity Futures Trading Commission (“CFTC”), nor have the SEC or CFTC passed upon the adequacy of this Prospectus. Any representation to the contrary is a
criminal offense.
Direxion Zacks
MLP High Income Index Shares
Investment Objective
The Direxion Zacks
MLP High Income Index Shares (the “Fund”) seeks investment results, before fees and expenses, that track the price and yield performance of the Zacks MLP High Income Index (the “Index”).
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.50%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.26%
|
Total
Annual Fund Operating Expenses
|
0.76%
|
Expense
Cap/Reimbursement
(2)
|
-0.11%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.65%
|
(1)
|
The Fund is classified for
federal income tax purposes as a taxable regular corporation or so-called Subchapter ‘‘C’’ corporation. As a ‘‘C’’ corporation, the Fund accrues deferred tax liability for its future tax liability
associated with the capital appreciation of its investments and the distributions received by the Fund on equity securities of master limited partnerships considered to be a return of capital and for any net operating gains. The Fund’s accrued
deferred tax liability, if any, is reflected each day in the Fund’s net asset value per share. The deferred income tax expense/(benefit) represents an estimate of the Fund’s potential tax expense/(benefit) if it were to recognize the
unrealized gains/(losses) in the portfolio. An estimate of deferred income tax expense/(benefit) is dependent upon the Fund’s net investment income/(loss) and realized and unrealized gains/(losses) on investments and such expenses may vary
greatly from year to year and from day to day depending on the nature of the Fund’s investments, the performance of those investments and general market conditions. Therefore, any estimate of deferred income tax expense/(benefit) cannot be
reliably predicted from year to year. For the fiscal year ended October 31, 2018, the Fund had net operating losses of $1,629,152 and accrued $138,810 in current income tax benefit primarily related to refunds of federal and state taxes which were
paid in prior fiscal years.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.65% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$66
|
$232
|
$412
|
$932
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 115% of the average
value of its portfolio.
Principal Investment Strategy
The Fund, under normal circumstances,
invests at least 80% of its net assets in the securities that comprise the Index.
The Index is
comprised of 25 securities selected from a universe of master limited partnerships (“MLPs”) listed on U.S. exchanges. MLPs are publicly traded partnerships generally engaged in the transportation, storage, processing, refining,
marketing, exploration, production, and mining of minerals and natural resources. By confining their operations to these specific activities, their interests, or units, are able to trade on public securities exchanges exactly like the shares of a
corporation, without entity level taxation. As such, the Fund will invest primarily in energy infrastructure MLPs which are engaged in the (i) gathering, transporting, processing, treating, terminalling, storing, refining, distributing, mining or
marketing of natural gas, natural gas liquids, crude oil, refined products or coal, (ii) the acquisition, exploitation and development of crude oil, natural gas and natural gas liquids, (iii) processing, treating, and refining of natural gas liquids
and crude oil, and (iv) owning, managing and transporting alternative fuels such as ethanol, hydrogen and biodiesel.
The MLPs are selected using a
proprietary, quantitative rules-based methodology developed by Zacks Investment Research, Inc. (“Zacks” or the “Index Provider”). The objective of the Index is to select a group of MLPs with the potential
1
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Trust Prospectus
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to yield and
outperform, on a risk adjusted basis, the S&P 500
®
Index and other benchmark indices.
MLPs considered for inclusion in the
Index generally, at the time of selection, pay a distribution and are listed on at least one domestic stock exchange with a minimum market capitalization of at least $300 million. Zacks further narrows the universe by ranking each potential MLP
based on a variety of factors including dividend yield, liquidity , short interest, and other factors. Generally, the Index will not include MLPs that do not regularly pay distributions. The 25 highest ranking MLPs as identified by the Index
methodology included in the Index and equally weighted such that MLP makes up approximately 4% of the Index. The Index is rebalanced at least quarterly, but may be rebalanced more often to ensure timely stock selections. As of December 31, 2018, the
Index included 25 MLPs, which had an average total market capitalization of $6.9 billion and component securities had total market capitalizations ranging from $737.2 million to $53.7 billion.
To qualify as an MLP and not be taxed
as a corporation, a partnership must receive at least 90% of its income from qualifying sources as set forth in Section 7704(d) of the Internal Revenue Code of 1986, as amended (the “Code”). These qualifying sources include natural
resource-based activities such as the processing, transportation and storage of mineral or nature resources. MLPs generally have two classes of owners, the general partner and limited partners. The general partner of an MLP is typically owned by a
major energy company, an investment fund, the direct management of the MLP, or is an entity owned by one or more of such parties. The general partner typically controls the operations and management of the MLP through an up to 2% equity interest in
the MLP plus, in many cases, ownership of common units and subordinated units. Limited partners typically own the remainder of the partnership, through ownership of common units, and have a limited role in the partnership’s operations and
management.
Unlike direct
investments in MLPs, income and losses from the Fund’s investments in MLPs will not directly flow through to the personal tax returns of shareholders. The Fund will report distributions from its investment, including MLPs made to shareholders
annually on Form 1099. Shareholders will not, solely by virtue of their status as Fund shareholders, be treated as engaged in the business conducted by the underlying MLPs for federal or state income tax purposes or for purposes of the tax on
unrelated business income of tax-exempt organizations. Under recent tax legislation, individuals and certain other non-corporate investors will be entitled to a 20% deduction against taxable income allocated from direct investments in MLPs. Neither
the Fund directly, nor the Fund’s shareholders indirectly, will be entitled to this deduction with respect to the Fund’s MLP investments.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund uses a
“passive” or indexing approach to attempt to achieve its investment objective. The Fund does not try to outperform the Index and does not generally take temporary defensive positions. Although the Fund intends to fully replicate the
Index, at times the Fund may gain exposure to only a representative sample of the securities in the Index that have aggregate characteristics similar to those of the Index, including exchange-traded funds (“ETFs”) and other investment
companies. This means the Fund may not hold all of the securities included in the Index. The Fund will rebalance its portfolio when the Index rebalances. Additionally, if the Fund receives a creation unit in cash, the Fund repositions its portfolio
in response to assets flowing into or out of the Fund. To the extent the Fund experiences regular cash purchases or redemptions of its shares, it may reposition its portfolio more frequently. Frequently Index rebalances and Fund creation units
received or redeemed in cash may result in high portfolio turnover.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Important Tax Risks Associated with the
Fund’s Investment in MLPs
Tax Status of the Fund Risk
- The Fund is treated as a regular corporation, or “C” corporation, for U.S. federal income tax purposes. This differs from most investment companies, which elect to be treated as
“regulated investment companies” under the Code in order to avoid paying entity level income taxes. Under current law, the Fund is not eligible to elect treatment as a regulated investment company due to its investments primarily in
MLPs. Accordingly, the Fund is subject to U.S. federal income tax on its taxable income at the graduated rates applicable to corporations (currently at a maximum rate of 21%) as well as state and local income taxes. The Fund expects that a portion
of the distributions it receives from MLPs may be treated as a tax-deferred return of capital, thus reducing the Fund’s current tax liability. However, the amount of taxes currently paid by the Fund will vary depending on the amount of income
and gains derived from investments and/or sales of MLP interests and such taxes will reduce your return from an investment in the Fund.
MLP Tax Risk
- Much of the benefit the Fund derives from its investment in securities of MLPs is a result of MLPs generally being treated as partnerships for U.S. federal income tax purposes. Partnerships do not
pay U.S. federal income tax at the partnership level. Rather, each partner is allocated a share of the partnership’s income, gains, losses, deductions and expenses. A change in current tax law, or a change in the business of a given MLP, could
result in an MLP being treated as a corporation for U.S. federal income tax purposes. As a result, the amount of cash available for distribution by the MLP would be reduced and the after-tax return to
Direxion Shares
ETF Trust Prospectus
|
2
|
the Fund with respect to its investment in such MLPs
would be materially reduced. Thus, if any of the MLPs owned by the Fund were treated as corporations for U.S. federal income tax purposes, it could result in a reduction in the value of your investment in the Fund and lower income.
Tax Deferred Risk
- Cash distributions from an MLP to the Fund that exceed the Fund’s allocable share of such MLP’s net taxable income are considered a tax-deferred return of capital that will reduce the
Fund’s adjusted tax basis in the securities of the MLP. These reductions in the Fund’s adjusted tax basis in the MLP securities will increase the amount of gain (or decrease the amount of loss) recognized by the Fund on a subsequent sale
of the securities. The Fund will accrue deferred income taxes for any future tax liability associated with (i) that portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains, as well as (ii)
capital appreciation of its investments. The Fund’s accrued deferred tax liability will be reflected each day in the Fund’s net asset value. Increases in deferred tax liability will decrease net asset value. Conversely, decreases in
deferred tax liability will increase net asset value. The Fund generally computes deferred income tax liability based on the maximum federal tax rate applicable to corporations, currently 21% and an assumed rate attributable to state taxes. A change
in the federal tax rate applicable to corporations and, consequently, any change in the deferred tax liability of the Fund, may have a significant impact on the net asset value of the Fund. The Fund’s current and deferred tax liability, if
any, will depend upon the Fund’s net investment income gains and losses and realized and unrealized gains and losses on investments and therefore may vary greatly from year to year depending on the nature of the Fund’s investments, the
performance of these investments and general market conditions. The Fund will rely to some extent on information provided by the MLPs, which may not be timely, to estimate deferred tax liability for purposes of financial statement reporting and
determining net asset value. From time to time, the Adviser may modify the estimates or assumptions regarding the Fund’s deferred tax liability as new information becomes available. The Fund’s estimates regarding its deferred tax
liability are made in good faith; however, the daily estimate of the Fund’s deferred tax liability used to calculate the Fund’s net asset value could vary dramatically from the Fund’s actual tax liability. Actual income taxes, if
any, will be incurred over many years depending on if, and when, investment gains and losses are realized, the then current basis of the Fund’s assets and other factors. Upon the sale of an MLP security, the Fund may be liable for previously
deferred taxes. As a result, the determination of the Fund’s actual tax liability may have a material impact on the Fund’s net asset value.
In the event the Fund is in a net
deferred tax asset position, the Fund will evaluate all available information and consider the criterion established by the Financial Accounting Standards Board Codification Topic 740, Income Taxes (formerly Statement of Financial Accounting
Standards No. 109) in order to properly assess whether it is more likely than not that the deferred tax asset will be realized or whether a valuation allowance is required.
Return of Capital Distributions Risk
- A portion of the Fund’s distributions are expected to be treated as a return of capital for tax purposes. Return of capital distributions are not taxable income to you but reduce your tax basis
in your Shares. Such a reduction in tax basis will generally result in larger taxable gains and/or lower tax losses on a subsequent sale of Shares. A distribution in excess of your basis will be taxable in the same manner as a sale of your Shares.
Shareholders who periodically receive the payment of dividends or other distributions consisting of a return of capital may be under the impression that they are receiving net profits from the Fund when, in fact, they are not. Shareholders should
not assume that the source of distributions is from the net profits of the Fund.
Tax Treatment of Qualified Dividends
Risk
- Distributions by the Fund will be treated as dividends for tax purposes to the extent of the Fund’s current or accumulated earnings and profits. Under current federal income tax law,
if applicable holding period requirements are met, qualified dividend income received by individuals and other non-corporate shareholders is taxed at long-term capital gain rates, which currently reach a maximum of 15% (20% for taxpayers with
taxable income exceeding certain thresholds).
Potential Substantial After-Tax
Correlation/Tracking Risk
- The Fund will be subject to taxation on its taxable income. The Fund’s net asset value will also be reduced by the accrual of any current and deferred tax
liabilities. The Index, however, is calculated without any deductions for taxes. As a result, the Fund’s after-tax performance could differ significantly from the performance of the Index even if the pretax performance of the Fund and the
performance of the Index are closely correlated.
MLP Liquidity Risk
- Although MLPs trade on national security exchanges, certain MLPs may trade less frequently than those of larger companies due to their market capitalizations. Due to limited trading volumes of
certain MLPs, the prices of such MLPs may display abrupt or erratic movements at times. Additionally, it may be more difficult for the Fund to buy and sell significant amounts of such securities without an unfavorable impact on prevailing market
prices. The Fund’s investment in securities that are less actively traded or over time experience decreased trading volume may restrict its ability to dispose of the securities at a fair price. Such a situation may prevent the Fund from
limiting losses, realizing gains or achieving a high correlation with the Index. This also may adversely affect the Fund’s ability to make dividend distributions to shareholders.
MLP Risk
- Investments in common units of MLPs involve risks that differ from investments in common stock. Holders of MLP common units are subject to certain risks inherent in the structure of MLPs, including
(i) tax risks, (ii) risk related to limited control of management or the general partner or managing member, (iii) limited rights to vote on matters affecting the MLP, except with respect to extraordinary transactions, (iv) conflicts of interest
between the general partner or managing member and its affiliates, on the one hand, and the limited partners or members, on the other hand, including those arising from incentive distribution payments or corporate opportunities, and (v) cash flow
risks.
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Direxion Shares ETF
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MLP common units and other equity securities can be
affected by macro-economic and other factors affecting the stock market in general, expectations of interest rates, investor sentiment towards MLPs or the energy sector, changes in a particular issuer’s financial condition, or unfavorable or
unanticipated poor performance of a particular issuer (in the case of MLPs, generally measured in terms of distributable cash flow). Prices of common units of individual MLPs and other equity securities also can be affected by fundamentals unique to
the partnership or company, including cash flow growth, cash generating power and distribution coverage.
Index
Correlation/Tracking Risk
—
There is no guarantee that the Fund will achieve a high degree of correlation to the
Index and therefore achieve its investment objective. The Fund may have difficulty achieving its investment objective due to fees, expenses (including rebalancing expenses), transaction costs, income items, valuation methodology, accounting
standards and disruptions or illiquidity in the markets for the securities held by the Fund, the Fund’s holding of uninvested cash, costs of complying with various new or existing regulatory requirements, and transactions carried out to
minimize the distribution of capital gains to shareholders and other requirements to maintain pass-through tax treatment. These are costs that may be incurred by the Fund that are not incurred by the Index. Market disruptions, regulatory
restrictions or extreme volatility will also adversely affect the Fund’s ability to achieve its investment objective. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such
stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities not included in the Index. Activities surrounding Index reconstitutions and other Index rebalancing events may hinder the Fund’s
ability to meet its investment objective.
Index Tracking Strategy Risk
—
Securities held by the Fund will generally not be bought or sold in response to market fluctuations and may be
concentrated in a particular industry if the Index is so concentrated. The
Fund will generally not sell a security because its issuer is in financial trouble or its value has declined,
unless that holding is removed or is anticipated to be removed from the Index.
The Index relies on various sources
of information to assess the securities included in the Index, including information that may be based on assumptions or estimates. There is no assurance that the Index Provider’s calculation methodology or sources of information will provide
an accurate assessment of the Index’s securities. Errors in Index data, Index computations or the construction of the Index in accordance with its methodology may occur from time to time and may not be identified and corrected by the Index
Provider for a period of time or at all, which may have an adverse impact on the Fund and its shareholders.
Energy Sector MLP Risk
- The Fund will invest primarily in MLPs operating in the energy sector
(“Energy MLPs”). These MLPs are subject to risks specific
to the energy sector including, but not limited to, the following:
•
|
The energy sector is
highly regulated. Energy MLPs are subject to significant regulation of virtually every aspect of their operations by federal, state and local governmental
|
|
agencies, including
how facilities are constructed, maintained and operated, environmental and safety controls, and the prices they may charge for the products and services they provide.
|
•
|
Energy MLPs may be
affected by fluctuations in the prices of energy commodities, including natural gas, natural gas liquids, crude oil and coal.
|
•
|
Energy MLPs engaged in
the exploration, development, management or production of energy commodities are at risk of the natural resources depleting over time, which may cause the market value of the MLP to decline over time.
|
•
|
Energy MLPs may be
adversely affected by reductions in the supply of or demand for energy commodities. For example, due to increased production in the U.S., there is a glut in the supply of natural gas. As a result, prices of commodities have declined significantly
and may continue to decline.
|
•
|
Energy MLPs may be
subject to various operational risks, such as disruption of operations, inability to timely and effectively integrate newly acquired assets, unanticipated operation and maintenance expenses, underestimated cost projections, and other risks arising
from specific business strategies.
|
•
|
Rising interest rates
could adversely impact the financial performance of MLPs by increasing their costs of capital, which may reduce an MLP’s ability to execute acquisitions or expansions in a cost-effective manner.
|
•
|
Extreme weather or
other natural disasters could adversely impact the value of the debt and equity securities of Energy MLPs.
|
•
|
Threats of or actual
attacks by terrorists on energy assets could impact the market for Energy MLPs.
|
•
|
If
a significant accident or event occurs and an MLP is not fully insured, it could adversely affect the MLP’s operations and financial condition and the securities issued by the MLP.
|
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or Mid-Capitalization Company
Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial
resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant institutional ownership and
are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger
Direxion Shares
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companies. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure, which could increase
the volatility of the Fund’s portfolio.
Money Market
Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including
money market funds, depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect
to the financial institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market
and credit risk related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will
maintain a stable value, and they may lose money.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Cybersecurity
Risk
-
Failures or breaches of the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s
business operations, potentially resulting in financial losses to the Fund. While the Fund has established business continuity plans and risk management systems seeking to address system breaches or failures, these plans and systems are inherently
limited. Further, cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
High Portfolio Turnover Risk
- The Fund may engage in active and frequent trading, which may lead to increased portfolio turnover, higher transaction costs, and the possibility of increased short-term capital gains (which will be
taxable to shareholders as ordinary income when distributed to them) and/or long-term capital gains.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. When you sell your Shares, they could be worth
less than what you paid for them.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Regulatory Risk
- The Fund is subject to the risk that a change in U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Fund’s operations and/or change the
competitive landscape.
Additionally, MLPs are subject to
significant federal, state and local government regulation in virtually every aspect of their operations, including how facilities are constructed, maintained and operated, environmental and safety controls, and the prices they may charge for the
products and services they provide. Various governmental authorities have the power to enforce compliance with these regulations and the permits issued under them, and violators are subject to administrative, civil and criminal penalties, including
civil fines, injunctions or both. For example, many state and federal environmental laws provide for civil penalties as well as regulatory remediation, thus adding to the potential liability an MLP may face. More extensive laws, regulations or
enforcement policies could be enacted in the future which would likely increase compliance costs and may adversely affect the financial performance of MLPs.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
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Direxion Shares ETF
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Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the net
asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no
guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or
create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 23.58% for the quarter ended June 30, 2016 and its lowest calendar quarter return was -22.06% for the quarter ended September 30, 2015. The year-to-date return as
of December 31, 2018 was -16.82%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(1/23/2014)
|
Return
Before Taxes
|
-16.82%
|
-13.97%
|
Return
After Taxes on Distributions
|
-16.82%
|
-14.11%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-9.96%
|
-9.83%
|
Zacks
MLP High Income Index
(reflects no deduction for fees, expenses or taxes)
|
-16.98%
|
-13.06%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.63%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax
returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares" is higher
because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in January 2014
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
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creation units, each of which is comprised of 50,000
Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price
greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income (qualified dividend income for certain non-corporate shareholders who satisfy certain restrictions). Those distributions will be subject to federal income taxes and may also be subject to state and
local taxes. A portion of the Fund’s distributions is also expected to be treated as a return of capital for tax purposes. Return of capital distributions are not taxable to you, but reduce your tax basis in your fund Shares. Distributions by
the Fund may be significantly higher than those of most ETFs.
Payments to Broker-Dealers and Other
Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may
create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
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Direxion Shares ETF
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The Direxion Shares ETF Trust
(“Trust”) is a registered investment company offering a number of separate exchange-traded funds (“ETFs”). This Prospectus describes the Direxion Zacks MLP High Income Index Shares (the “Fund”). Rafferty Asset
Management, LLC (“Rafferty” or “Adviser”) serves as the investment adviser to the Fund.
The Fund seeks
investment results, before fees and expenses, that track the price and yield performance of the Zacks MLP High Income Index (the “Index”).
Shares of the Fund
(“Shares”) are listed and traded on the NYSE Arca, Inc. (the “Exchange”), where the market prices for the Shares may be different from the intra-day value of the Shares disseminated by the Exchange and from their net asset
value (“NAV”). Unlike conventional mutual funds, Shares are not individually redeemable directly with the Fund. Rather, the Fund issues and redeems Shares on a continuous basis at NAV only in large blocks of Shares called “Creation
Units.” A Creation Unit consists of 50,000 Shares. Creation Units are issued and redeemed generally in cash and/or in-kind securities included in the Index. As a result, retail investors generally will not be able to purchase or redeem Shares
directly from, or with, the Fund. Most retail investors will purchase or sell Shares in the secondary market through a broker.
In order to provide additional
information regarding the value of Shares of the Fund, the Exchange, a market data vendor or other information provider, disseminates an Intraday Optimized Portfolio Value (“IOPV”) for the Fund. The Fund’s IOPV is expected to be
disseminated every 15 seconds during the regular trading hours of the Exchange. The IOPV is based on the current market value of the securities and cash required to be deposited in exchange for a Creation Unit. The IOPV does not necessarily reflect
the precise composition of the current portfolio holdings of the Fund as of a particular point in time, or an accurate valuation of the current portfolio. The quotations of certain Fund holdings may not be updated during U.S. trading hours if such
holdings do not trade in the U.S. The Fund is not involved in, nor responsible for, the calculation or dissemination of the IOPV and makes no representations or warranty as to its accuracy.
There is no assurance that the Fund will
achieve its investment objective and an investment in the Fund could lose money. The Fund is not a complete investment program.
Changes in Investment
Objective.
The Fund’s investment objective is not a fundamental policy and may be changed by the Fund's Board of Trustees without shareholder approval.
Additional Information Regarding Investment
Techniques and Policies
The Fund seeks investment results,
before fees and expenses, that track the performance of the Index. The Index is comprised of 25 master limited partnerships (“MLPs”).
A MLP consists of a general partner
and limited partners (or in the case of MLPs organized as limited liability companies, a managing member and members). The general partner or managing member typically controls the operations and management of the MLP and has an ownership stake in
the MLP. The limited partners or members, through their ownership of limited partner or member interests, provide capital to the entity, are intended to have no role in the operation and management of the entity and receive cash distributions. The
Fund will be a limited partner (or a member) in the MLPs in which it invests. The MLPs themselves generally do not pay United States federal income taxes; however, the Fund will be taxed on any distributions it receives from the MLPs in which it
invests. Thus, unlike investors in corporate securities, direct MLP investors are generally not subject to double taxation (
i.e.
, corporate level tax and tax on corporate dividends). To qualify as an MLP and
to not be taxed as a corporation, a partnership must receive at least 90% of its income from qualifying sources as set forth in Section 7704(d) of the Internal Revenue Code of 1986, as amended (the “Code”). These qualifying sources
include natural resource-based activities such as the processing, transportation and storage of mineral or natural resources.
In seeking to
achieve the Fund’s investment objective, Rafferty uses statistical and quantitative analysis to determine the investments the Fund makes and the techniques it employs. In general, if the Fund is performing as designed, the return of the Index
will dictate the return for the Fund. Rafferty does not invest the assets of the Fund in securities, derivatives or other investments based on Rafferty’s view of the investment merit of a particular security, instrument or company, nor does it
conduct conventional investment research or analysis or forecast market movements or trends. The Fund generally pursues its investment objective regardless of the market conditions and does not take defensive positions.
Rafferty seeks a pre-tax correlation
over time of 0.95 or better between the Fund’s performance and the performance of the Index; a correlation of 1.00 would represent perfect correlation. To do this, the Fund may hold a representative sample of the component securities of the
Index. The sampling of securities that is held by the Fund is intended to maintain high correlation with, and similar aggregate characteristics (
e.g.
, market capitalization and industry weightings) to, the
Index. The Fund also may invest in securities that are not included in the Index or may overweight or underweight certain components of the Index. The Fund’s assets will be focused in an industry or group of industries to the extent that the
Index focuses in a particular industry or group of industries. In addition, the Fund is non-diversified, which means that it may invest in the securities of a limited number of issuers.
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ETF Trust Prospectus
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The Fund may also
lend securities representing up to one-third of the value of its total assets (including the value of any collateral received).
The Fund is designed to provide
investment returns, before fees and expenses, that track the performance of the Index. While Rafferty attempts to minimize any differences between the investment results of the Fund and the performance of the Index, certain factors will tend to
cause the Fund’s investment results to vary from its stated investment objective. The Fund may have difficulty achieving its investment objective due to fees, expenses, transactions costs, income items, valuation methodology, accounting
standards, significant purchase and redemption activity by shareholders and/or disruptions or temporary lack of liquidity in the markets for the securities held by the Fund.
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Additional Information Regarding Principal
Risks
An investment in
the Fund entails risks. The Fund may not achieve its investment objective and may decline in value. The Fund presents risks not traditionally associated with other mutual funds and ETFs. It is important that investors closely review and understand
all of the Fund’s risks before making an investment. The Fund is not a complete investment program. Below, each risk of investing in the Fund is explained.
Important Tax Risks Associated with the
Fund’s Investment in MLPs
Tax
Status of the Fund Risk
The Fund is treated as
a regular corporation, or “C” corporation, for U.S. federal income tax purposes. This differs from most investment companies, which elect to be treated as “regulated investment companies” under the Code in order to avoid
paying entity level income taxes. Under current law, the Fund is not eligible to elect treatment as a regulated investment company due to its investments primarily in MLPs. Accordingly, the Fund is subject to U.S. federal income tax on its taxable
income at the graduated rates applicable to corporations (currently at a maximum rate of 21%) as well as state and local income taxes. The Fund expects that a portion of the distributions it receives from MLPs may be treated as a tax-deferred return
of capital, thus reducing the Fund’s current tax liability. However, the amount of taxes currently paid by the Fund will vary depending on the amount of income and gains derived from investments and/or sales of MLP interests and such taxes
will reduce your return from an investment in the Fund.
MLP Tax Risk
Much of the benefit the Fund derives from its
investment in securities of MLPs is a result of MLPs generally being treated as partnerships for U.S. federal income tax purposes. Partnerships do not pay U.S. federal income tax at the partnership level. Rather, each partner is allocated a share of
the partnership’s income, gains, losses, deductions and expenses. A change in current tax law, or a change in the business of a given MLP, could result in an MLP being treated as a corporation for U.S. federal income tax purposes. As a result,
the amount of cash available for distribution by the MLP would be reduced and the after-tax return to the Fund with respect to its investment in such MLPs would be materially reduced. Thus, if any of the MLPs owned by the Fund were treated as
corporations for U.S. federal income tax purposes, it could result in a reduction in the value of your investment in the Fund and lower income.
Tax Deferred Risk
Cash distributions from an MLP to the Fund that
exceed the Fund’s allocable share of such MLP’s net taxable income are considered a tax-deferred return of capital that will reduce the Fund’s adjusted tax basis in the securities of the MLP. These reductions in the Fund’s
adjusted tax basis in the MLP securities will increase the amount of gain (or decrease the amount of loss) recognized by the Fund on a subsequent sale of the securities. The Fund will accrue deferred income taxes for any future tax liability
associated with (i) that portion
of MLP distributions considered to be a tax-deferred
return of capital and for any net operating gains, as well as (ii) capital appreciation of its investments. The Fund’s accrued deferred tax liability will be reflected each day in the Fund’s NAV. Increases in deferred tax liability will
decrease NAV. Conversely, decreases in deferred tax liability will increase NAV. The Fund generally computes deferred income taxes based on the federal tax rate applicable to corporations, currently 21% and an assumed rate attributable to state
taxes. A change in the federal tax rate applicable to corporations and, consequently, any change in the deferred tax liability of the Fund, may have a significant impact on the NAV of the Fund. The Fund’s current and deferred tax liability, if
any, will depend upon the Fund’s net investment income gains and losses and realized and unrealized gains and losses on investments and therefore may vary greatly from year to year depending on the nature of the Fund’s investments, the
performance of these investments and general market conditions. The Fund will rely to some extent on information provided by the MLPs, which may not be timely, to estimate deferred tax liability for purposes of financial statement reporting and
determining NAV. From time to time, the Adviser may modify the estimates or assumptions regarding the Fund’s deferred tax liability as new information becomes available. The Fund’s estimates regarding its deferred tax liability are made
in good faith; however, the daily estimate of the Fund’s deferred tax liability used to calculate the Fund’s NAV could vary dramatically from the Fund’s actual tax liability. Actual income taxes, if any, will be incurred over many
years depending on if, and when, investment gains and losses are realized, the then current basis of the Fund’s assets and other factors. Upon the sale of an MLP security, the Fund may be liable for previously deferred taxes. As a result, the
determination of the Fund’s actual tax liability may have a material impact on the Fund’s NAV.
In the event the Fund is in a net
deferred tax asset position, the Fund will evaluate all available information and consider the criterion established by the Financial Accounting Standards Board Codification Topic 740, Income Taxes (formerly Statement of Financial Accounting
Standards No. 109) in order to properly assess whether it is more likely than not that the deferred tax asset will be realized or whether a valuation allowance is required.
Return of Capital Distributions Risk
A portion of the Fund’s distributions are
expected to be treated as a return of capital for tax purposes. Return of capital distributions are not taxable income to you but reduce your tax basis in your Shares. Such a reduction in tax basis will generally result in larger taxable gains
and/or lower tax losses on a subsequent sale of Shares. A distribution in excess of your basis will be taxable in the same manner as a sale of your Shares. Shareholders who periodically receive the payment of dividends or other distributions
consisting of a return of capital may be under the impression that they are receiving net profits from the Fund when, in fact,
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ETF Trust Prospectus
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10
|
they are not. Shareholders should not assume that the
source of distributions is from the net profits of the Fund.
Tax Treatment of Qualified Dividends
Risk
Distributions by the Fund will be treated
as dividends for tax purposes to the extent of the Fund’s current or accumulated earnings and profits. Under current federal income tax law, if applicable holding period requirements are met, qualified dividend income received by individuals
and other non- corporate shareholders is taxed at long-term capital gain rates, which currently reach a maximum of 15% (20% for taxpayers with taxable income exceeding certain thresholds).
Potential Substantial After-Tax
Correlation/Tracking Risk
The Fund will be
subject to taxation on its taxable income. The Fund’s NAV will also be reduced by the accrual of any current or deferred tax liabilities. The Index, however, is calculated without any deductions for taxes. As a result, the Fund’s after
tax performance could differ significantly from the performance of the Index even if the pretax performance of the Fund and the performance of the Index are closely correlated.
MLP Liquidity Risk
Although MLPs trade on national security exchanges,
certain MLPs may trade less frequently than those of larger companies due to their market capitalizations. Due to limited trading volumes of certain MLPs, the prices of such MLPs may display abrupt or erratic movements at times. Additionally, it may
be more difficult for the Fund to buy and sell significant amounts of such securities without an unfavorable impact on prevailing market prices. The Fund’s investment in securities that are less actively traded or over time experience
decreased trading volume may restrict its ability to dispose of the securities at a fair price. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. This also may adversely
affect the Fund’s ability to make dividend distributions to shareholders.
MLP Risk
Investments in common units of MLPs involve risks
that differ from investments in common stock. Holders of MLP common units are subject to certain risks inherent in the structure of MLPs, including (i) tax risks, (ii) risk related to limited control of management or the general partner or managing
member, (iii) limited rights to vote on matters affecting the MLP, except with respect to extraordinary transactions, (iv) conflicts of interest between the general partner or managing member and its affiliates, on the one hand, and the limited
partners or members, on the other hand, including those arising from incentive distribution payments or corporate opportunities, and (v) cash flow risks. MLP common units and other equity securities can be affected by macro-economic and other
factors affecting the stock market in general, expectations of interest rates, investor sentiment towards MLPs or the energy sector, changes in a particular issuer’s financial condition, or unfavorable or unanticipated poor performance of a
particular issuer (in the case of MLPs, generally measured in terms of distributable cash flow). Prices of common units of individual MLPs and other equity securities also can be affected by fundamentals unique to
the partnership or company, including cash flow growth,
cash generating power and distribution coverage.
Index Correlation/Tracking Risk
There is
no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its investment objective. The Fund may have difficulty achieving its investment objective due to fees, expenses (including rebalancing expenses),
transaction costs, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for the securities held by the Fund, the Fund’s holding of uninvested cash, costs of complying with various new or
existing regulatory requirements, and transactions carried out to minimize the distribution of capital gains to shareholders and other requirements to maintain pass-through tax treatment. These are costs that may be incurred by the Fund that are not
incurred by the Index. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to achieve its investment objective. The Fund may not have investment exposure to all components of the the
Index, or its weighting of investment exposure to such components may be different from that of the Index. In addition, the Fund may invest in financial instruments or securities not included in Index. The possibility of the Fund being materially
over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Activities surrounding index reconstitutions and other index repositioning events may hinder the Fund’s ability to meet its
investment objective.
Index
Tracking Strategy Risk
Securities held by
the Fund will generally not be bought or sold in response to market fluctuations and may be concentrated in a particular industry if the Index is so concentrated. The Fund will generally not sell a security because its issuer is in financial trouble
or its value has declined, unless that holding is removed or is anticipated to be removed from the Index.
The Fund’s Index relies on
various sources of information to assess the securities included in the Index, including information that may be based on assumptions or estimates. There is no assurance that the index provider’s calculation methodology or sources of
information will provide an accurate assessment of the Index’s securities. Errors in Index data, Index computations or the construction of Index in accordance with its methodology may occur from time to time and may not be identified and
corrected by the index provider for a period of time or at all, which may have an adverse impact on the Fund and its shareholders.
Energy Sector MLP Risk
The will invest primarily in energy infrastructure
MLPs which are engaged in the (i) gathering, transporting, processing, treating, terminalling, storing, refining, distributing, mining or marketing of natural gas, natural gas liquids, crude oil, refined products or coal, (ii) the acquisition,
exploitation and development of crude oil, natural gas and natural gas liquids, (iii) processing, treating, and refining of natural gas liquids and crude oil, (iv) owing, managing and transporting alternative fuels such as ethanol, hydrogen and
biodiesel (“Energy MLPs”). These MLPs are subject to risks specific
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|
Direxion Shares ETF
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to the energy sector
including, but not limited to, the following:
•
|
The energy sector is
highly regulated. Energy MLPs are subject to significant regulation of virtually every aspect of their operations by federal, state and local governmental agencies, including how facilities are constructed, maintained and operated, environmental and
safety controls, and the prices they may change for the products and services they provide.
|
•
|
Energy MLPs may be
affected by fluctuations in the prices of energy commodities, including natural gas, natural gas liquids, crude oil and coal.
|
•
|
Energy MLPs engaged in
the exploration, development, management or production of energy commodities are at risk of the natural resources depleting over time, which may cause the market value of the MLP to decline over time.
|
•
|
Energy MLPs may be
adversely affected by reductions in the supply of, or demand for, energy commodities. For example, due to increased production in the U.S., there is a glut in the supply of natural gas. As a result, prices of commodities have declined significantly
and may continue to decline.
|
•
|
Energy MLPs may be
subject to various operational risks, such as disruption of operations, inability to timely and effectively integrate newly acquired assets, unanticipated operation and maintenance expenses, underestimated cost projections, and other risks arising
from specific business strategies.
|
•
|
Rising interest rates
could adversely impact the financial performance of MLPs by increasing their costs of capital, which may reduce an MLP’s ability to execute acquisitions or expansion products in a cost-effective manner.
|
•
|
Extreme weather or
other natural disasters could adversely impact the value of the debt and equity securities of the Energy MLPs.
|
•
|
Threats of
attacks by terrorists on energy assets could impact the market for Energy MLPs.
|
•
|
If a significant
accident or event occurs and an MLP is not fully insured, it could adversely affect an MLP’s operations and financial condition and the securities issued by the MLP.
|
Large-Capitalization
Company Risk
Large-capitalization companies
may be less able to adapt to changing market conditions or to respond quickly to competitive challenges or to changes in business, product, financial, or market conditions. Larger companies may not be able to maintain growth at rates that may be
achieved by well-managed smaller and mid-size companies, which may affect the companies’ returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or Mid-Capitalization Company
Risk
Small- and/or mid-capitalization companies often
have narrower markets for their goods and/or services and more limited managerial and financial resources. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small
management group. Because these stocks are not
well-known to the investing public, there will normally be less publicly available information concerning these securities. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and
liquidity of securities held by the Fund, resulting in more volatile performance. They also face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Adverse Market Conditions Risk
The performance of the Fund is designed to correlate
to the performance of the Index. As a consequence, the Fund’s performance will suffer during conditions which are adverse to its investment objective. For example, if the Index has fallen on a given day, the Fund’s performance also
should fall. Conversely, if the Index has risen on a given day, the Fund’s performance should rise.
Money Market Instrument
Risk
Money market instruments, including money
market funds, depositary accounts and repurchase agreements may be used for cash management purposes. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be
subject to credit risk with respect to the financial institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase
agreements may be subject to market and credit risk related to the collateral securing the repurchase agreement. Money market instruments may also be subject to credit risks associated with the instruments in which they invest. There is no guarantee
that money market instruments will maintain a stable value, and they may lose money.
Cash Transaction Risk
Unlike many ETFs, the Fund expects to effect
redemptions principally for cash, rather than in-kind. Other ETFs generally are able to make in-kind redemptions and avoid realized gains in connection with transactions designed to meet redemption requests. Because the Fund may effect redemptions
principally for cash, rather than in-kind distributions, it may be required to sell portfolio securities in order to obtain the cash needed to distribute the redemption proceeds. Such cash transactions may have to be carried out over several days if
the securities market is relatively illiquid and may involve considerable brokerage fees. These brokerage fees, which will be higher than if the Fund redeemed its Shares
in
–
kind, will be passed on to redeemers of Creation Units in the form of redemption transaction fees. In addition, these factors may result in wider spreads between
the bid and the offered prices of the Fund’s Shares than for more conventional ETFs. Sales of portfolio securities to generate cash may trigger recapture income, which may be taxable to the Fund and may cause distributions from the Fund to be
treated as taxable dividends.
Cybersecurity Risk
The increased use of technologies, such as the
internet, to conduct business increases the operational, information security and related “cyber” risks both directly to the Fund and through its service providers. Similar types of cyber security
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risks are also present for issuers of securities in
which the Fund may invest, which could result in material adverse consequences for such issuers. Unlike many other types of risks faced by the Fund, these risks typically are not covered by insurance. Cyber incidents can result from deliberate
attacks or unintentional events. Cyber incidents may include, but are not limited to, gaining unauthorized access to digital systems (
e.g.
, through “hacking” or malicious software coding) for
purposes of misappropriating assets or sensitive information, corrupting data, causing physical damage to computer or network systems, or causing operational disruption. Cyber attacks may also be carried out in a manner that does not require gaining
unauthorized access, such as causing denial-of-service attacks on websites (
i.e
., efforts to make network services unavailable to intended users).
Failures or breaches of the
electronic systems of the Fund, the Fund’s advisor, distributor, other service providers, counterparties, securities trading venues, or the issuers of securities in which the Fund invests have the ability to cause disruptions and negatively
impact the Fund’s business operations, potentially resulting in financial losses to the Fund and its shareholders. Cyber attacks may also interfere with the Fund’s calculation of its NAV, result in the submission of erroneous trades or
erroneous creation or redemption orders, and could lead to violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs and/or additional compliance costs. While the
Fund has established business continuity plans, there are inherent limitations in such plans, including the possibility that certain risks have not been identified and that prevention and remediation efforts will not be successful. Furthermore, the
Fund cannot control the cyber security plans and systems of the Fund’s service providers or issuers of securities in which the Fund invests.
Early Close/Trading Halt Risk
An exchange or market may close or issue trading
halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. For example, there is a
risk that sharp price declines in securities owned by the Fund may trigger trading halts, which may result in the Fund’s shares trading at an increasingly large discount to NAV during part of, or all of, the trading day. In such circumstances,
the Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
High Portfolio Turnover Risk
Engaging in active and frequent trading leads to
increased portfolio turnover, higher transaction costs, and the possibility of increased short-term capital gains (which will be taxable to shareholders as ordinary income when distributed to them) and/or long-term capital gains.
Investment Risk
An investment in the Fund is not a deposit in a bank
and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. When you
sell your Shares, they could be worth less than what you paid for them.
Market Risk
Market risks include political, regulatory, market
and economic developments, including developments that impact specific economic sectors, industries or segments of the market. The Fund typically would lose value on a day when the Index declines and would gain value on a day when the Index
increases
Turbulence in the
financial markets and reduced liquidity may negatively affect issuers, which could have an adverse effect on the Fund. The Fund’s NAV could decline over short periods due to short-term market movements and over longer periods during market
downturns.
Non-Diversification
Risk
The Fund invests a high percentage of its
assets in a limited number of securities. The Fund’s NAV and total return may fluctuate more, or fall greater, in times of weaker markets than a diversified mutual fund because the Fund may invest its assets in a smaller number of issuers or
may invest a larger proportion of its assets in a single issuer. As a result, the gains or losses on a single investment may have a greater impact on the Fund’s NAV and may make the Fund more volatile than more diversified funds.
Regulatory Risk
The Fund is subject to the risk that a change in
U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Fund’s operations and/or change the competitive landscape.
Additional legislative or regulatory
changes could occur that may materially and adversely affect the Funds. For example, the regulatory environment for derivative instruments in which the Fund may invest is evolving, and changes in the regulation or taxation of derivative instruments
may materially and adversely affect the ability of the Funds to pursue their trading strategies. Such legislative or regulatory changes could pose additional risks and result in material adverse consequences to the Funds.
Additionally, MLPs are subject to
significant federal, state and local government regulation in virtually every aspect of their operations, including how facilities are constructed, maintained and operated, environmental and safety controls, and the prices they may charge for the
products and services they provide. Various governmental authorities have the power to enforce compliance with these regulations and the permits issued under them, and violators are subject to administrative, civil and criminal penalties, including
civil fines, injunctions or both. For example, many state and federal environmental laws provide for civil penalties as well as regulatory remediation, thus adding to the potential liability an MLP may face. More extensive laws, regulations or
enforcement policies could be enacted in the future which would likely increase compliance costs and may adversely affect the financial performance of MLPs.
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Securities Lending Risk
Securities lending
involves the risk that the Fund may lose money because the borrower of the loaned securities fails to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided
for loaned securities, a decline in the value of any investments made with cash collateral, or a “gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also
trigger adverse tax consequences for the Fund. In the event of a large redemption while the Fund has loaned portfolio securities, the Fund may suffer losses (
e.g
. overdraft fees) if it is unable to recall the
securities on loan in time to fulfill the redemption.
Special Risks of Exchange-Traded
Funds
Authorized Participants Concentration Risk
. The Fund may have a limited number of financial institutions that may act as Authorized Participants. Only Authorized Participants who have entered into agreements with a Fund’s distributor may
engage in creation or redemption transactions directly with the Fund. To the extent that those Authorized Participants exit the business or are unable to process creation and/or redemption orders, Shares may trade at a discount to NAV and possibly
face trading halts and/or delisting. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or investments that have lower trading volumes.
Market Price
Variance Risk
. Shares of the Fund that are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at NAV. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than NAV (a premium) or less than NAV
(a discount). The Adviser cannot predict if Shares will trade at a
premium or discount to the Fund’s NAV. Given the fact that Shares can be created and redeemed in creation units, the
Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and a shareholder may trade shares at a premium or a discount to the
Fund’s NAV. The Fund’s investment results are measured based upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent with
those experienced by those creating and redeeming directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or
other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly
be subject to trading halts and/or delisting.
Trading Issues
. Trading in Shares on the Exchange may be halted due to market conditions or for reasons that, in the view of the Exchange, make trading in Shares inadvisable, such as extraordinary market volatility
or other reasons.
Extraordinary market volatility can lead to trading
halts pursuant to “circuit breaker” rules of the Exchange or markets. There can be no assurance that Shares will continue to meet the listing requirements of the Exchange, and the listing requirements may be amended from time to
time.
A Precautionary Note to
Retail Investors
. The Depository Trust Company (“DTC”), a limited trust company and securities depositary that serves as a national clearinghouse for the settlement of trades for its participating banks
and broker-dealers, or its nominee, will be the registered owner of all outstanding Shares of each Fund of the Trust. Your ownership of Shares will be shown on the records of DTC and the DTC Participant broker through whom you hold the Shares. THE
TRUST WILL NOT HAVE ANY RECORD OF YOUR OWNERSHIP. Your account information will be maintained by your broker, who will provide you with account statements, confirmations of your purchases and sales of Shares, and tax information. Your broker also
will be responsible for ensuring that you receive shareholder reports and other communications from the Fund whose Shares you own. Typically, you will receive other services (
e.g.
, average basis information) only if your broker offers these services.
A Precautionary Note to Purchasers of
Creation Units
. Because new Shares may be issued on an ongoing basis, a “distribution” of Shares could be occurring at any time. As a dealer, certain activities on your part could, depending on the
circumstances, result in your being deemed a participant in the distribution, in a manner that could render you a statutory underwriter and subject you to the prospectus delivery and liability provisions of the Securities Act of 1933, as amended
(“Securities Act”). For example, you could be deemed a statutory underwriter if you purchase Creation Units from an issuing Fund, break them down into the constituent Shares and sell those Shares directly to customers, or if you choose
to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for Shares. Whether a person is an underwriter depends upon all of the facts and circumstances pertaining to that
person’s activities, and the examples mentioned here should not be considered a complete description of all the activities that could cause you to be deemed an underwriter. Dealers who are not “underwriters,” but are participating
in a distribution (as opposed to engaging in ordinary secondary market transactions), and thus dealing with Shares as part of an “unsold allotment” within the meaning of Section 4(3)(C) of the Securities Act, will be unable to take
advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities Act.
A Precautionary Note
to Investment Companies
. For purposes of the Investment Company Act of 1940, as amended (“1940 Act”) the Fund is a registered investment company, and the acquisition of Shares by other investment
companies is subject to the restrictions of Section 12(d)(1) thereof. Section 12(d)(1) of the 1940 Act restricts investments by investment companies in the securities of other investment companies, including shares of the Fund. Provided, generally,
that the Fund’s investments comply with Section 12(d)(1)(A), registered investment companies are permitted to invest in the Fund
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beyond the limits set forth in Section 12(d)(1)
subject to certain terms and conditions, including that such investment companies enter into an agreement with the Fund.
The Trust and the Fund have obtained
an exemptive order from the U.S. Securities and Exchange Commission (the “SEC”) allowing a registered investment company to invest in the Fund beyond the limits of Section 12(d)(1) subject to certain conditions, including that a
registered investment company enters into a Participation Agreement with the Trust regarding the terms of the investment. Any investment company considering purchasing Shares of the Fund in amounts that
would cause it to exceed the restrictions under Section
12(d)(1) should contact the Trust.
A Precautionary Note Regarding Unusual
Circumstances
. The Trust can postpone payment of redemption proceeds for any period during which (1) the Exchange is closed other than customary weekend and holiday closings, (2) trading on the Exchange is
restricted, as determined by the SEC, (3) any emergency circumstances exist, as determined by the SEC, or (4) the SEC by order permits for the protection of shareholders of the Fund.
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Share Price of the Fund
A fund’s share price is known
as its NAV. The Fund’s share price is calculated as of the close of regular trading on the NYSE, usually 4:00 p.m. Eastern Time (“Valuation Time”), each day the NYSE is open for business (“Business Day”). The NYSE is
open for business, Monday through Friday, except in observation of the following holidays: New Year’s Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The NYSE may close early on the business day before each of these holidays and on the day after Thanksgiving Day. NYSE holiday schedules are subject to change without notice.
If the exchange or market on which the
Fund’s investments are primarily traded closes early, the NAV may be calculated prior to its normal calculation time. Creation/redemption transaction order time cutoffs would also be accelerated.
The value of the Fund’s assets
that trade in markets outside the United States or in currencies other than the U.S. Dollar may fluctuate when foreign markets are open but the Fund is not open for business.
Share price is calculated by dividing
the Fund’s net assets by its shares outstanding. In calculating its NAV, the Fund generally values its assets on the basis of market quotations, last sale prices, or estimates of value furnished by a pricing service or brokers who make markets
in such instruments. If such information is not available for a security held by the Fund, is determined to be unreliable, or (to the Adviser’s knowledge) does not reflect a significant event occurring after the close of the market on which
the security principally trades (but before the close of trading on the NYSE), the security will be valued at fair value estimates by the Adviser under guidelines established by the Board of Trustees. Foreign securities, currencies and other assets
denominated in foreign currencies are translated into U.S. Dollars at the exchange rate of such currencies against the U.S. Dollar, as provided by an independent pricing service or reporting agency. The Fund also relies on a pricing service in
circumstances where the U.S. securities markets exceed a pre-determined threshold to value foreign securities held in the Fund’s portfolio. The pricing service, its methodology or the threshold may change from time to time. Debt obligations
with maturities of 60 days or less are valued at amortized cost.
Fair Value Pricing.
Securities are priced at a fair value as determined by the Adviser, under the oversight of the Board of Trustees, when reliable market quotations are not readily available, the Fund's pricing service does not provide a
valuation for such securities, the Fund's pricing service provides a valuation that in the judgment of the Adviser does not represent fair value, the Adviser believes that the market price is stale, or an event that affects the value of an
instrument (a “Significant Event”) has occurred since closing prices were established, but before the time as of which the Fund calculates its NAV. Examples of Significant Events may include: (1) events that relate to a single issuer or
to an entire market sector; (2) significant fluctuations in domestic or foreign markets; or (3) occurrences not tied directly to the securities markets, such as natural disasters, armed conflicts, or significant government actions. If such
Significant Events occur, the Fund may value the instruments at fair value, taking into account such events when it calculates the Fund’s NAV. Fair value determinations are made in good faith in accordance with procedures adopted by the Board
of Trustees. In addition, the Fund may also fair value an instrument if trading in a particular instrument is halted and does not resume prior to the closing of the exchange or other market.
Attempts to determine the fair value
of securities introduce an element of subjectivity to the pricing of securities. As a result, the price of a security determined through fair valuation techniques may differ from the price quoted or published by other sources and may not accurately
reflect the market value of the security when trading resumes. If a reliable market quotation becomes available for a security formerly valued through fair valuation techniques, Rafferty compares the market quotation to the fair value price to
evaluate the effectiveness of the Fund's fair valuation procedures and will use that market value in the next calculation of NAV.
Rule 12b-1 Fees
The Board of Trustees of the Trust
has adopted a Distribution and Service Plan (the “Plan”) pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year for certain
distribution-related activities and shareholder services.
No 12b-1 fees are currently paid by
the Fund, and there are no plans to impose these fees. However, in the event 12b-1 fees are charged in the future, because the fees are paid out of the Fund’s assets, over time these fees will increase the cost of your investment and may cost
you more than certain other types of sales charges.
Additional Information Regarding Deferred
Tax Liability
Because the
Fund is treated as a regular corporation, or “C” corporation, for U.S. federal income tax purposes, the Fund will incur tax expenses. In calculating the Fund’s daily NAV, the Fund will, among other things, account for its deferred
tax liability and/or asset balances. As a result, any deferred tax liability is reflected in the Fund’s daily NAV.
The Fund will accrue, in accordance
with generally accepted accounting principles, a deferred income tax liability balance at the currently effective maximum statutory federal corporate income tax rate (currently 21%) plus an assumed state and local income tax rate, for its future tax
liability associated with the capital appreciation of its investments and the distributions
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received by the Fund on equity securities of MLPs
considered to be return of capital and for any net operating gains. The Fund’s current and deferred tax liability, if any, will depend upon the Fund’s net investment gains and losses and realized and unrealized gains and losses on
investments and therefore may vary greatly from year to year depending on the nature of the Fund’s investments, the performance of those investments and general market conditions. Any deferred tax liability balance will reduce a Fund’s
NAV.
The Fund also will accrue,
in accordance with generally accepted accounting principles, a deferred tax asset balance which reflects an estimate of the Fund’s future tax benefit associated with net operating losses and unrealized losses. Any deferred tax asset balance
will increase the Fund’s NAV. To the extent the Fund has a deferred tax asset balance, the Fund will assess, in accordance with generally accepted accounting principles, whether a valuation allowance, which would offset the value of some or
all of the Fund’s deferred tax asset balance, is required. Pursuant to Financial Accounting Standards Board Accounting Standards Codification 740 (FASB ASC 740), the Fund will assess a valuation allowance to reduce some or all of the deferred
tax asset balance if, based on the weight of all available evidence, both negative and positive, it is more likely than not that some or all of the deferred tax asset will not be realized. The Fund will use judgment in considering the relative
impact of negative and positive evidence. The weight given to the potential effect of negative and positive evidence will be commensurate with the extent to which such evidence can be objectively verified. The Fund’s assessment considers,
among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability (which are dependent on, among other factors, future MLP cash distributions), the duration of statutory carryforward periods
and the associated risk that operating loss carryforwards may be limited or expire unused. However, this assessment generally may not consider the potential for market value increases with respect to the Fund’s investments in equity securities
of MLPs or any other securities or assets. Significant weight is given to the Fund’s forecast of future taxable income, which is based on, among other factors, the expected continuation of MLP cash distributions at or near current levels.
Consideration is also given to the effects of the potential of additional future realized and unrealized gains or losses on investments and the period over which deferred tax assets can be realized, as federal tax net operating loss carryforwards
expire in twenty years and federal capital loss carryforwards expire in five years. Recovery of a deferred tax asset is dependent on continued payment of the MLP cash distributions at or near current levels in the future and the resultant generation
of taxable income. The Fund will assess whether a valuation allowance is required to offset some or all of any deferred tax asset in connection with the calculation of a Fund’s NAV per share each day; however, to the extent the final valuation
allowance differs from the estimates the Fund used in calculating the Fund’s daily NAV, the application of such final valuation allowance could have a material impact on the Fund’s NAV.
The Fund’s deferred tax asset
and/or liability balances is estimated using estimates of effective tax rates expected to apply to taxable income in the years such balances are realized. The Fund will rely to some extent on information provided by MLPs in determining the extent to
which distributions received from MLPs constitute a return of capital, which information may not be provided to the Fund on a timely basis, in order to estimate deferred tax liability and/or asset balances for purposes of financial statement
reporting and determining its NAV. If such information is not received from such MLPs on a timely basis, the Fund will estimate the extent to which distributions received from MLPs constitute a return of capital based on average historical tax
characterization of distributions made by MLPs. The Fund’s estimates regarding its deferred tax liability and/or asset balances are made in good faith; however, the daily estimate of a Fund’s deferred tax liability and/or asset balances
used to calculate the Fund’s NAV could vary dramatically from the Fund’s actual tax liability. Actual income tax expense, if any, will be incurred over many years, depending on if and when investment gains and losses are realized, the
then-current basis of the Fund’s assets and other factors. As a result, the determination of the Fund’s actual tax liability may have a material impact on the Fund’s NAV. The Fund’s daily NAV calculation will be based on then
current estimates and assumptions regarding the Fund’s deferred tax liability and/or asset balances and any applicable valuation allowance, based on all information available to the Fund at such time. From time to time, the Fund may modify its
estimates or assumptions regarding its deferred tax liability and/or asset balances and any applicable valuation allowance as new information becomes available. Modifications of the Fund’s estimates or assumptions regarding its deferred tax
liability and/or asset balances and any applicable valuation allowance, changes in generally accepted accounting principles or related guidance or interpretations thereof, limitations imposed on net operating losses (if any) and changes in
applicable tax law could result in increases or decreases in the Fund’s NAV per Share, which could be material.
Creations, Redemptions and Transaction
Fees
Creation Units
. Investors such as market makers, large investors and institutions who wish to deal in Creation Units directly with the Fund must have entered into an authorized participant agreement with the principal underwriter and
the transfer agent, or purchase through a dealer that has entered into such an agreement. These investors are known as “Authorized Participants.” Set forth below is a brief description of the procedures applicable to the purchase and
redemption of Creation Units.
Purchase of the Fund
. To purchase Creation Units directly from the Fund, you must deposit with the Fund a basket of securities and/or cash. Each Business Day, prior to the opening of trading on the Exchange, an agent of the Fund
(“Index Receipt
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Agent”) will make available through the
National Securities Clearing Corporation (“NSCC”) a list of the names and number of shares of each security, if any, to be included in that day’s creation basket (“Deposit Securities”). The identity and number of shares
of the Deposit Securities required for a Creation Unit will change from time to time. The Fund reserves the right to permit or require the substitution of an amount of cash
–
i.e.
, a “cash in lieu” amount
–
to be added to the Balancing Amount (defined below) to replace any Deposit Security that may not be available in sufficient quantity for delivery, eligible for transfer through the clearing process (discussed below) or the Federal Reserve System or
eligible for trading by an Authorized Participant or the investor for which it is acting. For such custom orders, “cash in lieu” may be added to the Balancing Amount (defined below). The Balancing Amount and any “cash in
lieu” must be paid to the Trust on or before the third Business Day following the Transmittal Date. You must also pay a Transaction Fee, described below, in cash.
In addition to the in-kind deposit of
securities, Authorized Participants will either pay to, or receive from, the Fund an amount of cash referred to as the “Balancing Amount.” The Balancing Amount is the amount equal to the differential, if any, between the market value of
the Deposit Securities and the NAV of a Creation Unit. The Fund will publish, on a daily basis, information about the previous day’s Balancing Amount.
All purchase orders for Creation
Units must be placed by or through an Authorized Participant. Purchase orders will be processed either through a manual clearing process run at the DTC (“Manual Clearing Process”) or through an enhanced clearing process (“Enhanced
Clearing Process”) that is available only to those DTC participants that also are participants in the Continuous Net Settlement System of the NSCC. Authorized Participants that do not use the Enhanced Clearing Process will be charged a higher
Transaction Fee (discussed below). A purchase order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent’s automated system, telephone, facsimile or other means
permitted under the Participant Agreement, in order to receive that day’s NAV per Share. All other procedures set forth in the Participant Agreement must be followed in order for you to receive the NAV determined on that day.
Shares may be issued in advance of
receipt of Deposit Securities subject to various conditions including a requirement to maintain on deposit with the Trust cash in an amount up to 115% of the market value of the missing Deposit Securities. Any such transaction effected with the
Trust must be effected using the Manual Clearing Process consistent with the terms of the Authorized Participant Agreement.
Redemption of the Fund
. Redemption proceeds will be paid either in cash or in-kind with a basket of securities (“Redemption Securities”). In most cases, Redemption Securities will be the same as Deposit Securities on a given day.
There will be times, however, when the Deposit and Redemption Securities differ. The composition of the Redemption Securities will be available through the NSCC. The Fund reserves the right to honor a redemption request with a non-conforming
redemption basket.
If
the value of a Creation Unit is higher than the value of the Redemption Securities, you will receive from the Fund a Balancing Amount in cash. If the value of a Creation Unit is lower than the value of the Redemption Securities, you will be required
to pay to the Fund a Balancing Amount in cash. If you are receiving a Balancing Amount, the amount due will be reduced by the amount of the applicable Transaction Fee.
As with purchases, redemptions may be
processed either through the Manual Clearing Process or the Enhanced Clearing Process. Authorized Participants that do not use the Enhanced Clearing Process will be charged a higher Transaction Fee (discussed below). A redemption order must be
received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent’s automated system, telephone, facsimile or other means permitted under the Participant Agreement, in order to
receive that day’s NAV per Share. All other procedures set forth in the Participant Agreement must be followed in order for you to receive the NAV determined on that day.
An investor may request a redemption
in cash, which the Fund may in its sole discretion permit. Investors that elect to receive cash in lieu of one or more of the Redemption Securities are subject to an additional charge. Redemptions of Creation Units for cash (when available) and/or
outside of the Enhanced Clearing Process also require the payment of an additional charge.
Transaction Fees on Creation and
Redemption Transactions
. The Fund will impose Transaction Fees to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units. There is a fixed and a variable component
to the total Transaction Fee on transactions in Creation Units. A fixed Transaction Fee is applicable to each creation and redemption transaction, regardless of the number of Creation Units transacted. Purchasers and redeemers of Creation Units of
the Fund effected through the Manual Clearing Process are required to pay an additional charge to compensate for brokerage and other expenses. In addition, purchasers of Creation Units are responsible for payment of the costs of transferring the
Deposit Securities to the Trust. A variable Transaction Fee based upon the value of each Creation Unit also may be applicable to each purchase or redemption transaction. However, in no instance will the fees charged exceed 2% of the value of the
Creation Units subject to a redemption transaction. Redeemers of Creation Units are responsible for the costs of transferring securities from the Trust. Investors who use the services of a broker or other such intermediary may pay additional fees
for such services. In addition, Rafferty may, from time to time, at its own expense, compensate purchasers of Creation Units who have purchased substantial amounts of Creation Units and other financial institutions for administrative or marketing
services.
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The table below summarizes the
components of the Transaction Fees.
Direxion
Shares ETF Trust
|
Fixed
Transaction Fee
|
Maximum
Additional
Charge for
Redemptions*
|
In-Kind
|
Cash
|
NSCC
|
Outside
NSCC
|
Outside
NSCC
|
Direxion
Zacks MLP High Income Index Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
*
|
As a percentage of the amount
invested.
|
Frequent Purchases and Redemptions
. The Trust’s Board of Trustees has determined not to adopt policies and procedures designed to prevent or monitor for frequent purchases and redemptions of the Fund’s shares because the Fund sells and
redeems its shares at NAV only in Creation Units pursuant to the terms of an Authorized Participant Agreement between the Authorized Participant and the Distributor, and such direct trading between the Fund and Authorized Participants is critical to
ensuring that the Fund’s shares trade at or close to NAV. Further, the vast majority of trading in Fund shares occurs on the secondary market, which does not involve the Fund directly and therefore does not cause the Fund to experience many of
the harmful effects of market timing, such as dilution and disruption of portfolio management. In addition, the Fund imposes a Transaction Fee on Creation Unit transactions, which is designed to offset transfer and other transaction costs incurred
by the Fund in connection with the issuance and redemption of Creation Units and may employ fair valuation pricing to minimize potential dilution from market timing. Although the Fund reserves the right to reject any purchase orders, the Fund does
not currently impose any trading restrictions on frequent trading or actively monitor for trading abuses.
How to Buy and Sell Shares
The Fund issues and redeems Shares
only in large blocks of Shares called “Creation Units.”
Most investors will buy and sell
Shares in secondary market transactions through brokers. Shares that are listed for trading on the secondary market on the Exchange can be bought and sold throughout the trading day like other publicly traded shares. There is no minimum investment.
Although Shares are generally purchased and sold in “round lots” of 100 Shares, brokerage firms typically permit investors to purchase or sell Shares in smaller “oddlots” at no per-share price differential.
When buying or selling Shares through
a broker, you will incur customary brokerage commissions and charges, and you may pay some or all of the spread between the bid and the offer price in the secondary market on each leg of a round trip (purchase and sale) transaction. In addition,
because secondary market transactions occur at market prices, you may pay more than NAV when you buy Shares, and receive less than NAV when you sell those Shares.
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank), the Adviser may pay the intermediary for educational training programs, the development of technology platforms and reporting systems or other administrative services related
to the Fund. Ask your salesperson or visit your financial intermediary’s website for more information.
The Fund’s Exchange trading symbol
is ZMLP.
Share prices are reported
in dollars and cents per Share. For information about acquiring or selling Shares through a secondary market purchase, please contact your broker.
Book Entry
. Shares are held in book-entry form, which means that no stock certificates are issued. DTC or its nominee is the record owner of all outstanding Shares of the Fund and is recognized as the owner of all Shares for all
purposes.
Investors
owning Shares are beneficial owners as shown on the records of DTC or its participants. DTC serves as the securities depository for all Shares. Participants in DTC include securities brokers and dealers, banks, trust companies, clearing corporations
and other institutions that directly or indirectly maintain a custodial relationship with DTC. As a beneficial owner of Shares, you are not entitled to receive physical delivery of stock certificates or to have Shares registered in your name, and
you are not considered a registered owner of Shares. Therefore, to exercise any right as an owner of Shares, you must rely upon the procedures of DTC and its participants. These procedures are the same as those that apply to any other stocks that
you hold in book entry or “street name” through your brokerage account.
Rafferty provides
investment management services to the Fund. Rafferty has been managing investment companies since 1997. Rafferty is located at 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019. As of October 31, 2018, the Adviser had
approximately $12.8 in assets under management.
19
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Direxion Shares ETF
Trust Prospectus
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Under an
investment advisory agreement between the Trust and Rafferty, the Fund pays Rafferty fees at an annualized rate of 0.50% of the Fund’s average daily net assets. For the fiscal year ended October 31, 2018, the Adviser received a net management
fee of 0.39% as a percentage of average daily net assets from the Fund.
A discussion regarding the basis on
which the Board of Trustees approved the investment advisory agreement for the Fund is included in the Fund’s Annual Report for the fiscal period ended October 31, 2018.
Rafferty has entered into an
Operating Expense Limitation Agreement with the Fund. Under this Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse the Fund for Other Expenses through September
1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.65% of the Fund’s average daily net assets (excluding, as applicable, among other expenses, taxes, swap financing and related costs, acquired fund fees
and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
Any expense waiver or reimbursement
is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. Solely at Rafferty’s
option and discretion, Rafferty may pay, reimburse or otherwise assume one or more of the excluded expenses, in which case such expense will be subject to reimbursement by Rafferty in accordance with the Operating Expense Limitation Agreement. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
Paul Brigandi and Tony Ng are jointly
and primarily responsible for the day-to-day management of the Fund (the “Portfolio Managers”). An investment trading team of Rafferty employees assists the Portfolio Managers in the day-to-day management of the Fund subject to their
primary responsibility and oversight. The Portfolio Managers work with the investment trading team to decide the target allocation of the Fund’s investments and on a day-to-day basis, an individual portfolio trader executes transactions for
the Fund consistent with the target allocation. The members of the investment trading team rotate periodically among the various series of the Trust, including the Fund, so that no single individual is assigned to a specific Fund for extended
periods of time.
Mr.
Brigandi has been a Portfolio Manager at Rafferty since June 2004. Mr. Brigandi was previously involved in the equity trading training program for Fleet Boston Financial Corporation from August 2002 to April 2004. Mr. Brigandi is a 2002 graduate of
Fordham University.
Mr. Ng has
been a Portfolio Manager at Rafferty since April 2006. Mr. Ng was previously a Team Leader in the Trading Assistant Group with Goldman Sachs from 2004 to 2006. He was employed with Deutsche Asset Management from 1998 to 2004. Mr. Ng graduated from
State University at Buffalo in 1998.
The Fund's Statement of Additional
Information ("SAI") provides additional information about the investment team members’ compensation, other accounts they manage and their ownership of securities in the Fund.
A description of the Fund's policies
and procedures with respect to the disclosure of the Fund's portfolio securities is available in the Fund's SAI.
Foreside Fund Services, LLC
(“Distributor”) serves as the Fund’s distributor. U.S. Bancorp Fund Services, LLC (“USBFS”) serves as the Fund’s administrator, fund accountant, transfer agent, custodian and index receipt agent. The Distributor
is not affiliated with Rafferty or USBFS.
Fund Distributions
. The Fund pays out dividends from its net investment income, and distributes any net capital gains, if any, to its shareholders at least annually. The Fund is authorized to declare and pay capital gain distributions in
additional Shares or in cash. The Fund may have high portfolio turnover, which may cause it to generate significant amounts of taxable income.
Dividend Reinvestment Service
. Brokers may make the DTC book-entry dividend reinvestment service (“Reinvestment Service”) available to their customers who are shareholders of the Fund. If the Reinvestment Service is used with respect to
the Fund, its distributions of both net income and capital gains will automatically be reinvested in additional and fractional Shares thereof purchased in the secondary market. Without the Reinvestment Service, investors will receive Fund
distributions in
Direxion Shares
ETF Trust Prospectus
|
20
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cash, except as noted above under “Fund
Distributions.” To determine whether the Reinvestment Service is available and whether there is a commission or other charge for using the service, consult your broker. Fund shareholders should be aware that brokers may require them to adhere
to specific procedures and timetables to use the Reinvestment Service.
As with any investment, you
should consider the tax consequences of buying, holding, and disposing of Shares. The tax information in this Prospectus is only a general summary of some important federal tax considerations generally affecting the Fund and its shareholders. No
attempt is made to present a complete explanation of the federal tax treatment of the Fund’s activities, and this discussion is not intended as a substitute for careful tax planning. Accordingly, potential investors are urged to consult their
own tax advisers for more detailed information and for information regarding any state, local, or foreign taxes applicable to the Fund and to an investment in Shares.
Fund distributions to you and your sale
of your Shares will have tax consequences to you unless you hold your Shares through a tax-exempt entity or tax-deferred retirement arrangement, such as an individual retirement account or 401(k) plan.
The Fund is taxed as a regular
corporation for federal income tax purposes and as such is obligated to pay federal and applicable state and foreign corporate taxes on its taxable income. This differs from most investment companies, which elect to be treated as “regulated
investment companies” under the Code in order to avoid paying entity level income taxes. Under current law, the Fund is not eligible to elect treatment as a regulated investment company due to its investments primarily in MLPs invested in
energy assets. As a result, the Fund will be obligated to pay federal and state taxes on its taxable income as opposed to most other investment companies which are not so obligated.
As discussed below, the Fund expects
that a portion of the distribution it receives from MLPs may be treated as a tax-deferred return of capital, thus reducing the Fund’s current tax liability. However, the amount of taxes currently paid by the Fund will vary depending on the
amount of income and gains derived from investments and/or sales of MLP interests and such taxes will reduce your return from an investment in the Fund.
The Fund invests its assets primarily
in MLPs, which generally are treated as partnerships for federal income tax purposes. As a partner in the MLPs, the Fund must report its allocable share of the MLPs’ taxable income in computing its taxable income, regardless of the extent (if
any) to which the MLPs make distributions. Based upon the Adviser’s review of the historic results of the types of MLPs in which the Fund invests, the Adviser expects that the cash flow received by the Fund with respect to its MLP investments
will generally exceed the taxable income allocated to the Fund (and this excess generally will not be currently taxable to the Fund but, rather, will result in a reduction of the Fund’s adjusted tax basis in each MLP as described in the
following paragraph). This is the result of a variety of factors, including significant noncash deductions, such as accelerated depreciation. There is no assurance that the Adviser’s expectation regarding the tax character of MLP distributions
will be realized. If this expectation is not realized, there may be greater tax expense borne by the Fund and less cash available to distribute to you or to pay to expenses.
The Fund will also be subject to U.S.
federal income tax at the regular graduated corporate tax rates on any gain recognized by the Fund on any sale of equity securities of an MLP. The Fund may recognize gain as a result of the redemption of Creation Units as discussed below. Cash
distributions from an MLP to the Fund that exceed such Fund’s allocable share of such MLP’s net taxable income will reduce the Fund’s adjusted tax basis in the equity securities of the MLP. These reductions in such Fund’s
adjusted tax basis in the MLP equity securities will increase the amount of any taxable gain (or decrease the amount of any tax loss) recognized by the Fund on a subsequent sale of the securities.
The Fund will accrue deferred income
taxes for any future tax liability associated with (i) that portion of MLP distributions considered to be a tax-deferred return of capital as well as (ii) capital appreciation of its investments. The Fund’s accrued deferred tax liability will
be reflected each day in the Fund’s NAV. Increases in deferred tax liability will decrease NAV. Conversely, decreases in deferred tax liability will increase NAV. The Fund generally computes deferred income taxes based on the federal tax rate
applicable to corporations, currently 21%, and an assumed rate attributable to state taxes. A change in the federal tax rate applicable to corporations and, consequently, any change in the deferred tax liability of the Fund, may have a significant
impact on the NAV of the Fund. The Fund’s current and deferred tax liability, if any, will depend upon the Fund’s net investment income gains and losses and realized and unrealized gains and losses on investments and therefore may vary
greatly from year to year depending on the nature of the Fund’s investments, the performance of these investments and general market conditions. The Fund will rely to some extent on information provided by the MLPs, which is not necessarily
timely, to estimate deferred tax liability for purposes of financial statement reporting and determining the NAV. From time to time, the Adviser will modify the estimates or assumptions regarding the Fund’s deferred tax liability as new
information becomes available. The Fund estimates regarding its deferred tax liability are made in good faith; however, the daily estimate of the Fund’s deferred tax liability used to calculate the Fund’s NAV could vary dramatically from
the Fund’s actual tax liability. Actual income taxes, if any, will be incurred over many years depending on if, and when, investment gains and losses are realized, the then current basis of the Fund’s assets and other factors. Upon the
sale of an MLP security, the Fund may be liable for previously deferred taxes.
21
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Direxion Shares ETF
Trust Prospectus
|
Distributions made to you by the
Fund (other than distributions in redemption of shares subject to Section 302(b) of the Code) will generally constitute dividends to the extent of your allocable share of the Fund’s current or accumulated earnings and profits, as calculated
for federal income tax purposes. Generally, a corporation’s earnings and profits are computed based upon taxable income, with certain specified adjustments. As explained above, based upon the historic performance of the types of MLPs in which
the Fund intends to invest, the Adviser anticipates that the distributed cash from the MLPs generally will exceed the Fund’s share of the MLPs’ taxable income. Consequently, the Adviser anticipates that only a portion of the Fund’s
distributions will be treated as dividend income to you. To the extent that distributions to you exceed your allocable share of the Fund’s current and accumulated earnings and profits, your tax basis in the Fund’s Shares with respect to
which the distribution is made will be reduced, which will increase the amount of any taxable gain (or decrease the amount of any tax loss) realized upon a subsequent sale or redemption of such shares. To the extent you hold such shares as a capital
asset and have no further basis in the shares to offset the distribution, you will report the excess as capital gain.
Distributions treated as dividends
under the foregoing rules generally will be taxable as ordinary income to you but may be treated as “qualified dividend income.” Under current federal income tax law, qualified dividend income received by individuals and other
non-corporate shareholders is taxed at long-term capital gain rates, which currently reach a maximum of 15% (20% for taxpayers with taxable income exceeding certain thresholds). For a dividend to constitute qualified dividend income, the shareholder
generally must hold the shares paying the dividend for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date, although a longer period may apply if the shareholder engages in certain risk reduction transactions
with respect to the common stock.
Individuals with income exceeding
$200,000 ($250,000 if married and filing jointly) will be subject to a 3.8% Medicare contribution tax on their “net investment income,” which includes interest, dividends, and capital gains (including capital gains realized on the sale
or exchange of Fund shares).
Dividends paid by the Fund are
expected to be eligible for the dividends received deduction available to corporate shareholders under Section 243 of the Code. However, corporate shareholders should be aware that certain limitations apply to the availability of the dividends
received deduction, including rules which limit the deduction in cases where (i) certain holding period requirements are not met, (ii) the corporate shareholder is obligated (e.g., pursuant to a short sale) to make related payments with respect to
positions in substantially similar or related property, or (iii) the corporate shareholder’s investment in shares of a particular Fund is financed with indebtedness. Corporate shareholders should consult their own tax advisors regarding the
application of these limitations to their particular situations.
Capital gain or loss realized upon a
sale of Shares on the Listing Exchange generally is treated as a long-term capital gain or loss if the Shares have been held for more than one year and as a short-term capital gain or loss if the Shares have been held for one year or less. The
ability to deduct capital losses may be limited.
If you are neither a resident nor a
citizen of the United States or if you are a foreign entity, dividends paid to you by the Fund will generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate applies. In addition, a 30% U.S. withholding tax will be imposed on
dividends and proceeds of sales after December 31, 2018, paid to foreign shareholders if certain disclosure requirements are not satisfied.
Holders of Creation Units
. A person who purchases Shares in the Fund by exchanging securities for a Creation Unit generally will recognize capital gain or loss equal to the difference between the market value of the Creation Unit and the
person’s aggregate basis in the exchanged securities, adjusted for any Balancing Amount paid or received. A shareholder who redeems a Creation Unit generally will recognize gain or loss to the same extent and in the same manner as described
above.
More information
about taxes is in the Fund’s SAI.
The Trust enters into contractual
arrangements with various parties, which may include, among others, the Fund's investment adviser, custodian, and transfer agent, who provide services to the Fund. Shareholders are not parties to any such contractual arrangements and are not
intended beneficiaries of those contractual arrangements, and those contractual arrangements are not intended to create in any shareholder any right to enforce them against the service providers or to seek any remedy under them against the service
providers, either directly or on behalf of the Trust.
This Prospectus provides information
concerning the Fund that you should consider in determining whether to purchase Fund shares. Neither this Prospectus nor the SAI is intended, or should be read, to be or give rise to an agreement or contract between the Trust or the Fund and any
investor, or to give rise to any rights in any shareholder or other person other than any rights under federal or state law that may not be waived.
Direxion Shares
ETF Trust Prospectus
|
22
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ZACKS INVESTMENT RESEARCH, INC.
(“ZACKS”) SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS RELATED TO THE FUND OR UNDERLYING INDEX. ZACKS MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE INVESTMENT ADVISER, DISTRIBUTOR OR
OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY, FROM THE USE OF THE UNDERLYING INDICES OR ANY DATA INCLUDED THEREIN. ZACKS MAKES NO WARRANTY, EXPRESS OR IMPLIED, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE, WITH RESPECT TO THE FUND OR TO THE UNDERLYING INDEX OR TO ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL ZACKS HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL
DAMAGES (INCLUDING LOST PROFITS) IN CONNECTION WITH THE FUND OR THE UNDERLYING INDEX, EVEN IF ZACKS IS NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
23
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Direxion Shares ETF
Trust Prospectus
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The financial highlights table is
intended to help you understand the financial performance of the Fund for the periods indicated. The information set forth below was audited by Ernst & Young LLP, Independent Registered Public Accounting Firm, whose report, along with the Fund's
financial statements, is included in the Annual shareholder report, which is available upon request and incorporated by reference into the Fund's SAI. Certain information reflects financial results for a single Share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment in the Fund (assuming reinvestment of all dividends and distributions).
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asset
Value,
Beginning of
Year/Period
|
Net
Investment
Income
(Loss)
1
|
Net
Investment
Income
(Loss)
1,2
|
Net
Realized
and
Unrealized
Gain (Loss)
on Investments
3
|
Net
Increase
(Decrease)
in Net
Asset Value
Resulting
from Operations
|
Dividends
from Net
Investment
Income
|
Distributions
from Realized
Capital Gains
|
Distributions
from
Return of
Capital
|
Total
Distributions
|
Net
Asset
Value,
End of
Year/Period
|
Direxion
Zacks MLP High Income Index Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$16.15
|
0.03
|
0.01
|
(0.30)
|
(0.27)
|
–
|
–
|
(1.60)
|
(1.60)
|
$14.28
|
For
the Year Ended October 31, 2017
|
$18.04
|
0.12
|
0.02
|
(0.41)
|
(0.29)
|
–
|
–
|
(1.60)
|
(1.60)
|
$16.15
|
For
the Year Ended October 31, 2016
|
$23.28
|
0.05
|
(0.05)
|
(3.69)
|
(3.64)
|
–
|
–
|
(1.60)
|
(1.60)
|
$18.04
|
For
the Year Ended October 31, 2015
|
$40.24
|
(0.02)
|
0.02
|
(14.03)
|
(14.05)
|
–
|
–
|
(2.91)
|
(2.91)
|
$23.28
|
For
the Period January 23, 2014
8
through October 31, 2014
|
$40.00
|
(0.08)
|
(0.14)
|
2.39
|
2.31
|
–
|
–
|
(2.07)
|
(2.07)
|
$40.24
|
Direxion Shares
ETF Trust Prospectus
|
24
|
Financial Highlights
(continued)
|
|
|
RATIOS
TO AVERAGE NET ASSETS
5
|
Portfolio
Turnover
Rate
7
|
|
|
Total
Return
4
|
Net
Assets,
End of
Year/Period
(000's omitted)
|
Net
Expenses
6
|
Total
Expenses
|
Net
Investment
Income (Loss)
after
Expense
Reimbursement
|
Net
Expenses
2,6
|
Total
Expenses
2
|
Net
Investment
Income (Loss)
after
Expense
Reimbursement
2
|
|
Direxion
Zacks MLP High Income Index Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(1.74)%
|
$52,110
|
0.65%
9
|
0.76%
|
(0.08)%
|
0.65%
|
0.76%
|
(0.08)%
|
115%
|
|
For
the Year Ended October 31, 2017
|
(1.90)%
|
$63,781
|
0.65%
9
|
0.94%
|
0.13%
|
0.65%
|
0.94%
|
0.13%
|
86%
|
|
For
the Year Ended October 31, 2016
|
(15.11)%
|
$64,039
|
0.65%
9
|
0.99%
|
(0.27)%
|
0.65%
|
0.99%
|
(0.27)%
|
151%
|
|
For
the Year Ended October 31, 2015
|
(36.20)%
|
$74,496
|
0.65%
9
|
0.89%
|
0.07%
|
0.65%
|
0.89%
|
0.07%
|
171%
|
|
For
the Period January 23, 2014
8
through October 31, 2014
|
5.73%
|
$54,328
|
0.65%
9
|
1.23%
|
(0.43)%
|
0.65%
|
1.23%
|
(0.43)%
|
92%
|
|
1
|
Net investment income (loss)
per share represents net investment income divided by the daily average shares of beneficial interest outstanding throughout each period.
|
2
|
Excludes interest expense and
extraordinary expenses which comprise of tax and litigation expenses.
|
3
|
Due to the timing of sales
and redemptions of capital shares, the net realized and unrealized gain (loss) per share will not equal the Fund's changes in net realized and unrealized gain (loss) on investments, in-kind redemptions, futures and swaps for the period.
|
4
|
Total return is calculated
assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period and redemption on the last day of the period. Total return calculated for
a period of less than one year is not annualized. The total return would have been lower if certain expenses had not been reimbursed/waived or recouped by the investment advisor.
|
5
|
For periods less than a year,
these ratios are annualized.
|
6
|
Net expenses include effects
of any reimbursement/waiver or recoupment.
|
7
|
Portfolio turnover rate is
not annualized and excludes the value of portfolio securities received or delivered as a result of in-kind creations or redemptions of the Fund's capital shares. Portfolio turnover rate does not include effects of turnover of the swap and future
contracts portfolio. Short-term securities with maturities less than or equal to 365 days are also excluded from portfolio turnover calculation.
|
8
|
Commencement of investment
operations.
|
9
|
This ratio excludes current
and deferred tax benefits/expenses for all components of the Statement of Operations. Had these amounts been included, the ratio for the period ended October 31, 2014 and years ended October 31, 2015, October 31, 2016, October 31, 2017 and October
31, 2018 would be 1.63%, 0.39%, 2.41%, 0.13% and 0.41%, respectively.
|
25
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Direxion Shares ETF
Trust Prospectus
|
1301
Avenue of the Americas (6th Avenue), 28th Floor
|
New York,
New York 10019
|
866-476-7523
|
More Information on the Direxion Shares ETF Trust
Statement of Additional Information
(“SAI”):
The Fund's SAI contains
more information on the Fund and its investment policies. The SAI is incorporated in this Prospectus by reference (meaning it is legally part of this Prospectus). A current SAI is on file with the Securities and Exchange Commission
(“SEC”).
Annual and Semi-Annual Reports
to Shareholders:
The Fund's reports will provide
additional information on the Fund's investment holdings, performance data and a letter discussing the market conditions and investment strategies that significantly affected the Fund's performance during that period.
To Obtain the SAI or Fund Reports Free of Charge:
Write
to:
|
Direxion
Shares ETF Trust
|
|
1301 Avenue
of the Americas (6th Avenue), 28th Floor
New York, New York 10019
|
Call:
|
866-476-7523
|
By
Internet:
|
www.direxioninvestments.com
|
These documents and other
information about the Fund can be reviewed and copied at the SEC Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at (202) 551-8090. Reports and other information
about the Fund may be viewed on screen or downloaded from the EDGAR Database on the SEC’s website at http://www.sec.gov. Copies of these documents may be obtained, after paying a duplicating fee, by electronic request at the following e-mail
address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-1520.
SEC File Number: 811-22201
Direxion Shares ETF Trust
Statement of Additional Information
1301
Avenue of the Americas (6th Avenue), 28th Floor
|
New York,
New York 10019
|
866-476-7523
|
www.direxioninvestments.com
Direxion Zacks MLP High Income Index Shares (ZMLP)
The Direxion Shares ETF Trust (“Trust”) is an
investment company that offers shares of a variety of exchange-traded funds, including the Direxion Zacks MLP High Income Index Shares (the “Fund”) to the public. Shares of the Fund offered in this Statement of Additional Information
(“SAI”) are listed and traded on the NYSE Arca, Inc.
There is no assurance that the Fund will achieve its investment
objective and an investment in the Fund could lose money. No single Fund is a complete investment program.
This SAI, dated February 28, 2019, is not
a prospectus. It should be read in conjunction with the Fund's prospectus dated February 28, 2019 (“Prospectus”). This SAI is incorporated by reference into the Prospectus. In other words, it is legally part of the Prospectus. To receive
a copy of the Prospectus, without charge, write or call the Trust at the address or telephone number listed above.
February 28, 2019
Table of Contents
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A-1
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Direxion Shares ETF Trust
The Trust is a
Delaware statutory trust organized on April 23, 2008 and is registered with the Securities and Exchange Commission (“SEC”) as an open-end management investment company under the Investment Company Act of 1940, as amended (“1940
Act”). The Trust currently consists of 120 separate series or “Funds.”
Prior to September 12, 2016, the Fund
pursued its respective investment strategy under its former fund name, the Direxion Zacks MLP High Income Shares.
The Fund seeks to provide investment
results, before fees and expenses, which correspond to the performance of the Zacks MLP High Income Index (the “Index”).
Shares of the Fund
(“Shares”) are issued and redeemed at net asset value per share (“NAV”) only in large blocks called “Creation Units.” Creation Units are issued and redeemed in-kind for securities and an amount of cash or entirely
cash, in each case at the discretion of Rafferty Asset Management, LLC (“Rafferty” or the “Adviser”). Shares cannot be purchased from, and are not redeemable securities of, the Fund, except when aggregated in Creation Units.
Therefore, most investors will buy and sell Shares of the Fund in secondary market transactions through brokers. Shares can be bought and sold throughout the trading day like other publicly traded shares. Investors may acquire Shares directly from
the Fund, and shareholders may tender their Shares for redemption directly to the Fund, only in Creation Units of 50,000 Shares, as discussed in the “Purchases and Redemptions” section below.
The Shares offered in this SAI is listed
and traded on the NYSE Arca, Inc. (the “Exchange”).
Classification of the Fund
The Fund is a
“non-diversified” series of the Trust pursuant to the 1940 Act. The Fund is considered “non-diversified” because a relatively high percentage of its assets may be invested in the securities of a limited number of issuers. To
the extent that the Fund assumes large positions in the securities of a small number of issuers, the Fund’s net asset value ("NAV") may fluctuate to a greater extent than that of a diversified company as a result of changes in the financial
condition or in the market’s assessment of the issuers, and the Fund may be more susceptible to any single economic, political or regulatory occurrence than a diversified company.
Exchange Listing and Trading
The Shares are
listed and traded on the Exchange and may trade at prices that differ to some degree from their NAV. There can be no assurance that the requirements of the Exchange necessary to maintain the listing of Shares of the Fund will continue to be met. The
Exchange may, but is not required to, remove the Shares of the Fund from listing if (i) following the initial 12-month period beginning at the commencement of trading of the Fund, there are fewer than 50 beneficial owners of the Shares of the Fund;
(ii) the value of the Index is no longer calculated or available; (iii) the Index no longer meets various liquidity and other metrics as required by the Exchange’s continued listing standards; or (iv)such other event shall occur or condition
exist that, in the opinion of the Exchange, makes further dealings on the Exchange inadvisable. The Exchange will remove the Shares of the Fund from listing and trading upon termination of such Fund.
As is the case with other publicly
listed securities, when Shares of the Fund are bought or sold through a broker, an investor may incur a brokerage commission determined by that broker, as well as other charges.
The Trust reserves the right to
adjust the price levels of the Shares in the future to help maintain convenient trading ranges for investors. Any adjustments would be accomplished through stock splits or reverse stock splits, which would have no effect on the net assets of the
Fund or an investor’s equity interest in the Fund.
The trading prices of the
Fund’s shares in the secondary market generally differ from the Fund’s daily NAV per share and are affected by market forces such as supply and demand, economic conditions and other factors. Rafferty Asset Management, LLC ("Rafferty" or
"Adviser") may, from time to time, make payments to certain market makers in the Trust’s shares pursuant to an Exchange authorized program.
In order to provide additional
information regarding the value of Shares of the Fund, the Exchange, a market data vendor or other information provider, disseminates an Intraday Optimized Portfolio Value (“IOPV”) for the Fund. The Fund’s IOPV is expected to be
disseminated every 15 seconds during the regular trading hours of the Exchange. The IOPV is based on the current market value of the securities and cash required to be deposited in exchange for a Creation Unit. The IOPV does not necessarily reflect
the precise composition of the current portfolio holdings of the Fund as of a particular point in time, or an accurate valuation of the current portfolio. The quotations of certain Fund holdings may not be updated during U.S. trading hours if such
holdings do not trade in the U.S. The Fund is not involved in, nor responsible for, the calculation or dissemination of the IOPV and makes no representations or warranty as to its accuracy.
Investment Policies and Techniques
The Fund generally invests at
least 80% of its net assets (plus any borrowings for investment purposes) in the securities of the Index.
The Fund’s investment objective is
a non-fundamental policy of the Fund that may be changed by the Board without shareholder approval.
With the exception of limitations
described in the “Investment Restrictions” section, the Fund may engage in the investment strategies discussed below. There is no assurance that any of these strategies or any other strategies and methods of investment available to the
Fund will result in the achievement of the Fund’s investment objective.
This section provides a description
of the securities in which the Fund may invest to achieve its investment objective, the strategies it may employ and the corresponding risks of such securities and strategies. The greatest risk of investing in an exchange-traded fund ("ETF") is that
its returns will fluctuate and you could lose money.
Money Market Instruments
. The Fund may invest in bankers’ acceptances, certificates of deposit, demand and time deposits, savings shares and commercial paper of
domestic banks and savings and loans that have assets of at least $1 billion and capital, surplus, and undivided profits of over $100 million as of the close of their most recent fiscal year, or instruments that are insured by the Bank Insurance
Fund or the Savings Institution Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”). The Fund also may invest in high quality, short-term, corporate debt obligations, including variable rate demand notes, having
terms-to-maturity of less than 397 days. Because there is no secondary trading market in demand notes, the inability of the issuer to make required payments could impact adversely the Fund’s ability to resell when it deems advisable to do
so.
The Fund may invest
in foreign money market instruments, which typically involve more risk than investing in U.S. money market instruments. See “Foreign Securities” below. These risks include, among others, higher brokerage commissions, less public
information, and less liquid markets in which to sell and meet large shareholder redemption requests.
Bankers’ Acceptances
. Bankers’ acceptances generally are negotiable instruments (time drafts) drawn to finance the export, import, domestic shipment or storage
of goods. They are termed “accepted” when a bank writes on the draft its agreement to pay it at maturity, using the word “accepted.” The bank is, in effect, unconditionally guaranteeing to pay the face value of the instrument
on its maturity date. The acceptance may then be held by the accepting bank as an asset, or it may be sold in the secondary market at the going rate of interest for a specified maturity.
Certificates of Deposit (“CDs”)
. The FDIC is an agency of the U.S. government that insures the deposits of certain banks and savings and loan associations up to
$250,000 per deposit. The interest on such deposits may not be insured to the extent this limit is exceeded. Current federal regulations also permit such institutions to issue insured negotiable CDs in amounts of $250,000 or more without regard to
the interest rate ceilings on other deposits. To remain fully insured, these investments must be limited to $250,000 per insured bank or savings and loan association.
Commercial Paper
. Commercial paper includes notes, drafts or similar instruments payable on demand or having a maturity at the time of issuance not exceeding nine months,
exclusive of days of grace or any renewal thereof. The Fund may invest in commercial paper rated A-l or A-2 by Standard & Poor’s
®
Ratings
Services (“S&P
®
”) or Prime-1 or Prime-2 by Moody’s Investors Service
®
, Inc. (“Moody’s”), and in other lower quality commercial paper.
Corporate Debt Securities
The Fund may invest in investment
grade corporate debt securities of any rating or maturity. Investment grade corporate bonds are those rated BBB or better by S&P
®
or Baa or
better by Moody’s. Securities rated BBB by S&P
®
are considered investment grade, but Moody’s considers securities rated Baa to have
speculative characteristics. See Appendix A for a description of corporate bond ratings. The Fund may also invest in unrated securities.
Corporate debt securities are
fixed-income securities issued by businesses to finance their operations, although corporate debt instruments may also include bank loans to companies. Notes, bonds, debentures and commercial paper are the most common types of corporate debt
securities, with the primary difference being their maturities and secured or un-secured status. Commercial paper has the shortest term and is usually unsecured.
The broad category of corporate debt
securities includes debt issued by domestic or foreign companies of all kinds, including those with small-, mid- and large-capitalizations. Corporate debt may be rated investment-grade or below investment-grade and may carry variable or floating
rates of interest.
Because of
the wide range of types and maturities of corporate debt securities, as well as the range of creditworthiness of its issuers, corporate debt securities have widely varying potentials for return and risk profiles. For example, commercial paper issued
by a large established domestic corporation that is rated investment grade may have a modest return on
principal, but carries relatively limited risk. On
the other hand, a long-term corporate note issued by a small foreign corporation from an emerging market country that has not been rated may have the potential for relatively large returns on principal, but carries a relatively high degree of
risk.
Corporate debt securities
carry both credit risk and interest rate risk. Credit risk is the risk that the Fund could lose money if the issuer of a corporate debt security is unable to pay interest or repay principal when it is due. Some corporate debt securities that are
rated below investment grade are generally considered speculative because they present a greater risk of loss, including default, than higher-quality debt securities. The credit risk of a particular issuer’s debt security may vary based on its
priority for repayment. For example, higher ranking (senior) debt securities have a higher priority than lower ranking (subordinated) securities. This means that the issuer might not make payments on subordinated securities while continuing to make
payments on senior securities. In addition, in the event of bankruptcy, holders of higher-ranking senior securities may receive amounts otherwise payable to the holders of more junior securities. Interest rate risk is the risk that the value of
certain corporate debt securities will tend to fall when interest rates rise. In general, corporate debt securities with longer terms tend to fall more in value when interest rates rise than corporate debt securities with shorter terms.
On July 27, 2017, the U.K.-based
Financial Conduct Authority (the “FCA”) announced its intention to cease sustaining LIBOR after 2021. It is possible that the ICE Benchmark Administration (“IBA”) and the banks that offer reference rates could continue to
produce LIBOR on the current basis after 2021, but it cannot be assured that LIBOR will survive in its current form. The effect of the FCA’s decision not to sustain LIBOR, or, if changes are ultimately made to LIBOR, the effect of those
changes, cannot be predicted. In addition, it cannot be predicted what alternative index would be chosen should this occur. If LIBOR in its current form does not survive or if an alternative index is chosen, the market value and/or liquidity of
securities with distributions or interest rates based on LIBOR could be adversely affected.
Energy Infrastructure Industry Risk
The MLPs in which the Fund
invests are engaged in the: (i) gathering, transporting, processing, treating, terminalling, storing, refining, distributing, mining or marketing of natural gas, natural gas liquids, crude oil, refined products or coal, (ii) the acquisition,
exploitation and development of crude oil, natural gas and natural gas liquids, (iii) processing, treating, and refining of natural gas liquids and crude oil, and (iv) owning, managing and transporting alternative energy infrastructure assets,
including alternative fuels such as ethanol, hydrogen and biodiesel. These MLPs are subject to many of the risks associated with investments in the energy infrastructure companies, including the following:
Commodity Risks
. The return on the Fund’s investments will depend on the margins received by MLPs and energy infrastructure companies for the exploration, development,
production, gathering, transportation, processing, storing, refining, distribution, mining or marketing of natural gas, natural gas liquids, crude oil, refined petroleum products or coal. These margins may fluctuate widely in response to a variety
of factors including global and domestic economic conditions, weather conditions, natural disasters, the supply and price of imported energy commodities, the production and storage levels of energy commodities in certain regions or in the world,
political instability, terrorist activities, transportation facilities, energy conservation, domestic and foreign governmental regulation and taxation and the availability of local, intrastate and interstate transportation systems. Volatility of
commodity prices also may make it more difficult for MLPs and energy infrastructure companies to raise capital to the extent the market perceives that their performance may be directly or indirectly tied to commodity prices.
Supply and Demand Risks
. A decrease in the production of natural gas, natural gas liquids, crude oil, coal or other energy commodities, a reduction in the volume of such
commodities available for transportation, mining, processing, storage or distribution, or a sustained decline in demand for such commodities, may adversely affect the financial performance or prospects of MLPs and energy infrastructure companies.
MLPs and energy infrastructure companies are subject to supply and demand fluctuations in the markets they serve which will be impacted by a wide range of factors, including fluctuating commodity prices, weather, increased conservation or use of
alternative fuel sources, increased governmental or environmental regulation, depletion, growing interest rates, declines in domestic or foreign production, accidents or catastrophic events, and economic conditions, among others.
Operational Risks
. MLPs and energy infrastructure companies are subject to various operational risks, such as disruption of operations, inability to timely and effectively
integrate newly acquired assets, unanticipated operation and maintenance expenses, lack of proper asset integrity, underestimated cost projections, inability to renew or increased costs of rights of way, failure to obtain the necessary permits to
operate and failure of third-party contractors to perform their contractual obligations. Thus, some MLPs and energy infrastructure companies may be subject to construction risk, acquisition risk or other risks arising from their specific business
strategies.
Acquisition Risks
. The ability of MLPs and energy infrastructure companies to grow and, where applicable, to increase dividends or distributions to their equity holders can
be highly dependent on their ability to make acquisitions of energy businesses that result in an increase in free cash flow. In the event that such companies are unable to make such accretive acquisitions because they are unable to identify
attractive acquisition candidates or negotiate acceptable purchase contracts, because they are unable to raise financing for such acquisitions on economically acceptable terms, or because they are outbid by competitors, their future growth and
ability to make or raise dividends or distributions will be limited and their ability to
repay their debt and make payments to preferred
equity holders may be weakened. Furthermore, even if these companies do consummate acquisitions that they believe will be accretive, the acquisitions may instead result in a decrease in free cash flow.
Regulatory Risks
. MLPs and energy infrastructure companies are subject to significant federal, state and local government regulation in virtually every aspect of their
operations, including how facilities are constructed, maintained and operated, environmental and safety controls, and the prices they may charge for the products and services they provide. Various governmental authorities have the power to enforce
compliance with these regulations and the permits issued under them, and violators are subject to administrative, civil and criminal penalties, including civil fines, injunctions or both.
For example, many state and federal
environmental laws provide for civil penalties as well as regulatory remediation, thus adding to the potential liability an MLP or energy infrastructure company may face. More extensive laws, regulations or enforcement policies could be enacted in
the future which would likely increase compliance costs and may adversely affect the financial performance of MLPs and energy infrastructure companies.
Rising Interest Rate Risks
. The values of securities of MLPs and energy infrastructure companies in the Fund’s portfolio are susceptible to decline when interest rates
rise. Accordingly, the market price of the Fund’s common stock may decline when interest rates rise. Rising interest rates could adversely impact the financial performance of these companies by increasing their costs of capital. This may
reduce an MLP’s ability to execute acquisitions or expansion projects in a cost-effective manner.
Terrorism Risks
. The terrorist attacks in the United States on September 11, 2001 had a disruptive effect on the economy and the securities markets. United States military
and related action in the Middle East could have significant adverse effects on the U.S. economy and the stock market. Uncertainty surrounding military strikes or actions or a sustained military campaign may affect an MLP’s or energy
infrastructure company’s operations in unpredictable ways, including disruptions of fuel supplies and markets, and transmission and distribution facilities could be direct targets, or indirect casualties, of an act of terror. The U.S.
government has issued warnings that energy assets, specifically the United States’ pipeline infrastructure, may be the future target of terrorist organizations. In addition, changes in the insurance markets have made certain types of insurance
more difficult, if not impossible, to obtain and have generally resulted in increased premium costs.
Weather Risks
. Extreme weather patterns, such as Hurricane Ivan in 2004 and Hurricane Katrina in 2005, or environmental hazards, such as the BP oil spill in 2010, could
result in significant volatility in the supply of energy and power and could adversely impact the value of the debt and equity securities of the MLPs and energy infrastructure industry in which the Fund invests. This volatility may create
fluctuations in commodity prices and earnings of MLPs and energy infrastructure companies.
Catastrophe Risk
. The operations of MLPs and energy infrastructure companies are subject to many hazards inherent in the transporting, processing, storing, distributing,
mining or marketing of natural gas, natural gas liquids, crude oil, coal, refined petroleum products or other hydrocarbons, or in the exploring, managing or producing of such commodities, including: damage to pipelines, storage tanks or related
equipment and surrounding properties caused by hurricanes, tornadoes, floods, fires and other natural disasters; inadvertent damage from construction or other equipment; leaks of natural gas, natural gas liquids, crude oil, refined petroleum
products or other hydrocarbons; and fires and explosions. These risks could result in substantial losses due to personal injury or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental damage
and may result in the curtailment or suspension of their related operations. Not all MLPs and energy infrastructure companies are fully insured against all risks inherent to their businesses. If a significant accident or event occurs that is not
fully insured, it could adversely affect an MLP’s or energy infrastructure company’s operations and financial condition and the securities issued by the company.
Competition Risk
. The MLPs and energy infrastructure companies may face substantial competition in acquiring assets, expanding or constructing assets and facilities,
obtaining and retaining customers and contracts, securing trained personnel and operating their assets. Many of their competitors, including major oil companies, independent exploration and production companies, MLPs and other diversified energy
companies, will have superior financial and other resources.
Depletion and Exploration Risk
. Energy reserves naturally deplete as they are produced over time. Many energy companies are either engaged in the production of natural gas,
natural gas liquids, crude oil, or coal, or are engaged in transporting, storing, distributing and processing these items or their derivatives on behalf of shippers. To maintain or grow their revenues, these companies or their customers need to
maintain or expand their reserves through exploration of new sources of supply, through the development of existing sources or, through acquisitions. The financial performance of MLPs and energy infrastructure companies may be adversely affected if
they, or the companies to whom they provide the service, are unable to cost-effectively acquire additional reserves sufficient to replace the depleted reserves. If an MLP or energy infrastructure company fails to add reserves by acquiring or
developing them, its reserves and production will decline over time as the reserves are produced. If an MLP or energy infrastructure company is not able to raise capital on favorable terms, it may not be able to add to or maintain its
reserves.
Financing Risk
. Some MLPs and energy infrastructure companies may rely on capital markets to raise money to pay their existing obligations. Their ability to access the
capital markets on attractive terms or at all may be affected by any of the risk factors associated with MLPs and energy infrastructure companies described above, by general economic and market
conditions or by other factors. This may in turn affect
their ability to satisfy their obligations to us. In addition, certain MLPs and energy infrastructure companies are dependent on their parents or sponsors for a majority of their revenues.
Common Stocks
. The Fund may invest in common stocks. Common stocks represent the residual ownership interest in the issuer and are entitled to the income and increase in the
value of the assets and business of the entity after all of its obligations and preferred stock are satisfied. Common stocks generally have voting rights. Common stocks fluctuate in price in response to many factors including historical and
prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity.
Convertible Securities
. The Fund may invest in convertible securities that may be considered high yield securities. Convertible securities include corporate bonds, notes and
preferred stock that can be converted into or exchanged for a prescribed amount of common stock of the same or a different issue within a particular period of time at a specified price or formula. A convertible security entitles the holder to
receive interest paid or accrued on debt or dividends paid on preferred stock until the convertible stock matures or is redeemed, converted or exchanged. While no securities investment is without some risk, investments in convertible securities
generally entail less risk than the issuer’s common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a fixed income security. The
market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline. While convertible securities generally offer lower interest or dividend yields than nonconvertible debt
securities of similar quality, they do enable the investor to benefit from increases in the market price of the underlying common stock. When investing in convertible securities, the Fund may invest in the lowest credit rating category.
Preferred Stock
. The Fund may invest in preferred stock. A preferred stock blends the characteristics of a bond and common stock. It can offer the higher yield of a bond and
has priority over common stock in equity ownership, but does not have the seniority of a bond and its participation in the issuer’s growth may be limited. Preferred stock has preference over common stock in the receipt of dividends and in any
residual assets after payment to creditors if the issuer is dissolved. Although the dividend is set at a fixed annual rate, in some circumstances it can be changed or omitted by the issuer. When investing in preferred stocks, the Fund may invest in
the lowest credit rating category.
Warrants and Rights
. The Fund may purchase warrants and rights, which are instruments that permit the Fund to acquire, by subscription, the capital stock of a corporation at
a set price, regardless of the market price for such stock. Warrants may be either perpetual or of limited duration, but they usually do not have voting rights or pay dividends. The market price of warrants is usually significantly less than the
current price of the underlying stock. Thus, there is a greater risk that warrants might drop in value at a faster rate than the underlying stock.
The Fund may have both direct and
indirect exposure to foreign securities through investments in publicly traded securities such as stocks and bonds, stock index futures contracts, options on stock index futures contracts and options on securities and on stock indices to foreign
securities. In most cases, the best available market for foreign securities will be on exchanges or in OTC markets located outside the United States.
Investing in foreign securities
carries political and economic risks distinct from those associated with investing in the United States. Non-U.S. securities may be subject to currency risks or to foreign government taxes. There may be less information publicly available about a
non-U.S. issuer than about a U.S. issuer, and a foreign issuer may or may not be subject uniform accounting, auditing and financial reporting standards and practices comparable to those in the U.S. Other risks of investing in such securities include
political or economic instability in the country involved, the difficulty of predicting international trade patterns and the possibility of the imposition of exchange controls. The prices of such securities may be more volatile than those of U.S.
securities. There maybe also be the possibility of expropriation of assets or nationalization, imposition of withholding taxes on dividend or interest payments, difficulty obtaining and enforcing judgments against foreign entities or diplomatic
developments which could affect investment in these countries. Losses and other expenses may be incurred in converting currencies in connection with purchases and sales of foreign securities.
Non-U.S. stocks markets may not be as
developed or efficient as, and may be more volatile than, those in the U.S. While the volume of shares traded on non-U.S. stock markets generally has been growing, such markets usually have substantially less volume than U.S. markets. Therefore, the
Fund’s investment in non-U.S. equity securities may be less liquid and subject to more rapid and erratic price movements than comparable securities listed for trading on U.S. exchanges. Non-U.S. equity securities may trade at price/earnings
multiples higher than comparable U.S. securities and such levels may not be sustainable. There may be less government supervision and regulation of foreign stock exchanges, brokers, banks and listed companies abroad than in the U.S. Moreover,
settlement practices for transactions in foreign markets may differ from those in U.S. markets. Such differences may include delays beyond periods customary in the U.S. and practices, such as delivery of securities prior to receipt of payment, that
increase the likelihood of a failed settlement, which can result in losses to the Fund. The
value of non-U.S.
investments and the investment income derived from them may also be affected unfavorably by changes in currency exchange control regulations. Foreign brokerage commissions, custodial expenses and other fees are also generally higher than for
securities traded in the U.S. This may cause the Fund to incur higher portfolio transaction costs than domestic equity funds. Fluctuations in exchanges rates may also affect the earning power and asset value of the foreign entity issuing a security,
even on denominated in U.S. dollars. Dividend and interest payments may be repatriated based on the exchange rate at the time of disbursement, and restrictions on capital flows may be imposed.
Developing and Emerging Markets
.
Emerging and developing markets abroad may offer special opportunities for
investing,
but may have greater risks than more developed foreign markets, such as those in Europe,
Canada,
Australia,
New Zealand and Japan.
There may be even less liquidity in their securities markets, and settlements of purchases and sales of
securities may be subject to additional delays. They are subject to greater risks of limitations on the repatriation of income and profits because of currency restrictions imposed by local governments. Those countries may also be subject to the risk
of greater political and economic instability, which can greatly affect the volatility of prices of securities in those countries.
Investing in emerging market
securities imposes risks different from, or greater than, risks of investing in foreign developed countries. These risks include: smaller market capitalization of securities markets, which may suffer periods of relative illiquidity; significant
price volatility; restrictions on foreign investment; and possible repatriation of investment income and capital. In addition, foreign investors may be required to register the proceeds of sales; future economic or political crises could lead to
price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization, or creation of government monopolies. The currencies of emerging market countries may experience significant declines against the U.S. Dollar.
Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries. Additional risks of emerging markets securities may include:
greater social, economic and political uncertainty and instability; more substantial governmental involvement in the economy; less governmental supervision and regulation; unavailability of currency hedging techniques; companies that are newly
organized and small; differences in auditing and financial reporting standards, which may result in unavailability of material information about issuers; and less developed legal systems. In addition, emerging securities markets may have different
clearance and settlement procedures, which may be unable to keep pace with the volume of securities transactions or otherwise make it difficult to engage in such transactions.
Asia-Pacific Countries
. In addition to the risks associated with foreign and emerging markets, the developing market Asia-Pacific countries in which the Fund may invest are
subject to certain additional or specific risks. The Fund may make substantial investments in Asia-Pacific countries. In the Asia-Pacific markets, there is a high concentration of market capitalization and trading volume in a small number of issuers
representing a limited number of industries, as well as a high concentration of investors and financial intermediaries. Many of these markets also may be affected by developments with respect to more established markets in the region, such as Japan
and Hong Kong. Brokers in developing market Asia-Pacific countries typically are fewer in number and less well-capitalized than brokers in the United States. These factors, combined with the U.S. regulatory requirements for open-end investment
companies and the restrictions on foreign investment, result in potentially fewer investment opportunities for the Fund and may have an adverse impact on the Fund’s investment performance.
Many of the developing market
Asia-Pacific countries may be subject to a greater degree of economic, political and social instability than is the case in the United States and Western European countries. Such instability may result from, among other things: (i) authoritarian
governments or military involvement in political and economic decision-making, including changes in government through extra-constitutional means; (ii) popular unrest associated with demands for improved political, economic and social conditions;
(iii) internal insurgencies; (iv) hostile relations with neighboring countries; and/or (v) ethnic, religious and racial disaffection. In addition, the governments of many of such countries, such as Indonesia, have a heavy role in regulating and
supervising the economy.
An
additional risk common to most such countries is that the economy is heavily export-oriented and, accordingly, is dependent upon international trade. The existence of overburdened infrastructure and obsolete financial systems also present risks in
certain countries, as do environmental problems. Certain economies also depend to a significant degree upon exports of primary commodities and, therefore, are vulnerable to changes in commodity prices that, in turn, may be affected by a variety of
factors. The legal systems in certain developing market Asia-Pacific countries also may have an adverse impact on the Fund. For example, while the potential liability of a shareholder in a U.S. corporation with respect to acts of the corporation is
generally limited to the amount of the shareholder's investment, the notion of limited liability is less clear in certain emerging market Asia-Pacific countries. Similarly, the rights of investors in developing market Asia-Pacific companies may be
more limited than those of shareholders of U.S. corporations. It may be difficult or impossible to obtain and/or enforce a judgment in a developing market Asia-Pacific country.
Governments of many developing
market Asia-Pacific countries have exercised and continue to exercise substantial influence over many aspects of the private sector. In certain cases, the government owns or controls many companies, including the largest in the country. Accordingly,
government actions in the future could have a significant effect on economic conditions in developing market Asia-Pacific countries, which could affect private sector companies and the Fund itself, as well as the value of securities in the Fund's
portfolio. In addition, economic statistics of developing market Asia-Pacific countries may be less reliable than economic statistics of more developed nations.
It is possible that developing market
Asia-Pacific issuers may not be subject to the same accounting, auditing and financial reporting standards as U.S. companies. Inflation accounting rules in some developing market Asia-Pacific countries require companies that keep accounting records
in the local currency, for both tax and accounting purposes, to restate certain assets and liabilities on the company’s balance sheet in order to express items in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits for certain developing market Asia-Pacific companies. In addition, satisfactory custodial services for investment securities may not be available in some developing Asia-Pacific countries, which may result in
the Fund incurring additional costs and delays in providing transportation and custody services for such securities outside such countries.
Certain developing Asia-Pacific
countries are especially large debtors to commercial banks and foreign governments. Fund management may determine that, notwithstanding otherwise favorable investment criteria, it may not be practicable or appropriate to invest in a particular
developing Asia-Pacific country. The Fund may invest in countries in which foreign investors, including management of the Fund, have had no or limited prior experience.
Brazil
. Investing in Brazil involves certain considerations not typically associated with investing in the United States. Additional considerations include: (i) investment
and repatriation controls, which could affect the Fund’s ability to operate; (ii) fluctuations in the rate of exchange between the Brazilian Real and the U.S. Dollar; (iii) the generally greater price volatility and lesser liquidity that
characterize Brazilian securities markets, as compared with U.S. markets; (iv) the effect that balance of trade could have on Brazilian economic stability and the Brazilian government's economic policy; (v) potentially high rates of inflation, a
rising unemployment rate, and a high level of debt, each of which may hinder economic growth; (vi) governmental involvement in and influence on the private sector; (vii) Brazilian accounting, auditing and financial standards and requirements, which
differ from those in the United States; (viii) political and other considerations, including changes in applicable Brazilian tax laws; and (ix) restrictions on investments by foreigners. In addition, commodities, such as oil, gas and minerals,
represent a significant percentage of Brazil’s exports and, therefore, its economy is particularly sensitive to fluctuations in commodity prices. Additionally, an investment in Brazil is subject to certain risks stemming from political and
economic corruption. For example, the Brazilian Federal Police conducted a criminal investigation into corruption allegations, known as Operation Car Wash, which led to charges against high level politicians and corporate executives and resulted in
substantial fines for some of Brazil’s largest companies. This has had a widespread political and economic impact and may continue to affect negatively the country and the reputation of Brazilian companies connected with the investigation, and
therefore, the trading price of securities issued by those companies. While the economy of Brazil has enjoyed substantial economic growth in recent years, there can be no guarantee that this growth will continue.
China
. Investing in China involves special considerations not typically associated with investing in countries with more democratic governments or more established economies
or currency markets. These risks include: (i) the risk of nationalization or expropriation of assets or confiscatory taxation; (ii) greater governmental involvement in and control over the economy, interest rates and currency exchange rates; (iii)
controls on foreign investment and limitations on repatriation of invested capital; (iv) greater social, economic and political uncertainty (including the risk of war); (v) dependency on exports and the corresponding importance of international
trade; (vi) currency exchange rate fluctuations; (vii) differences in, or lack of, auditing and financial reporting standards that may result in unavailability of material information about issuers; and (viii) the risk that certain companies in
which the Fund may invest may have dealings with countries subject to sanctions or embargoes imposed by the U.S. government or identified as state sponsors of terrorism.
For over three decades, the Chinese
government has been reforming economic and market practice and has been providing a larger sphere for private ownership of property. While currently contributing to growth and prosperity, the government may decide not to continue to support these
economic reform programs and could possible return to the completely centrally planned economy that existed prior to 1978. There is also a greater risk in China than in many other countries of currency fluctuations, currency non-convertibility,
interest rate fluctuations and higher rates of inflation as a result of internal social unrest or conflicts with other countries. China is an emerging market and demonstrates significantly higher volatility from time to time in comparison to
developed markets. The government of China maintains strict currency controls in support of economic, trade and political objectives and regularly intervenes in the currency market. The government's actions in this respect may not be transparent or
predictable. As a result, the value of the Yuan, and the value of securities designed to provide exposure to the Yuan, can change quickly and arbitrarily. Furthermore, it is difficult for foreign investors to directly access money market securities
in China because of investment and trading restrictions. While the economy of China has enjoyed substantial economic growth in recent years, there can be no guarantee this growth will continue. Reduction in spending on Chinese products and services,
the institution of additional tariffs or other trade barriers, including as a result of heightened trade tensions between China and the United States, or a downturn in any of the economies of China’s key trading partners may have an adverse
impact on the Chinese economy. These and other factors may decrease the value and liquidity of the Fund's investments. The Chinese economy may experience a significant slowdown as a result of, among other things, a deterioration of global demand for
Chinese exports, as well as contraction in spending on domestic goods by Chinese consumers. In addition, China may experience substantial rates of inflation or economic recessions, which would have a negative effect on its economy and securities
market.
Recently, there has
been increased attention from the SEC and the Public Company Accounting Oversight Board (“PCAOB”) with regard to international auditing standards of U.S.-listed companies with significant operations in China as well as
PCAOB-registered auditing firms in China. Currently,
the SEC and PCAOB are only able to get limited information about these auditing firms and are restricted from inspecting the audit work and practices of registered accountants in China. These restrictions may result in the unavailability of material
information about the Chinese issuers.
China A-shares are equity securities
of companies based in mainland China that trade on Chinese stock exchanges such as the Shanghai Stock Exchange (“SSE”) and the Shenzhen Stock Exchange (“SZSE”) (“A-shares”). Foreign investment in A-shares on the
SSE and SZSE has historically not been permitted other than through licenses granted by the People’s Republic of China (“PRC”) known as the Qualified Foreign Institutional Investor (“QFII”) and Renminbi Qualified
Foreign Institutional Investor (“RQFII”) licenses. Each license permits investment in A-shares only up to a specified quota.
Because restrictions continue to
exist and capital therefore cannot flow freely into and out of the A-Share market, it is possible that in the event of a market disruption, the liquidity of the A-Share market and trading prices of A-Shares could be more severely affected than the
liquidity and trading prices of markets where securities are freely tradable and capital therefore flows more freely. The nature and duration of such a market disruption or the impact that it may have on the A-Share market are unknown. In the event
that a Fund invests in A-Shares directly, a Fund may incur significant losses, or may not be able fully to implement or pursue its investment objectives or strategies, due to investment restrictions on RQFIIs and QFIIs, illiquidity of the Chinese
securities markets, or delay or disruption in execution or settlement of trades. A-Shares may become subject to frequent and widespread trading halts.
The Chinese government has in the
past taken actions that benefitted holders of A-Shares. As A-Shares become more available to foreign investors, such as a Fund, the Chinese government may be less likely to take action that would benefit holders of A-Shares. In addition, there is no
guarantee that an A-Shares quota will be sufficient for a Fund’s intended scope of investment.
The regulations which apply to
investments by RQFIIs and QFIIs, including the repatriation of capital, are relatively new. The application and interpretation of such regulations are therefore relatively untested. In addition, there is little precedent or certainty evidencing how
such discretion may be exercised now or in the future; and even if there were precedent, it may provide little guidance as PRC authorities would likely continue to have broad discretion.
Investment in eligible A-shares
listed and traded on the SSE is now permitted through the Stock Connect program. Stock Connect is a securities trading and clearing program established by Hong Kong Securities Clearing Company Limited, the SSE and Chinese Securities Depositary and
Clearing Corporation that aims to provide mutual stock market access between China and Hong Kong by permitting investors to trade and settle shares on each market through their local exchanges. Certain Funds may invest in other investment companies
that invest in A-shares through Stock Connect or on such other stock exchanges in China which participate in Stock Connect from time to time. Under Stock Connect, the Fund’s trading of eligible A-shares listed on the SSE would be effectuated
through its Hong Kong broker.
Although no individual investment
quotas or licensing requirements apply to investors in Stock Connect, trading through Stock Connect’s Northbound Trading Link is subject to aggregate and daily investment quota limitations that require that buy orders for A-shares be rejected
once the remaining balance of the relevant quota drops to zero or the daily quota is exceeded (although the Fund will be permitted to sell A-shares regardless of the quota balance). These limitations may restrict the Fund from investing in A-shares
on a timely basis, which could affect the Fund’s ability to effectively pursue its investment strategy. Investment quotas are also subject to change. Investment in eligible A-shares through Stock Connect is subject to trading, clearance and
settlement procedures that could pose risks to the Fund. A-shares purchased through Stock Connect generally may not be sold or otherwise transferred other than through Stock Connect in accordance with applicable rules. In addition, Stock Connect
will only operate on days when both the Chinese and Hong Kong markets are open for trading and when banks in both markets are open on the corresponding settlement days. Therefore, an investment in A-shares through Stock Connect may subject the Fund
to a risk of price fluctuations on days where the Chinese market is open, but Stock Connect is not trading.
Europe
.
Investing in European countries may impose economic and political risks associated with Europe in general and the specific European countries in which it invests.
The economies and markets of European countries are often closely connected and interdependent, and events in one European country can have an adverse impact on other European countries. The Fund makes investments in securities of issuers that are
domiciled in, or have significant operations in, member countries of the Economic and Monetary Union of the European Union (the “EU”), which requires member countries to comply with restrictions on inflation rates, deficits, interest
rates, debt levels and fiscal and monetary controls, each of which may significantly affect every country in Europe. Decreasing imports or exports, changes in governmental or EU regulations on trade, changes in the exchange rate of the euro (the
common currency of certain EU countries), the default or threat of default by an EU member country on its sovereign debt, and/or an economic recession in an EU member country may have a significant adverse effect on the economies of EU member
countries and their trading partners, including some or all of the emerging markets materials sector countries. Although certain European countries do not use the euro, many of these countries are obliged to meet the criteria for joining the euro
zone. Consequently, these countries must comply with many of the restrictions noted above. The European financial markets have experienced volatility and adverse trends in recent years due to concerns about economic downturns, rising government debt
levels and the possible default of government debt in several European countries, including Greece, Ireland, Italy, Portugal and Spain. In order to prevent further economic deterioration, certain
countries, without prior warning, can institute
“capital controls.” Countries may use these controls to restrict volatile movements of capital entering and exiting their country. Such controls may negatively affect the Fund’s investments. A default or debt restructuring by any
European country would adversely impact holders of that country’s debt and sellers of credit default swaps linked to that country’s creditworthiness, which may be located in countries other than those listed above. In addition, the
credit ratings of certain European countries were recently downgraded. These downgrades may result in further deterioration of investor confidence. These events have adversely affected the value and exchange rate of the euro and may continue to
significantly affect the economies of every country in Europe, including countries that do not use the euro and non-EU member countries. Responses to the financial problems by European governments, central banks and others, including austerity
measures and reforms, may not produce the desired results, may result in social unrest and may limit future growth and economic recovery or have other unintended consequences. Further defaults or restructurings by governments and other entities of
their debt could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, one or more countries may abandon the euro and/or withdraw from the EU, including, with respect to the latter, the
United Kingdom, which is a significant market in the global economy. The impact of these actions, especially if they occur in a disorderly fashion, is not clear but could be significant and far-reaching and could adversely impact the value of
investments in the region.
In a referendum
held on June 23, 2016, the United Kingdom (the “UK”) resolved to leave the EU (referred to as “Brexit”). The referendum has introduced significant uncertainties and instability in the financial markets as the UK negotiates
its exit from the EU, which is currently scheduled for March 29, 2019, however, this timing could change. The outcome of negotiations and the potential consequences remain uncertain. The effects of Brexit will depend on any agreements the UK makes
to retain access to the EU Common Market either during a transitional period or more permanently. Brexit could lead to legal and tax uncertainty and potentially divergent national laws and regulations as the UK determines which EU laws to replace or
replicate. Additionally, Brexit could lead to global economic uncertainty and result in significant volatility in the global stock markets and currency exchange rate fluctuations. The UK has one of the largest economies in Europe and is a major
trading partner with the other EU countries and the United States. If implemented, Brexit might negatively affect the City of London’s economy, which is heavily dominated by financial services, as banks might be forced to move staff and comply
with two separate sets of rules or lose business to banks in Continental Europe. In addition, Brexit would likely create additional economic stresses for the UK, including the potential for decreased trade, capital outflows, devaluation of the
British pound, wider corporate bond spreads due to uncertainty, and declines in business and consumer spending as well as foreign direct investment.
Brexit may also have a destabilizing
impact on the EU to the extent that other member states similarly seek to withdraw from the EU. Any further exits from the EU would likely cause additional market disruptions globally and introduce new legal and regulatory uncertainties.
India
. Investments in India involve special considerations not typically associated with investing in countries with more established economies or currency markets.
Political, religious, and border disputes persist in India. India has recently experienced and may continue to experience civil unrest and hostilities with certain of its neighboring countries, including Pakistan, and the Indian government has
confronted separatist movements in several Indian states, including Kashmir. Government control over the economy, currency fluctuations or blockage, and the risk of nationalization or expropriation of assets offer higher potential losses.
Governmental actions could have a negative effect on the economic conditions in India, which could adversely affect the value and liquidity of investments made by the Fund. The securities markets in India are comparatively underdeveloped with some
exceptions and consist of a small number of listed companies with small market capitalization, greater price volatility and substantially less liquidity than companies in more developed markets. The limited liquidity of the Indian securities market
may also affect the Fund’s ability to acquire or dispose of securities at the price or time that it desires or the Fund’s ability to track the Index.
The Indian government exercises
significant influence over many aspects of the economy, and the number of public sector enterprises in India is substantial. While the Indian government has implemented economic structural reform with the objectives of liberalizing India's exchange
and trade policies, reducing the fiscal deficit, controlling inflation, promoting a sound monetary policy, reforming the financial sector, and placing greater reliance on market mechanisms to direct economic activity, there can be no assurance that
these policies will continue or that the economic recovery will be sustained.
Global factors and foreign actions
may inhibit the flow of foreign capital on which India is dependent to sustain its growth. In addition, the Reserve Bank of India has imposed limits on foreign ownership of Indian companies, which may decrease the liquidity of the Fund’s
portfolio and result in extreme volatility in the prices of Indian securities. In November 2016, the Indian government eliminated certain large denomination cash notes as legal tender, causing uncertainty in certain financial markets. These factors,
coupled with the lack of extensive accounting, auditing and financial reporting standards and practices, as applicable in the United States, may increase the risk of loss for the Fund.
Securities laws in India are
relatively new and unsettled and, as a result, there is a risk of significant and unpredictable change in laws governing foreign investment, securities regulation, title to securities and shareholder rights. Foreign investors in particular may be
adversely affected by new or amended laws and regulations. Certain Indian regulatory approvals, including approvals from the Securities and Exchange Board of India, the central government and the tax authorities (to
the extent that tax benefits need to be utilized), may
be required before the Fund can make investments in Indian companies. Foreign investors in India still face burdensome taxes on investments in income producing securities.
While the Indian economy has enjoyed
substantial economic growth in recent years, there can be no guarantee this growth will continue. Technology and software sectors represent a significant portion of the total capitalization of the Indian securities markets. The value of these
companies will generally fluctuate in response to technological and regulatory developments, and, as a result, the Fund’s holdings are expected to experience correlated fluctuations. Natural disasters, such as tsunamis, flooding or droughts,
could occur in India or surrounding areas and could negatively affect the Indian economy. Agriculture occupies a prominent position in the Indian economy, therefore, it may be negatively affected by adverse weather conditions and the effects of
global climate change. These and other factors may decrease the value and liquidity of the Fund's investments.
Italy
.
Investment in Italian issuers involves risks that are specific to Italy, including, regulatory, political, currency, and economic risks. Italy’s economy is
dependent upon external trade with other economies
—
specifically Germany, France and
other Western European developed countries. As a result, Italy is dependent on the economies of these other countries and any change in the price or demand for Italy’s exports may have an adverse impact on its economy. Interest rates on
Italy’s debt may rise to levels that may make it difficult for it to service high debt levels without significant financial help from the EU and could potentially lead to default. Recently, the Italian economy has experienced volatility due to
concerns about economic downturn and rising government debt levels. Italy has been warned by the Economic and Monetary Union of the EU to reduce its public spending and debt and actions by Italy to cut spending or increase taxes in response could
have significant adverse effects on the Italian economy. These events have adversely impacted the Italian economy, causing credit agencies to lower Italy’s sovereign debt rating and could decrease outside investment in Italian companies. High
amounts of debt and public spending may stifle Italian economic growth or cause prolonged periods of recession.
Japan
. Japanese investments may be significantly affected by events influencing Japan’s economy and changes in the exchange rate between the Japanese yen and the U.S.
Dollar. Japan’s economy fell into a long recession in the 1990s. After a few years of mild recovery in the mid-2000s, Japan’s economy fell into another recession as a result of the recent global economic crisis. Japan is heavily
dependent on exports and foreign oil and may be adversely affected by higher commodity prices, trade tariffs, protectionist measures, competition from emerging economies, and the economic conditions of its trading partners, such as China.
Furthermore, Japan is located in a seismically active area, and in 2011 experienced an earthquake of a sizeable magnitude and a tsunami that significantly affected important elements of its infrastructure and resulted in a nuclear crisis. Since
these events, Japan’s financial markets have fluctuated dramatically. The full extent of the impact of these events on Japan’s economy and on foreign investment in Japan is difficult to estimate. The risks of natural disaster of varying
degrees, such as earthquakes and tsunamis, and the resulting damage, continue to exist. Japan’s economic prospects may be affected by the political and military situations of its near neighbors, notably North and South Korea, China, and
Russia. In addition, Japan’s labor market is adapting to an aging workforce, declining population, and demand for increased labor mobility. These demographic shifts and fundamental structural changes to the labor markets may negatively impact
Japan’s economic competiveness.
South Korea
. South Korean investments may be significantly affected by events influencing its economy, which is heavily dependent on exports and the demand for certain
finished goods. South Korea’s main industries include electronics, automobile production, chemicals, shipbuilding, steel, textiles, clothing, footwear, and food processing. Conditions that weaken demand for such products worldwide or in other
Asian countries could have a negative impact on the South Korean economy as a whole. The South Korean economy’s reliance on international trade makes it highly sensitive to fluctuations in international commodity prices, currency exchanges
rates and government regulation, and vulnerable to downturns of the world economy, particularly with respects to its four largest export markets (the EU, Japan, United States, and China). South Korea has experienced modest economic growth in recent
years, but such continued growth may slow due, in part, to the economic slowdown in China and the increased competitive advantage of Japanese exports with the weakened yen. The South Korean economy’s long-term challenges include an aging
population, inflexible labor market, and overdependence on exports to drive economic growth. Relations with North Korea could also have as significant impact on the economy of South Korea. Relations between South Korea and North Korea remain tense,
as exemplified in periodic acts of hostility, and the possibility of serious military engagement still exists. Armed conflict between North Korea and South Korea could have a severe adverse impact on the South Korean economy and its securities
markets.
Latin America
. Investments in Latin American countries involve special considerations not typically associated with investing in the United States. Most Latin American
countries have experienced, at one time or another, severe and persistent levels of inflation, including, in some cases, hyperinflation. This has, in turn, led to high interest rates, extreme measures by governments to keep inflation in check, and a
generally debilitating effect on economic growth. Although inflation in many countries has lessened, there is no guarantee it will remain at lower levels. In addition, the political history of certain Latin American countries has been characterized
by political uncertainty, military intervention in civilian and economic spheres, and political corruption. Such developments, if they were to reoccur, could reverse favorable trends toward market and economic reform, privatization, and removal of
trade barriers, and result in significant disruption to the securities markets. Certain Latin American countries may also have managed currencies, which are maintained at artificial levels to the U.S. Dollar rather than at levels determined by the
market. This type of system can lead to sudden and large adjustments in the currency which, in turn, can have a disruptive and negative effect on foreign investors. For example, in late 1994, the value of the
Mexican peso lost more than one-third of its value
relative to the U.S. Dollar. Certain Latin American countries also restrict the free conversion of their currency into foreign currencies, including the U.S. Dollar. There is no significant foreign exchange market for many currencies and it would,
as a result, be difficult for the Fund to engage in foreign currency transactions designed to protect the value of the Fund’s interests in securities denominated in such currencies. Finally, a number of Latin American countries are among the
largest debtors of developing countries. There have been moratoria on, and reschedulings of, repayment with respect to these debts. Such events can restrict the flexibility of these debtor nations in the international markets and result in the
imposition of onerous conditions on their economies.
Mexico
. Investment in Mexican issuers involves risks that are specific to Mexico, including regulatory, political, and economic risks. In the past, Mexico has experienced
high interest rates, economic volatility, significant devaluation of its currency (the peso), and high unemployment rates. The Mexican economy is dependent upon external trade with other economies, specifically with the United States and certain
Latin American countries. Additionally, a high level of foreign investment in Mexican assets may increase Mexico’s exposure to risks associated with changes in international investor sentiment. Recent political developments in the U.S. may
also have potential implications for the current trade arrangements between the U.S. and Mexico, which could affect the value of securities held by the Fund. For example, uncertainty regarding the status of the North American Free Trade Agreement
(NAFTA) or its recently negotiated successor -- the United States-Mexico-Canada Agreement -- may have a significant impact on Mexico’s economic outlook and the value of a fund’s investment in Mexico.
The Mexican economy is heavily
dependent on trade with, and foreign investment from, the U.S. and Canada, which are Mexico’s principal trading partners. Any changes in the supply, demand, price or other economic component of Mexico’s imports or exports, as well as any
reductions in foreign investment from, or changes in the economies of, the U.S. or Canada, may have an adverse impact on the Mexican economy. Because commodities such as oil and gas, minerals and metals represent a large portion of the
region’s exports, the economies of these countries are particularly sensitive to fluctuations in commodity prices. Mexico’s economy has also become increasingly oriented toward manufacturing in the years since NAFTA entered into force.
Because Mexico’s top export is automotive vehicles, its economy is strongly tied to the U.S. automotive market, and changes to certain segments in the U.S. market could have an impact on the Mexican economy. The automotive industry and other
industrial products can be highly cyclical, and companies in these industries may suffer periodic operating losses. These industries can also be significantly affected by labor relations and fluctuating component prices. The agricultural and mining
sectors of Mexico’s economy also account for a large portion of its exports, and Mexico is susceptible to fluctuations in the price and demand for agricultural products and natural resources. In addition, Mexico has privatized or has begun the
process of privatization of certain entities and industries, and some investors have suffered losses due to the inability of the newly privatized entities to adjust to a competitive environment and changing regulatory standards.
Mexico has been destabilized by local
insurrections, social upheavals and drug related violence. Additionally, violence near border areas, border-related political disputes, and other social upheaval may lead to strained international relations. Mexico has also experienced contentious
and very closely decided elections. Changes in political parties and other political events may affect the economy and contribute to additional instability. Recurrence of these or similar conditions may adversely impact the Mexican economy.
Russia
. Investing in Russia involves risks and special considerations not typically associated with investing in United States. Since the breakup of the Soviet Union at the
end of 1991, Russia has experienced dramatic political, economic, and social change. The political system in Russia is emerging from a long history of extensive state involvement in economic affairs. The country is undergoing a rapid transition from
a centrally-controlled command system to a market-oriented, democratic model. As a result, companies in Russia are characterized by a lack of: (i) management with experience of operating in a market economy; (ii) modern technology; and, (iii) a
sufficient capital base with which to develop and expand their operations. It is unclear what will be the future effect on Russian companies, if any, of Russia’s continued attempts to move toward a more market-oriented economy. Russia’s
economy has experienced severe economic recession, if not depression, since 1990 during which time the economy has been characterized by high rates of inflation, high rates of unemployment, declining gross domestic product, deficit government
spending, and a devalued currency. The economic reform program has involved major disruptions and dislocations in various sectors of the economy, and those problems have been exacerbated by growing liquidity problems. Russia’s economy is also
heavily reliant on the energy and defense-related sectors, and is therefore susceptible to the risks associated with these industries. Further, Russia presently receives significant financial assistance from a number of countries through various
programs. To the extent these programs are reduced or eliminated in the future, Russian economic development may be adversely impacted. The laws and regulations in Russia affecting Western business investment continue to evolve in an unpredictable
manner. Russian laws and regulations, particularly those involving taxation, foreign investment and trade, title to property or securities, and transfer of title, which may be applicable to the Fund’s activities are relatively new and can
change quickly and unpredictably in a manner far more volatile than in the United States or other developed market economies. Although basic commercial laws are in place, they are often unclear or contradictory and subject to varying interpretation,
and may at any time be amended, modified, repealed or replaced in a manner adverse to the interest of the Fund.
As a result of
recent events involving Ukraine and Russia and other political conflicts, the United States and the European Union imposed sanctions on certain Russian individuals and companies, including certain financial institutions, and have limited certain
exports and imports to and from Russia. The United States and other nations or international organizations
may impose additional, broader economic sanctions or
take other actions that may adversely affect Russian-related issuers in the future. These sanctions, any future sanctions or other actions, or even the threat of further sanctions or other actions, may negatively affect the value and liquidity of
the Fund’s investments. Russia may undertake countermeasures or retaliatory actions which may further impair the value and liquidity of the Fund’s investments.
To the extent the Fund invests in
stocks of foreign corporations, the Fund’s investment in such stocks may also be in the form of depositary receipts or other securities convertible into securities of foreign issuers. Depository receipts are receipts, typically issued by a
financial institution, with evidence of underlying securities issued by a non-U.S. issuer. Types of depositary receipts include American Depositary Receipts (“ADRs”), Global Depositary Receipts (“GDRs”) and European
Depositary Receipts (“EDRs”). Depository receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted.
ADRs are receipts typically issued by
an American bank or trust company that evidence ownership of underlying securities issued by a foreign corporation. Investments in ADRs have certain advantages over direct investment in the underlying foreign securities because: (i) ADRs are U.S.
dollar-denominated investments that are easily transferable and for which market quotations are readily available, and (ii) issuers whose securities are represented by ADRs are generally subject to auditing, accounting and financial reporting
standards similar to those applied to domestic issuers. By investing in ADRs rather than directly in the stock of foreign issuers outside the U.S. the Fund may avoid certain risks related to investing in foreign securities in non-U.S. markets,
however, ADRs do not eliminate all risks inherent in investing in the securities of foreign issuers.
EDRs are receipts issued in Europe
that evidence a similar ownership arrangement. GDRs are receipts issued throughout the world that evidence a similar arrangement. Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are
designed for use in European securities markets. GDRs are tradable both in the United States and in Europe and are designed for use throughout the world.
Depositary receipts may be purchased
through “sponsored” or “unsponsored” facilities, in which the Fund may invest. A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a depositary may establish an
unsponsored facility without participation by the issuer of the depositary security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts of the deposited securities.
Fund investments in depositary receipts,
which include ADRs, GDRs and EDRs, are deemed to be investments in foreign securities for purposes of the Fund’s investment strategy.
The Fund may invest directly and
indirectly in foreign currencies. Investments in foreign currencies are subject to numerous risks not least being the fluctuation of foreign currency exchange rates with respect to the U.S. Dollar. Exchange rates fluctuate for a number of
reasons.
Inflation
. Exchange rates change to reflect changes in a currency’s buying power. Different countries experience different inflation rates due to different monetary
and fiscal policies, different product and labor market conditions, and a host of other factors.
Trade
Deficits
. Countries with trade deficits tend to experience a depreciating currency. Inflation may be the cause of a trade deficit, making a country’s goods more expensive and less competitive and so
reducing demand for its currency.
Interest
Rates
. High interest rates may raise currency values in the short term by making such currencies more attractive to investors. However, since high interest rates are often the result of high inflation,
long-term results may be the opposite.
Budget Deficits and Low Savings Rates
. Countries that run large budget deficits and save little of their national income tend to suffer a depreciating currency because they
are forced to borrow abroad to finance their deficits. Payments of interest on this debt can inundate the currency markets with the currency of the debtor nation. Budget deficits also can indirectly contribute to currency depreciation if a
government chooses inflationary measures to cope with its deficits and debt.
Political
Factors
. Political instability in a country can cause a currency to depreciate. Demand for a certain currency may fall if a country appears a less desirable place in which to invest and do
business.
Government Control
. Through their own buying and selling of currencies, the world’s central banks sometimes manipulate exchange rate movements. In addition,
governments occasionally issue statements to influence people’s expectations about the direction of exchange rates, or they may instigate policies with an exchange rate target as the goal.
The value of the
Fund’s investments is calculated in U.S. Dollars each day that the New York Stock Exchange (“NYSE”) is open for business. As a result, to the extent that the Fund’s assets are invested in instruments denominated in foreign
currencies and the currencies appreciate relative to the U.S. Dollar, the Fund’s NAV per share as expressed in U.S. Dollars (and, therefore, the value of your investment) should increase. If the U.S. Dollar appreciates relative to the other
currencies, the opposite should occur.
The currency-related gains and losses
experienced by the Fund will be based on changes in the value of portfolio securities attributable to currency fluctuations only in relation to the original purchase price of such securities as stated in U.S. Dollars. Gains or losses on shares of
the Fund will be based on changes attributable to fluctuations in the NAV of such shares, expressed in U.S. Dollars, in relation to the original U.S. Dollar purchase price of the shares. The amount of appreciation or depreciation in the Fund’s
assets also will be affected by the net investment income generated by the money market instruments in which the Fund invests and by changes in the value of the securities that are unrelated to changes in currency exchange rates.
The Fund may incur currency exchange
costs when it sells instruments denominated in one currency and buys instruments denominated in another.
Currency Transactions
. The Fund conducts currency exchange transactions on a spot basis. Currency transactions made on a spot basis are for cash at the spot rate prevailing
in the currency exchange market for buying or selling currency. The Fund also enters into forward currency contracts. See “Futures Contracts, Options, and Other Derivative Strategies” section below. A forward currency contract is an
obligation to buy or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are entered into on the
interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A currency forward contract will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the
currency that is purchased, similar to when a fund sells a security denominated in one currency and purchases a security denominated in another currency. For example, the Fund may enter into a forward contract when it owns a security that is
denominated in a non-U.S. currency and desires to “lock in” the U.S. dollar value of the security.
The Fund may invest in a combination
of forward currency contracts and U.S. Dollar-denominated market instruments in an attempt to obtain an investment result that is substantially the same as a direct investment in a foreign currency-denominated instrument. This investment technique
creates a “synthetic” position in the particular foreign-currency instrument whose performance the Adviser is trying to duplicate. For example, the combination of U.S. Dollar-denominated instruments with “long” forward
currency exchange contracts creates a position economically equivalent to a money market instrument denominated in the foreign currency itself. Such combined positions are sometimes necessary when the money market in a particular foreign currency is
small or relatively illiquid.
The Fund may invest in forward
currency contracts to hedge either specific transactions (transaction hedging) or portfolio positions (position hedging). Transaction hedging is the purchase or sale of forward currency contracts with respect to specific receivables or payables of
the Fund in connection with the purchase and sale of portfolio securities. Position hedging is the sale of a forward currency contract on a particular currency with respect to portfolio positions denominated or quoted in that currency.
The Fund may use forward currency
contracts for position hedging if consistent with its policy of trying to expose its net assets to foreign currencies. The Fund is not required to enter into forward currency contracts for hedging purposes and it is possible that the Fund may not be
able to hedge against a currency devaluation that is so generally anticipated that the Fund is unable to contract to sell the currency at a price above the devaluation level it anticipates.
The Fund currently does not intend to
enter into a forward currency contract with a term of more than one year, or to engage in position hedging with respect to the currency of a particular country to more than the aggregate market value (at the time the hedging transaction is entered
into) of its portfolio securities denominated in (or quoted in or currently convertible into or directly related through the use of forward currency contracts in conjunction with money market instruments to) that particular currency.
Under definitions adopted by the
Commodity Futures Trading Commission (“CFTC”) and SEC, non-deliverable forwards are considered swaps, and therefore are included in the definition of “commodity interests.” Although non-deliverable forwards have historically
been traded in the over-the-counter (“OTC”) market, as swaps they may in the future be required to be centrally cleared and traded on public facilities. For more information on central clearing and trading of cleared swaps, see
“Cleared swaps,” “Risks of cleared swaps,” “Comprehensive swaps regulation” and “Developing government regulation of derivatives.” Currency forwards that qualify as deliverable forwards are not
regulated as swaps for most purposes, and are not included in the definition of “commodity interests.” However these forwards are subject to some requirements applicable to swaps, including reporting to swap data repositories,
documentation requirements, and business conduct rules applicable to swap dealers. CFTC regulation of currency forwards, especially non-deliverable forwards, may restrict the Fund’s ability to use these instruments in the manner described
above or subject the investment manager to CFTC registration and regulation as a commodity pool operator (“CPO”).
At or before the
maturity of a forward currency contract, the Fund may either sell a portfolio security and make delivery of the currency, or retain the security and terminate its contractual obligation to deliver the currency by buying an “offsetting”
contract obligating it to buy, on the same maturity date, the same amount of the currency. If the Fund engages in an offsetting transaction, it may later enter into a new forward currency contract to sell the currency.
If the Fund engages in an offsetting
transaction, it will incur a gain or loss to the extent that there has been movement in forward currency contract prices. If forward prices go down during the period between the date the Fund enters into a forward currency contract for the sale of a
currency and the date it enters into an offsetting contract for the purchase of the currency, the Fund will realize a gain to the extent that the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to buy. If
forward prices go up, the Fund will suffer a loss to the extent the price of the currency it has agreed to buy exceeds the price of the currency it has agreed to sell.
Since the Fund invests in money
market instruments denominated in foreign currencies, it may hold foreign currencies pending investment or conversion into U.S. Dollars. Although the Fund values its assets daily in U.S. Dollars, it does not convert its holdings of foreign
currencies into U.S. Dollars on a daily basis. The Fund will convert its holdings from time to time, however, and incur the costs of currency conversion. Foreign exchange dealers do not charge a fee for conversion, but they do realize a profit based
on the difference between the prices at which they buy and sell various currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at one rate, and offer to buy the currency at a lower rate if the Fund tries to resell the currency
to the dealer.
Risks of currency forward contracts
.
The successful use of these transactions will usually depend on the Adviser’s ability to accurately forecast currency exchange
rate movements. Should exchange rates move in an unexpected manner, the Fund may not achieve the anticipated benefits of the transaction, or it may realize losses. In addition, these techniques could result in a loss if the counterparty to the
transaction does not perform as promised, including because of the counterparty’s bankruptcy or insolvency. While the Fund uses only counterparties that meet its credit quality standards, in unusual or extreme market conditions, a
counterparty’s creditworthiness and ability to perform may deteriorate rapidly, and the availability of suitable replacement counterparties may become limited. Currency forward contracts may limit potential gain from a positive change in the
relationship between the U.S. Dollar and foreign currencies. Unanticipated changes in currency prices may result in poorer overall performance for the Fund than if it had not engaged in such contracts. Moreover, there may be an imperfect correlation
between the Fund’s portfolio holdings of securities denominated in a particular currency and the currencies bought or sold in the forward contracts entered into by the Fund. This imperfect correlation may cause the Fund to sustain losses that
will prevent the Fund from achieving a complete hedge or expose the Fund to risk of foreign exchange loss.
Foreign Currency Options
. The Fund may invest in foreign currency-denominated securities and may buy or sell put and call options on foreign currencies. The Fund may buy or
sell put and call options on foreign currencies either on exchanges or in the OTC market. A put option on a foreign currency gives the purchaser of the option the right to sell a foreign currency at the exercise price until the option expires. A
call option on a foreign currency gives the purchaser of the option the right to purchase the currency at the exercise price until the option expires. Currency options traded on U.S. or other exchanges may be subject to position limits which may
limit the ability of the Fund to reduce foreign currency risk using such options. OTC options differ from traded options in that they are two-party contracts with price and other terms negotiated between buyer and seller, and generally do not have
as much market liquidity as exchange-traded options.
Foreign Currency
Exchange-Related Securities
Foreign Currency Warrants
. Foreign currency warrants such as Currency Exchange Warrants
SM
(“CEWs
SM
”) are warrants which entitle the
holder to receive from their issuer an amount of cash (generally, for warrants issued in the United States, in U.S. Dollars) which is calculated pursuant to a predetermined formula and based on the exchange rate between a specified foreign currency
and the U.S. Dollar as of the exercise date of the warrant. Foreign currency warrants generally are exercisable upon their issuance and expire as of a specified date and time. Foreign currency warrants have been issued in connection with U.S.
Dollar-denominated debt offerings by major corporate issuers in an attempt to reduce the foreign currency exchange risk which, from the point of view of prospective purchasers of the securities, is inherent in the international fixed-income
marketplace. Foreign currency warrants may attempt to reduce the foreign exchange risk assumed by purchasers of a security by, for example, providing for a supplemental payment in the event that the U.S. Dollar depreciates against the value of a
major foreign currency such as the Japanese yen or the Euro. The formula used to determine the amount payable upon exercise of a foreign currency warrant may make the warrant worthless unless the applicable foreign currency exchange rate moves in a
particular direction (
e.g.
, unless the U.S. Dollar appreciates or depreciates against the particular foreign currency to which the warrant is linked or indexed). Foreign currency warrants are severable from
the debt obligations with which they may be offered, and may be listed on exchanges. Foreign currency warrants may be exercisable only in certain minimum amounts, and an investor wishing to exercise warrants who possesses less than the minimum
number required for exercise may be required either to sell the warrants or to purchase additional warrants, thereby incurring additional transaction costs. In the case of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate relating to exercise is determined, during which
time the exchange rate could change significantly,
thereby affecting both the market and cash settlement values of the warrants being exercised. The expiration date of the warrants may be accelerated if the warrants should be delisted from an exchange or if their trading should be suspended
permanently, which would result in the loss of any remaining “time value” of the warrants (
i.e.
, the difference between the current market value and the exercise value of the warrants), and, in the
case the warrants were “out-of-the-money,” in a total loss of the purchase price of the warrants.
Warrants are generally unsecured
obligations of their issuers and are not standardized foreign currency options issued by the Options Clearing Corporation (“OCC”). Unlike foreign currency options issued by OCC, the terms of foreign exchange warrants generally will not
be amended in the event of governmental or regulatory actions affecting exchange rates or in the event of the imposition of other regulatory controls affecting the international currency markets. The initial public offering price of foreign currency
warrants is generally considerably in excess of the price that a commercial user of foreign currencies might pay in the interbank market for a comparable option involving significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to significant foreign exchange risk, including risks arising from complex political or economic factors.
Principal Exchange Rate Linked Securities
. Principal exchange rate linked securities (“PERLs
SM
”) are debt obligations the principal on which is payable at maturity in an amount that may vary based on the exchange rate between the U.S. Dollar
and a particular foreign currency at or about that time. The return on “standard” principal exchange rate linked securities is enhanced if the foreign currency to which the security is linked appreciates against the U.S. Dollar, and is
adversely affected by increases in the foreign exchange value of the U.S. Dollar; “reverse” principal exchange rate linked securities are like the “standard” securities, except that their return is enhanced by increases in
the value of the U.S. Dollar and adversely impacted by increases in the value of foreign currency. Interest payments on the securities are generally made in U.S. Dollars at rates that reflect the degree of foreign currency risk assumed or given up
by the purchaser of the notes (
i.e.
, at relatively higher interest rates if the purchaser has assumed some of the foreign exchange risk, or relatively lower interest rates if the issuer has assumed some of the
foreign exchange risk, based on the expectations of the current market). Principal exchange rate linked securities may in limited cases be subject to acceleration of maturity (generally, not without the consent of the holders of the securities),
which may have an adverse impact on the value of the principal payment to be made at maturity.
Performance Indexed Paper
. Performance indexed paper
(“PIPs
SM
”)
is U.S.
Dollar-denominated commercial paper the yield of which is
linked to certain foreign exchange rate movements.
The yield
to
the investor on performance indexed paper is
established at maturity as a function of spot exchange rates between the U.S. Dollar
and a designated currency as
of
or about that time
(generally, the index maturity two days prior to maturity).
The yield to the
investor will be within a range stipulated at the time of purchase of the obligation, generally with a guaranteed minimum rate of return that is below, and a potential maximum rate of return that is above,
market yields on U.S. Dollar-denominated commercial paper, with both the minimum and
maximum rates
of return
on the investment
corresponding to the minimum and maximum values of the spot exchange rate two business days prior to maturity.
The Fund may invest in hybrid
instruments. A hybrid instrument is a type of potentially high-risk derivative that combines a traditional stock, bond, or commodity with an option or forward contract. Generally, the principal amount, amount payable upon maturity or redemption, or
interest rate of a hybrid is tied (positively or negatively) to the price of some commodity, currency or securities index or another interest rate or some other economic factor (each a “benchmark”). The interest rate or (unlike most
fixed income securities) the principal amount payable at maturity of a hybrid security may be increased or decreased, depending on changes in the value of the benchmark. A hybrid could be, for example, a bond issued by an oil company that pays a
small base level of interest, in addition to interest that accrues when oil prices exceed a certain predetermined level. Such a hybrid instrument would be a combination of a bond and a call option on oil.
Hybrids can be used as an efficient
means of pursuing a variety of investment goals, including currency hedging, and increased total return. Hybrids may not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a result,
may be leveraged and move (up or down) more steeply and rapidly than the benchmark. These benchmarks may be sensitive to economic and political events, such as commodity shortages and currency devaluations, which cannot be readily foreseen by the
purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero. Thus, an investment in a hybrid may entail significant market risks that are not associated with a similar investment in a traditional, U.S.
Dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest. The purchase of hybrids also exposes the Fund to the credit risk of the issuer of the hybrids. These risks may cause significant
fluctuations in the NAV of the Fund.
Certain issuers of structured
products such as hybrid instruments may be deemed to be investment companies as defined in the 1940 Act. As a result, the Fund’s investment in these products may be subject to limits applicable to investments in investment companies and may be
subject to restrictions contained in the 1940 Act.
Illiquid Investments and Restricted
Securities
The Fund may
purchase and hold illiquid investments. The Fund will not purchase or otherwise acquire any security if, as a result, more than 15% of its net assets (taken at current value) would be invested in investments that are illiquid.
The term “illiquid
investments” for this purpose means any investment that the Fund reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market
value of the investment. The Fund will not acquire illiquid securities if, as a result, such securities would comprise more than 15% of the value of the Fund’s net assets. Rafferty, subject to oversight by the Board of Trustees, has the
ultimate authority to determine, to the extent permissible under the federal securities laws, which securities are liquid or illiquid for purposes of this 15% limitation under the Fund’s liquidity risk management program, adopted pursuant to
Rule 22e-4 under the 1940 Act. Illiquid securities will be priced at fair value as determined in good faith under procedures adopted by the Board of Trustees. If, through the appreciation of illiquid securities or the depreciation of liquid
securities, the Fund should be in a position where more than 15% of the value of its net assets are invested in illiquid securities, including restricted securities which are not readily marketable, Rafferty will report such occurrence to the Board
of Trustees and take such steps as are deemed advisable to protect liquidity in accordance with the Fund’s liquidity risk management program.
The Fund may not be able to sell
illiquid investments when Rafferty considers it desirable to do so or may have to sell such investments at a price that is lower than the price that could be obtained if the investments were liquid. In addition, the sale of illiquid investments may
require more time and result in higher dealer discounts and other selling expenses than does the sale of investments that are not illiquid. Illiquid investments also may be more difficult to value due to the unavailability of reliable market
quotations for such investments, and investment in illiquid investments may have an adverse impact on NAV.
Rule 144A
establishes a “safe harbor” from the registration requirements of the 1933 Act for resales of certain securities to qualified institutional buyers. Institutional markets for restricted securities that have developed as a result of Rule
144A provide both readily ascertainable values for certain restricted securities and the ability to liquidate an investment to satisfy share redemption orders. This policy does not include restricted securities eligible for resale pursuant to Rule
144A under the Securities Act of 1933, as amended (“1933 Act”), which the Trust’s Board of Trustees (“Board” or “Trustees”), or Rafferty, under Board-approved guidelines, has determined are liquid. The Fund
currently does not anticipate investing in such restricted securities. However, to the extent that the Fund does invest in such restricted securities, an insufficient number of qualified institutional buyers interested in purchasing Rule
144A-eligible securities held by the Fund could adversely affect the marketability of such portfolio securities, and the Fund may be unable to dispose of such securities promptly or at reasonable prices.
The Fund may purchase indexed
securities, which are securities, the value of which varies positively or negatively in relation to the value of other securities, securities indices or other financial indicators, consistent with its investment objective. Indexed securities may be
debt securities or deposits whose value at maturity or coupon rate is determined by reference to a specific instrument or statistic. Recent issuers of indexed securities have included banks, corporations and certain U.S. government agencies.
The performance of indexed securities
depends to a great extent on the performance of the security or other instrument to which they are indexed and also may be influenced by interest rate changes in the United States and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values may decline substantially if the issuer’s creditworthiness deteriorates. Indexed securities may be more volatile than the underlying instruments. Certain indexed
securities that are not traded on an established market may be deemed illiquid. See “Illiquid Investments and Restricted Securities” above.
Futures Contracts, Options, and
Other Derivative Strategies
Generally, derivatives are
financial instruments whose value depends on, or is derived from, the value of one or more underlying assets, reference rates, or indices or other market factors (“reference assets”) and may relate to stocks bonds, interest rates, credit
currencies, commodities or related indices. Derivative instruments can provide an efficient means to gain long or short exposure to the value of a reference asset without actually owning or selling the instrument. Examples of derivative instruments
include futures contracts, swap agreements, options, options on futures contracts and forward currently contracts.
The Fund may enter into derivatives
instruments which may include futures contracts, forward contracts, options on currencies, commodities, indices, or futures contracts and swaps which provide long and short exposure to reference assets. Derivatives may be more sensitive to changes
in interest rates or to sudden fluctuations in market prices and thus the Fund’s losses may be greater if it invests in derivatives than if it invests in non-derivative instruments. Derivatives are also subject to counterparty risk, which is
the risk that the other party in the transaction will not fulfill its contractual obligations.
The use of
derivative instruments is subject to applicable regulations of the SEC, the several exchanges upon which they are traded and the CFTC. In addition, the Fund’s ability to use derivative instruments will be limited by tax considerations. See
“Dividends, Other Distributions and Taxes.”
Under current CFTC regulations, if
the Fund uses commodity interests (such as futures contracts, options on futures contracts and swaps) other than for bona fide hedging purposes (as defined by the CFTC) the aggregate initial margin and premiums required to establish these positions
(after taking into account unrealized profits and unrealized losses on any such positions and excluding the amount by which options that are “in-the-money” at the time of purchase) may not exceed 5% of the Fund’s NAV, or
alternatively, the aggregate net notional value of those positions, as determined at the time the most recent position was established, may not exceed 100% of the fund’s NAV (after taking into account unrealized profits and unrealized losses
on any such positions). Pursuant to a claim for exemption filed with the National Futures Association, the Fund is not deemed to be a commodity pool under the Commodity Exchange Act.
The Fund is subject to the risk that
a change in U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Fund’s operation and/or change the competitive landscape. In this regard, any further amendment to the Commodity Exchange
Act or its related regulations that subject the Fund to additional regulation may have adverse impacts on the Fund’s operations and expenses.
In addition to the
instruments, strategies and risks described below and in the Prospectus, Rafferty may discover additional opportunities in connection with derivative instruments and other similar or related techniques. These new opportunities may become available
as Rafferty develops new techniques, as regulatory authorities broaden the range of permitted transactions and as new derivative instruments or other techniques are developed. Rafferty may utilize these opportunities to the extent that they are
consistent with the Fund’s investment objective and permitted by the Fund’s investment limitations and applicable regulatory authorities. The Fund’s Prospectus or this SAI will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or in the Prospectus.
Special Risks
. The use of derivative instruments involves special considerations and risks, certain of which are described below. Risks pertaining to particular derivative instruments are described in the sections that
follow.
(1) Options and
futures prices can diverge from the prices of their underlying instruments. Options and futures prices are affected by such factors as current and anticipated short-term interest rates, changes in volatility of the underlying instrument and the time
remaining until expiration of the contract, which may not affect security prices the same way. Imperfect or no correlation also may result from differing levels of demand in the options and futures markets and the securities markets, from structural
differences in how options and futures and securities are traded, and from imposition of daily price fluctuation limits or trading halts.
(2) As described below, the Fund
might be required to maintain assets as “cover,” maintain segregated accounts or make margin payments when it takes positions in Financial Instruments involving obligations to third parties (
e.g.
,
Financial Instruments other than purchased options). If the Fund were unable to close out its positions in such Financial Instruments, it might be required to continue to maintain such assets or accounts or make such payments until the position
expired or matured. These requirements might impair the Fund’s ability to sell a portfolio security or make an investment when it would otherwise be favorable to do so or require that the Fund sell a portfolio security at a disadvantageous
time. The Fund’s ability to close out a position in a Financial Instrument prior to expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of the other
party to the transaction (the “counterparty”) to enter into a transaction closing out the position. Therefore, there is no assurance that any position can be closed out at a time and price that is favorable to the Fund.
(3) Losses may arise due to
unanticipated market price movements, lack of a liquid secondary market for any particular instrument at a particular time or due to losses from premiums paid by the Fund on options transactions.
Cover
. Transactions using derivative instruments, other than purchased options, expose the Fund to an obligation to another party. The Fund will not enter into any such
transactions unless it owns either (1) an offsetting (“covered”) position in securities or other options or futures contracts or (2) cash and liquid assets with a value, marked-to-market daily, sufficient to cover its potential
obligations to the extent not covered as provided in (1) above. The Fund will comply with SEC guidelines regarding cover for these instruments and will, if the guidelines so require, set aside cash or liquid assets in an account with its custodian,
U.S. Bancorp Fund Services, LLC (“USBFS”), in the prescribed amount as determined daily.
Assets used as cover or held in an
account cannot be sold while the position in the corresponding derivative instrument is open, unless they are replaced with other appropriate assets. As a result, the commitment of a large portion of the Fund’s assets to cover or accounts
could impede portfolio management or the Fund’s ability to meet redemption requests or other current obligations.
Futures Contracts
. The Fund may use certain options (traded on an exchange or OTC, or otherwise), futures contracts (sometimes referred to as “futures”) and
options on futures contracts as a substitute for a comparable market position in the underlying security or index, to attempt to hedge or limit the exposure of the Fund’s position, to create a synthetic money market position, for certain
tax-related purposes or to effect closing transactions.
Generally, a
futures contract is a standard binding agreement to buy or sell a specified quantity of an underlying reference instrument, such as a specific security, currency or commodity, at a specified price at a specified later date. A “sale” of a
futures contract means the acquisition of a contractual obligation to deliver the underlying reference instrument called for by the contract at a specified price on a specified date. A “purchase” of a futures contract means the
acquisition of a contractual obligation to acquire the underlying reference instrument called for by the contract at a specified price on a specified date. The purchase or sale of a futures contract will allow the Fund to increase or decrease its
exposure to the underlying reference instrument without having to buy the actual instrument.
The underlying reference instruments
to which futures contracts may relate include non-U.S. currencies, interest rates, stock and bond indices and debt securities, including U.S. government debt obligations. In most cases the contractual obligation under a futures contract may be
offset, or “closed out,” before the settlement date so that the parties do not have to make or take delivery. The closing out of a contractual obligation is usually accomplished by buying or selling, as the case may be, an identical,
offsetting futures contract. This transaction, which is effected through a member of an exchange, cancels the obligation to make or take delivery of the underlying instrument or asset. If the original position entered into is a long position
(futures contract purchased), there will be a gain (loss) if the offsetting sell transaction is carried out at a higher (lower) price, inclusive of commissions. If the original position entered into is a short position (futures contract sold) there
will be a gain (loss) if the offsetting buy transaction is carried out at a lower (higher) price, inclusive of commissions.
Certain futures contracts are
cash-settled, meaning the futures contract obligates the seller to deliver (and purchaser to accept) an amount of cash equal to a specific dollar amount multiplied by the difference between the final settlement price of a specific futures contract
and the price at which the agreement is made. No physical delivery of the underlying asset is made.
Whether the Fund realizes a gain/loss
from futures activities depends generally upon the movements in the underlying reference asset (generally a commodity, currency, security or index). The extent of the Fund’s loss from an unhedged short position in a futures contract is
potentially unlimited, and investors may lose the amount that they invest plus any profits recognized on their investment.
Futures contracts may be bought and
sold on U.S. and non-U.S. exchanges. Futures contracts in the U.S. have been designed by exchanges that have been designated “contract markets” by the CFTC and must be executed through a futures commission merchant (“FCM”),
which is a brokerage firm that is a member of the relevant contract market. Each exchange guarantees performance of the contracts as between the clearing members of the exchange, thereby reducing the risk of counterparty default. Because all
transactions in the futures market are made, offset, or fulfilled by an FCM through a clearinghouse associated with the exchange on which the contracts are traded, the Fund will incur brokerage fees when it buys or sells futures contracts. The Fund
generally buys and sells futures contracts only on contract markets (including exchanges or boards of trade) where there appears to be an active market for the futures contracts, but there is no assurance that an active market will exist for any
particular contract or at any particular time. An active market makes it more likely that futures contracts will be liquid and bought and sold at competitive market prices. In addition, many of the futures contracts available may be relatively new
instruments without a significant trading history. As a result, there can be no assurance that an active market will develop or continue to exist.
When the Fund enters into a futures
contract, it must deliver to an account controlled by the FCM (that has been selected by the Fund), an amount referred to as “initial margin” that is typically calculated as an amount equal to the volatility in market value of a contract
over a fixed period. Initial margin requirements are determined by the respective exchanges on which the futures contracts are traded and the FCM. Thereafter, a “variation margin” amount may be required to be paid by the Fund or received
by the Fund in accordance with margin controls set for such accounts, depending upon changes in the marked-to-market value of the futures contract. The account is marked-to-market daily and the variation margin is monitored by the Fund’s
investment manager and custodian on a daily basis. When the futures contract is closed out, if the Fund has a loss equal to, or greater than, the margin amount, the margin amount is paid to the FCM along with any loss in excess of the margin amount.
If the Fund has a loss of less than the margin amount, the excess margin is returned to the Fund. If the Fund has a gain, the full margin amount and the amount of the gain is paid to the Fund. Some futures contracts provide for the delivery of
securities that are different than those that are specified in the contract. For a futures contract for delivery of debt securities, on the settlement date of the contract, adjustments to the contract can be made to recognize differences in value
arising from the delivery of debt securities with a different interest rate from that of the particular debt securities that were specified in the contract. In some cases, securities called for by a futures contract may not have been issued when the
contract was written.
Risks of
futures contracts.
The Fund’s use of futures contracts is subject to the risks associated with derivative instruments generally. The Fund may not be able to properly effect its strategy when a liquid market is
unavailable for the futures contract the Fund wishes to close, which may at times occur. If the Fund were unable to liquidate a futures position due to the absence of a liquid secondary market or the imposition of price limits, it could incur
substantial losses. The Fund would continue to be subject to market risk with respect to the position. In addition, the Fund would continue to be required to make daily variation margin payments and might be required to maintain cash or liquid
assets in an account.
A purchase or sale
of a futures contract may result in losses to the Fund in excess of the amount that the Fund delivered as initial margin. Because of the relatively low margin deposits required, futures trading involves a high degree of leverage; as a result, a
relatively small price movement in a futures contract may result in immediate and substantial loss, or gain, to the Fund. In addition, if the Fund has insufficient cash to meet daily variation margin requirements or close out a futures position, it
may have to sell securities from its portfolio at a time when it may be disadvantageous to do so. Adverse market movements could cause the Fund to experience substantial losses on an investment in a futures contract. There is a risk of loss by the
Fund of the initial and variation margin deposits in the event of bankruptcy of the FCM with which the Fund has an open position in a futures contract. The assets of the Fund may not be fully protected in the event of the bankruptcy of the FCM or
central counterparty because the Fund might be limited to recovering only a pro rata share of all available funds and margin segregated on behalf of an FCM’s customers. If the FCM does not provide accurate reporting, the Fund is also subject
to the risk that the FCM could use the Fund’s assets, which are held in an omnibus account with assets belonging to the FCM’s other customers, to satisfy its own financial obligations or the payment obligations of another customer to the
central counterparty.
The
difference (called the “spread”) between prices in the cash market for the purchase and sale of the underlying reference instrument and the prices in the futures market is subject to fluctuations and distortions due to differences in the
nature of those two markets. First, all participants in the futures market are subject to initial deposit and variation margin requirements. Rather than meeting additional variation margin requirements, investors may close futures contracts through
offsetting transactions that could distort the normal pricing spread between the cash and futures markets. Second, the liquidity of the futures markets depends on participants entering into offsetting transactions rather than making or taking
delivery of the underlying instrument. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, resulting in pricing distortion. Third, from the point of view of speculators, the margin deposit
requirements that apply in the futures market are less onerous than similar margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions. When such
distortions occur, a correct forecast of general trends in the price of an underlying reference instrument by the investment manager may still not necessarily result in a profitable transaction.
Futures contracts that are traded on
non-U.S. exchanges may not be as liquid as those purchased on CFTC-designated contract markets. In addition, non-U.S. futures contracts may be subject to varied regulatory oversight. The price of any non-U.S. futures contract and, therefore, the
potential profit and loss thereon, may be affected by any change in the non-U.S. exchange rate between the time a particular order is placed and the time it is liquidated, offset or exercised.
The CFTC and the various exchanges
have established limits referred to as “speculative position limits” on the maximum net long or net short position that any person, such as the Fund, may hold or control in a particular futures contract. Trading limits are also imposed
on the maximum number of contracts that any person may trade on a particular trading day. An exchange may order the liquidation of positions found to be in violation of these limits and it may impose other sanctions or restrictions. The regulation
of futures, as well as other derivatives, is a rapidly changing area of law.
Futures exchanges may also limit the
amount of fluctuation permitted in certain futures contract prices during a single trading day. This daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day’s settlement
price. Once the daily limit has been reached in a futures contract subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and does not
limit potential losses because the limit may prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of positions and subjecting some holders of futures contracts to substantial losses.
Risks Associated with Commodity Futures
Contracts
. There are several additional risks associated with transactions in commodity futures contracts.
Unlike the financial futures markets,
in the commodity futures markets there are costs of physical storage associated with purchasing the underlying commodity. The price of the commodity futures contract will reflect the storage costs of purchasing the physical commodity, including the
time value of money invested in the physical commodity. To the extent that the storage costs for an underlying commodity change while the Fund is invested in futures contracts on that commodity, the value of the futures contract may change
proportionately.
In the
commodity futures markets, producers of the underlying commodity may decide to hedge the price risk of selling the commodity by selling futures contracts today to lock in the price of the commodity at delivery tomorrow. In order to induce
speculators to purchase the other side of the same futures contract, the commodity producer generally must sell the futures contract at a lower price than the expected future spot price. Conversely, if most hedgers in the futures market are
purchasing futures contracts to hedge against a rise in prices, then speculators will only sell the other side of the futures contract at a higher futures price than the expected future spot price of the commodity. The changing nature of the hedgers
and speculators in the commodity markets will influence whether futures prices are above or below the expected future spot price, which can have significant implications for the Fund. If the nature of hedgers and speculators in futures markets
has shifted when it is time for the Fund to reinvest
the proceeds of a maturing contract in a new futures contract, the Fund might reinvest at higher or lower futures prices, or choose to pursue other investments.
The commodities which underlie
commodity futures contracts may be subject to additional economic and non-economic variables, such as drought, floods, weather, livestock disease, embargoes, tariffs, and international economic, political and regulatory developments. These factors
may have a larger impact on commodity prices and commodity-linked instruments, including futures contracts, than on traditional securities. Certain commodities are also subject to limited pricing flexibility because of supply and demand factors.
Others are subject to broad price fluctuations as a result of the volatility of the prices for certain raw materials and the instability of supplies of other materials. These additional variables may create additional investment risks which subject
the Fund’s investments to greater volatility than investments in traditional securities.
Forward Contracts
. The Fund may enter into equity, equity index or interest rate forward contracts for purposes of attempting to gain exposure to an index or group of
securities without actually purchasing these securities, or to hedge a position. Forward contracts are two-party contracts pursuant to which one party agrees to pay the counterparty a fixed price for an agreed upon amount of commodities, securities,
or the cash value of the commodities, securities or the securities index, at an agreed upon date. Because they are two-party contracts and may have terms greater than seven days, forward contracts may be considered to be illiquid for the
Fund’s illiquid investment limitations. The Fund will not enter into any forward contract unless Rafferty believes that the other party to the transaction is creditworthy. The Fund bears the risk of loss of the amount expected to be received
under a forward contract in the event of the default or bankruptcy of a counterparty. If such a default occurs, the Fund will have contractual remedies pursuant to the forward contract, but such remedies may be subject to bankruptcy and insolvency
laws which could affect the Fund’s rights as a creditor.
Options
. The value of an option position will reflect, among other things, the current market value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying investment and general market conditions. Options that expire unexercised have no value. Options currently are traded on the Chicago Board Options Exchange
®
and other exchanges, as well as the OTC markets.
By buying a call option on a
security, the Fund has the right, in return for the premium paid, to buy the security underlying the option at the exercise price. By writing (selling) a call option and receiving a premium, the Fund becomes obligated during the term of the option
to deliver securities underlying the option at the exercise price if the option is exercised. By buying a put option, the Fund has the right, in return for the premium, to sell the security underlying the option at the exercise price. By writing a
put option, the Fund becomes obligated during the term of the option to purchase the securities underlying the option at the exercise price.
Because options premiums paid or
received by the Fund are small in relation to the market value of the investments underlying the options, buying and selling put and call options can be more speculative than investing directly in securities.
The Fund may effectively terminate
its right or obligation under an option by entering into a closing transaction. For example, the Fund may terminate its obligation under a call or put option that it had written by purchasing an identical call or put option; this is known as a
closing purchase transaction. Conversely, the Fund may terminate a position in a put or call option it had purchased by writing an identical put or call option; this is known as a closing sale transaction. Closing transactions permit the Fund to
realize profits or limit losses on an option position prior to its exercise or expiration.
Risks of Options on Currencies and
Securities
. Exchange-traded options in the United States are issued by a clearing organization affiliated with the exchange on which the option is listed that, in effect, guarantees completion of every
exchange-traded option transaction. In contrast, OTC options are contracts between the Fund and its counterparty (usually a securities dealer or a bank) with no clearing organization guarantee. Thus, when the Fund purchases an OTC option, it relies
on the counterparty from which it purchased the option to make or take delivery of the underlying investment upon exercise of the option. Failure by the counterparty to do so would result in the loss of any premium paid by the Fund as well as the
loss of any expected benefit of the transaction.
The Fund’s ability to establish
and close out positions in exchange-traded options depends on the existence of a liquid market. However, there can be no assurance that such a market will exist at any particular time. Closing transactions can be made for OTC options only by
negotiating directly with the counterparty, or by a transaction in the secondary market if any such market exists. There can be no assurance that the Fund will in fact be able to close out an OTC option position at a favorable price prior to
expiration. In the event of insolvency of the counterparty, the Fund might be unable to close out an OTC option position at any time prior to its expiration.
If the Fund were unable to effect a
closing transaction for an option it had purchased, it would have to exercise the option to realize any profit. The inability to enter into a closing purchase transaction for a covered call option written by the Fund could cause material losses
because the Fund would be unable to sell the investment used as cover for the written option until the option expires or is exercised.
Options on Indices
. An index fluctuates with changes in the market values of the securities included in the index. Options on indices give the holder the right to receive an
amount of cash upon exercise of the option. Receipt of this cash amount will depend upon the closing level of the index upon which the option is based being greater than (in the case of a call) or less than (in the case of put) the exercise price of
the option. Some stock index options are based on a broad market
index such as the S&P 500
®
Composite Stock Index, the NYSE Composite Index or the NYSE Arca Major Market Index or on a narrower index such as the Philadelphia Stock Exchange
Over-the-Counter Index.
Each of
the exchanges has established limitations governing the maximum number of call or put options on the same index that may be bought or written by a single investor, whether acting alone or in concert with others (regardless of whether such options
are written on the same or different exchanges or are held or written on one or more accounts or through one or more brokers). Under these limitations, option positions of all investment companies advised by Rafferty are combined for purposes of
these limits. Pursuant to these limitations, an exchange may order the liquidation of positions and may impose other sanctions or restrictions. These position limits may restrict the number of listed options that the Fund may buy or sell.
Puts and calls on indices are similar
to puts and calls on securities or futures contracts except that all settlements are in cash and gain or loss depends on changes in the index in question rather than on price movements in individual securities or futures contracts. When the Fund
writes a call on an index, it receives a premium and agrees that, prior to the expiration date, the purchaser of the call, upon exercise of the call, will receive from the Fund an amount of cash if the closing level of the index upon which the call
is based is greater than the exercise price of the call. The amount of cash is equal to the difference between the closing price of the index and the exercise price of the call multiplied by a specific factor (“multiplier”), which
determines the total value for each point of such difference. When the Fund buys a call on an index, it pays a premium and has the same rights to such call as are indicated above. When the Fund buys a put on an index, it pays a premium and has the
right, prior to the expiration date, to require the seller of the put, upon the Fund’s exercise of the put, to deliver to the Fund an amount of cash if the closing level of the index upon which the put is based is less than the exercise price
of the put, which amount of cash is determined by the multiplier, as described above for calls. When the Fund writes a put on an index, it receives a premium and the purchaser of the put has the right, prior to the expiration date, to require the
Fund to deliver to it an amount of cash equal to the difference between the closing level of the index and the exercise price times the multiplier if the closing level is less than the exercise price.
Risks of Options on Indices
. If the Fund has purchased an index option and exercises it before the closing index value for that day is available, it runs the risk that the level of the index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the difference between the closing index value and the exercise price of the option (times the applicable multiplier) to the assigned writer.
OTC Options
. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size and strike price, the terms of
OTC options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract. While this type of arrangement allows the Fund great flexibility to tailor the option to its needs, OTC options
generally involve greater risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded.
Options on Futures Contracts
. When the Fund writes an option on a futures contract, it becomes obligated, in return for the premium paid, to assume a position in the futures
contract at a specified exercise price at any time during the term of the option. If the Fund writes a call, it assumes a short futures position. If it writes a put, it assumes a long futures position. When the Fund purchases an option on a futures
contract, it acquires the right in return for the premium it pays to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put).
Whether the Fund realizes a gain or
loss from futures activities depends upon movements in the underlying security or index. The extent of the Fund’s loss from an unhedged short position from writing unhedged call options on futures contracts is potentially unlimited. The Fund
only purchases and sells options on futures contracts that are traded on a U.S. exchange or board of trade.
Purchasers and sellers of options on
futures can enter into offsetting closing transactions, similar to closing transactions in options, by selling or purchasing, respectively, an instrument identical to the instrument purchased or sold. Positions in options on futures contracts may be
closed only on an exchange or board of trade that provides a secondary market. However, there can be no assurance that a liquid secondary market will exist for a particular contract at a particular time. In such event, it may not be possible to
close a futures contract or options position.
Under certain circumstances, futures
exchanges may establish daily limits on the amount that the price of an option on a futures contract can vary from the previous day’s settlement price; once that limit is reached, no trades may be made that day at a price beyond the limit.
Daily price limits do not limit potential losses because prices could move to the daily limit for several consecutive days with little or no trading, thereby preventing liquidation of unfavorable positions.
If the Fund were unable to liquidate
an option on a futures position due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial losses. The Fund would continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required to make daily variation margin payments and might be required to maintain cash or liquid assets in an account.
Risks of Options on Futures Contracts
. The ordinary spreads between prices in the cash and futures markets (including the options on futures markets), due to differences in the natures of those markets, are subject to the following factors, which may create
distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting transactions, which could distort the normal relationships between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into
offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing distortion. Third, from the point of view of speculators, the
deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions.
Combined Positions
.
The Fund may purchase
and write options in combination with each other.
For example, the Fund may purchase a put option and write a call option on the same underlying instrument, in order to construct a combined position whose risk and return characteristics are similar to selling a futures contract. Another possible
combined position would involve writing a call option at one strike price and buying a call option at a lower price, in order to reduce the risk of the written call option in the event of a substantial price increase. Because combined options
positions involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out.
The Fund may enter into
caps, floors and collars relating to securities, interest rates or currencies. In a cap or floor, the buyer pays a premium (which is generally, but not always, a single up-front amount) for the right to receive payments from the other party if, on
specified payment dates, the applicable rate, index or asset is greater than (in the case of a cap) or less than (in the case of a floor) an agreed level, for the period involved and the applicable notional amount. A collar is a combination
instrument in which the same party buys a cap and sells a floor. Depending upon the terms of the cap and floor comprising the collar, the premiums will partially, or entirely, offset each other. The notional amount of a cap, collar or floor is used
to calculate payments, but is not itself exchanged. The Fund may be both a buyer and seller of these instruments. In addition, the Fund may engage in combinations of put and call options on securities (also commonly known as collars), which may
involve physical delivery of securities. Like swaps, caps, floors and collars are very flexible products. The terms of the transactions entered by the Fund may vary from the typical examples described here.
The Fund may enter into swap and
other derivatives to obtain exposure to an underlying asset without actually purchasing such asset. Swap agreements are generally two-party contracts entered into primarily by institutional investors for periods ranging from a day to more than one
year. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or
“swapped” between the parties are calculated with respect to a “notional amount,”
i.e.
, the return on, or increase/decrease, in value of a particular dollar amount invested in a
“basket” of securities representing a particular index or an ETF representing a particular index or group of securities.
The Fund may enter into swaps to
invest in a market without owning or taking physical custody of securities. For example, in one common type of total return swap, the Fund’s counterparty will agree to pay the Fund the rate at which the specified asset or indicator (
e.g.
, an ETF, or securities comprising a benchmark index, plus the dividends or interest that would have been received on those assets) increased in value multiplied by the relevant notional amount of the swap. The
Fund will agree to pay to the counterparty an interest fee (based on the notional amount) and the rate at which, the specified asset or indicator would decreased in value multiplied by the notional amount of the swap, plus, in certain instances,
commissions or trading spreads on the notional amount.
As a result, the swap has a similar
economic effect as if the Fund were to invest in the assets underlying the swap in an amount equal to the notional amount of the swap. The return to the Fund on such swap should be the gain or loss on the notional amount plus dividends or interest
on the assets less the interest paid by the Fund on the notional amount. However, unlike cash investments in the underlying assets, the Fund will not be an owner of the underlying assets and will not have voting or similar rights in respect of such
assets.
As a trading technique,
Rafferty may substitute physical securities with a swap having investment characteristics substantially similar to the underlying securities.
The use of swaps is a highly
specialized activity which involves investment techniques and risks in addition to, and in some cases different from, those associated with ordinary portfolio securities transactions. The primary risks associated with the use of swaps are mispricing
or improper valuation, imperfect correlation between movements in the notional amount and the price of the underlying investments, and the inability of the counterparties or clearing organization to perform. If a counterparty’s
creditworthiness for an over-the-counter swap declines, the value of the swap would likely decline. Moreover, there is no guarantee that the Fund could eliminate its exposure under an outstanding swap by entering into an offsetting swap with the
same or another party. In addition, the Fund may use a combination of swaps on an underlying index and swaps on an ETF that is designed to track the performance of that index. The performance of an ETF may deviate from the performance of its
underlying index due to embedded costs and other factors. Thus, to the extent the Fund invests in swaps
that use an ETF as the reference asset, the Fund may
be subject to greater correlation risk and may not achieve as high a degree of correlation with the Index as it would if the Fund used only swaps on the underlying index. Rafferty, under the supervision of the Board of Trustees, is responsible for
determining and monitoring the liquidity of the Fund’s transactions in swaps.
Common
Types of Swaps
The Fund
may enter into any of several types of swaps, including:
Total Return Swaps.
Total return swaps may be used either as economically similar substitutes for owning the reference asset specified in the swap, such as the securities that comprise a given market index,
particular securities or commodities, or other assets or indicators. They
also may be used as a means of obtaining exposure in markets
where
the reference asset is unavailable or it may otherwise be impossible or impracticable for the Fund to own that asset.
“Total return”
refers to the
payment
(or receipt)
of the total return on the underlying reference asset, which is then exchanged for the receipt (or payment) of an interest rate. Total return swaps
provide the Fund with the additional flexibility of gaining exposure to a market or sector index by
using the most cost-effective vehicle available.
Interest Rate Swaps.
Interest rate swaps, in their most basic form, involve the exchange by the Fund with another party of their respective commitments to pay or receive interest. For example, the Fund might exchange its right to receive
certain floating rate payments in exchange for another party’s right to receive fixed rate payments. Interest rate swaps can take a variety of other forms, such as agreements to pay the net differences between two different interest indexes or
rates. Despite their differences in form, the function of interest rate swaps is generally the same: to increase or decrease the Fund’s exposure to long- or short-term interest rates. For example, the Fund may enter into an interest rate swap
to preserve a return or spread on a particular investment or a portion of its portfolio or to protect against any increase in the price of securities the Fund anticipates purchasing at a later date.
Other Financial Instruments
. Other forms of swaps that the Fund may enter into include: interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified
rate, or “cap”; interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified level, or “floor,” and interest rate collars,
under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels.
Mechanics
of Swaps
Payments
. Most swaps entered into by the Fund calculate and settle the obligations of the parties to the agreement on a “net basis” with a single payment. Consequently, a Fund’s current obligations (or rights)
under a swap will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the “net amount”). Other swaps may require initial
premium (discount) payments as well as periodic payments (receipts) related to the interest leg of the swap or to the default of the reference entity. The Fund’s current obligations under most swaps
(
e.g.
, total return swaps, equity/index swaps, interest rate swaps) will be accrued daily (offset against any amounts owed to the Fund by the counterparty to the swap) and any accrued but unpaid net amounts
owed to a swap counterparty will be covered by segregating or earmarking cash or other assets determined to be liquid. However, typically no payments will be made until the settlement date. The net amount of the excess, if any, of the Fund’s
obligations over its entitlements with respect to a swap agreement entered into on a net basis will be accrued daily and an amount of cash or liquid asset having an aggregate NAV at least equal to the accrued excess will be maintained in an account
with the Custodian that satisfies the 1940 Act. The Fund also will establish and maintain such accounts with respect to its total obligations under any swaps that are not entered into on a net basis. Obligations under swap agreements so covered will
not be construed to be “senior securities” for purposes of the Fund’s investment restriction concerning senior securities.
Counterparty Credit Risk
. The Fund will not enter into any uncleared swap (
i.e.
, not cleared by a central counterparty) unless Rafferty believes that the other party to the transaction is creditworthy. The
counterparty to an uncleared swap will typically be a major global financial institution. The Fund bears the risk of loss of the amount expected to be received under a swap in the event of the default or bankruptcy of a swap counterparty. If such a
default occurs, the Fund will have contractual remedies pursuant to the swaps, but such remedies may be subject to bankruptcy and insolvency laws that could affect the Fund’s rights as a creditor. The counterparty risk for cleared swaps is
generally lower than for uncleared over-the-counter swaps because, in a cleared swap, a clearing organization becomes substituted for each counterparty to a cleared swap. The clearing organization takes on the obligations of each side of the swap
and the Fund would only to the clearing organization for performance of financial obligations. However, there can be no assurance that the clearing organization, or its members, will satisfy its obligations to the Fund. Upon entering into a cleared
swap, the Fund may be required to deposit with its futures commission merchant an amount of cash or cash equivalents equal to a small percentage of the notional amount (this amount is subject to change by the clearing organization that clears the
trade). This amount, known as “initial margin,” is in the nature of a performance bond or good faith deposit on the cleared swap and is returned to the Fund upon termination of the swap, assuming all contractual obligations have been
satisfied. Subsequent payments, known as “variation margin” to and from the broker will be made daily as the price of the swap fluctuates, making the long and short position in the
swap contract more or less valuable, a process known
as “marking-to-market.” The premium (discount) payments are built into the daily price of the swap and thus are amortized through the variation margin. The variation margin payment also includes the daily portion of the periodic payment
stream.
Termination and
Default Risk
. Swap agreements do not involve the delivery of securities or other underlying assets. Accordingly, if a swap is entered into on a net basis, if the other party to a swap agreement defaults, the
Fund’s risk of loss consists of the net amount of payments that the Fund is contractually entitled to receive, if any.
Regulatory
Margin
In recent years,
regulators across the globe, including the CFTC and the U.S. banking regulators, have adopted margin requirements applicable to uncleared swaps. While the Fund is not directly subject to these requirements, where the Fund’s counterparty is
subject to the requirements, uncleared swaps between the Fund and that counterparty are required to be marked-to-market on a daily basis, and collateral is required to be exchanged to account for any changes in the value of such swaps. The rules
impose a number of requirements as to these exchanges of margin, including as to the timing of transfers, the type of collateral (and valuations for such collateral) and other matters that may be different than what the Fund would agree with its
counterparty in the absence of such regulation. In all events, where the Fund is required to post collateral to its swap counterparty, such collateral will be posted to an independent bank custodian, where access to the collateral by the swap
counterparty will generally not be permitted unless the Fund is in default on its obligations to the swap counterparty.
In addition to the variation margin
requirements, regulators have adopted “initial” margin requirements applicable to uncleared swaps. Where applicable, these rules require parties to an uncleared swap to post, to a custodian that is independent from the parties to the
swap, collateral (in addition to any “variation margin” collateral noted above) in an amount that is either (i) specified in a schedule in the rules or (ii) calculated by the regulated party in accordance with a model that has been
approved by that party’s regulator(s). At this time, the initial margin rules do not apply to the Fund’s swap trading relationships. However, the rules are being implemented on a phased basis, and it is possible that in the future, the
rules could apply to the Fund. In the event that the rules apply, they would impose significant costs on the Fund’s ability to engage in uncleared swaps and, as such, could adversely affect Rafferty’s ability to manage the Fund, may
impair the Fund’s ability to achieve its investment objective and/or may result in reduced returns to the Fund’s investors.
Comprehensive swaps regulation.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and related regulatory developments have imposed comprehensive new regulatory requirements on swaps and swap market
participants. The regulatory framework includes: (1) registration and regulation of swap dealers and major swap participants; (2) requiring central clearing and execution of standardized swaps; (3) imposing margin requirements on swap transactions;
(4) regulating and monitoring swap transactions through position limits and large trader reporting requirements; and (5) imposing record keeping and centralized and public reporting requirements, on an anonymous basis, for most swaps. The CFTC is
responsible for the regulation of most swaps. The SEC has jurisdiction over a small segment of the market referred to as “security-based swaps,” which includes swaps on single securities or credits, or narrow-based indices of securities
or credits.
Uncleared
swaps.
In an
uncleared swap, the swap counterparty is typically a brokerage firm, bank or other financial institution. The Fund customarily enters into uncleared swaps based on
the standard terms and conditions of an International Swaps and Derivatives Association
(“ISDA”) Master Agreement.
ISDA is a voluntary industry association
of participants in the OTC derivatives markets that has developed standardized contracts used by such participants that have agreed to be bound by such standardized contracts. In the event that one party to a swap transaction defaults and the
transaction is terminated prior to its scheduled termination date, one of the parties may be required to make an early termination payment to the other. An early termination payment may be payable by either the defaulting or non-defaulting party,
depending upon which of them is
“in-the-money” with respect to the swap at the time of its termination. Early termination payments may be calculated in various ways, but are intended to approximate
the amount the “in-the-money” party would have to pay to replace the swap as of the date of its termination. During the term of an uncleared swap, the Fund will be required to pledge to the swap counterparty, from time to time, an amount
of cash and/or other assets equal to the total net amount (if any) that would be payable by the Fund to the counterparty if all outstanding swaps between the parties were terminated on the date in question, including any early termination payments
(variation margin). Periodically, changes in the amount pledged are made to recognize changes in value of the contract resulting from, among other things, interest on the notional value of the contract, market value changes in the underlying
investment, and/or dividends paid by the issuer of the underlying instrument. Likewise,
the counterparty will be required to pledge cash or other assets to cover its obligations to the Fund. However,
the amount pledged may not always be equal to or more than the amount due to the other party. Therefore,
if a counterparty defaults in its obligations to the Fund, the amount
pledged by the counterparty and available to the Fund may not be sufficient to cover all the amounts due to the Fund and the Fund may sustain a loss. Currently, the Fund does not typically provide initial margin in connection with uncleared swaps.
However, rules requiring initial margin
to be posted by certain market participants for uncleared swaps have been adopted and are being phased in over time. When these rules take effect with respect to the
Fund,
if the Fund
is deemed to have material swaps exposure under applicable swap regulations, it will be required to post initial margin in addition to variation
margin.
Cleared swaps.
Certain standardized swaps are subject to mandatory central clearing and exchange-trading. The Dodd-Frank Act and implementing rules will ultimately require the clearing and exchange-trading of many swaps. Mandatory
exchange-trading and clearing will occur on a phased-in basis based on the type of market participant, CFTC approval of contracts for central clearing and public trading facilities making such cleared swaps available to trade. To date, the CFTC has
designated only certain of the most common types of credit default index swaps and interest rate swaps as subject to mandatory clearing and certain public trading facilities have made certain of those cleared swaps available to trade, but it is
expected that additional categories of swaps will in the future be designated as subject to mandatory clearing and trade execution requirements. Central clearing is intended to reduce counterparty credit risk and increase liquidity, but central
clearing does not eliminate these risks and may involve additional costs and risks not involved with uncleared swaps. For more information, see “Risks of cleared swaps” below.
In a cleared swap, the Fund’s
ultimate counterparty is a central clearinghouse rather than a brokerage firm, bank or other financial institution. Cleared swaps are submitted for clearing through each party’s FCM, which must be a member of the clearinghouse that serves as
the central counterparty. Transactions executed on a swap execution facility may increase market transparency and liquidity but may require the Fund to incur increased expenses to access the same types of swaps that it has used in the past. When the
Fund enters into a cleared swap, it must deliver to the central counterparty (via the FCM) an amount referred to as “initial margin.” Initial margin requirements are determined by the central counterparty, and are typically calculated as
an amount equal to the volatility in market value of the cleared swap over a fixed period, but an FCM may require additional initial margin above the amount required by the central counterparty. During the term of the swap agreement, a
“variation margin” amount may also be required to be paid by the Fund or may be received by the Fund in accordance with margin controls set for such accounts. If the value of the Fund’s cleared swap declines, the Fund will be
required to make additional “variation margin” payments to the FCM to settle the change in value. Conversely, if the market value of the Fund’s position increases, the FCM will post additional “variation margin” to the
Fund’s account. At the conclusion of the term of the swap agreement, if the Fund has a loss equal to or greater than the margin amount, the margin amount is paid to the FCM along with any loss in excess of the margin amount. If the Fund has a
loss of less than the margin amount, the excess margin is returned to the Fund. If the Fund has a gain, the full margin amount and the amount of the gain is paid to the Fund.
Risks of swaps generally.
The use of swap transactions is a highly specialized activity, which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. Whether the Fund will be
successful in using swap agreements to achieve its investment goal depends on the ability of the Adviser to correctly predict which types of investments are likely to produce greater returns. If the Adviser, in using swap agreements, is incorrect in
its forecasts of market values, interest rates, inflation, currency exchange rates or other applicable factors, the investment performance of the Fund will be less than its performance would have been if it had not used the swap agreements. The risk
of loss to the Fund for swap transactions that are entered into on a net basis depends on which party is obligated to pay the net amount to the other party. If the counterparty is obligated to pay the net amount to the Fund, the risk of loss to the
Fund is loss of the entire amount that the Fund is entitled to receive. If the Fund is obligated to pay the net amount, the Fund’s risk of loss is generally limited to that net amount. If the swap agreement involves the exchange of the entire
principal value of a security, the entire principal value of that security is subject to the risk that the other party to the swap will default on its contractual delivery obligations. In addition, the Fund’s risk of loss also includes any
margin at risk in the event of default by the counterparty (in an uncleared swap) or the central counterparty or FCM (in a cleared swap), plus any transaction costs.
Because bilateral swap agreements are
structured as two-party contracts and may have terms of greater than seven days, these swaps may be considered to be illiquid and, therefore, subject to the Fund’s limitation on investments in illiquid securities. If a swap transaction is
particularly large or if the relevant market is illiquid, the Fund may not be able to establish or liquidate a position at an advantageous time or price, which may result in significant losses. Participants in the swap markets are not required to
make continuous markets in the swap contracts they trade. Participants could refuse to quote prices for swap contracts or quote prices with an unusually wide spread between the price at which they are prepared to buy and the price at which they are
prepared to sell. Some swap agreements entail complex terms and may require a greater degree of subjectivity in their valuation. However, the swap markets have grown substantially in recent years, with a large number of financial institutions acting
both as principals and agents, utilizing standardized swap documentation. As a result, the swap markets have become increasingly liquid. In addition, central clearing and the trading of cleared swaps on public facilities are intended to increase
liquidity.
Rafferty, under the
supervision of the Board of Trustees, is responsible for determining and monitoring the liquidity of the Fund’s swap transactions. Rules adopted under the Dodd-Frank Act require centralized reporting of detailed information about many swaps,
whether cleared or uncleared. This information is available to regulators and also, to a more limited extent and on an anonymous basis, to the public. Reporting of swap data is intended to result in greater market transparency. This may be
beneficial to funds that use swaps in their trading strategies. However, public reporting imposes additional recordkeeping burdens on these funds, and the safeguards established to protect anonymity are not yet tested and may not provide protection
of the Fund’s identity as intended. Certain IRS positions may limit the Fund’s ability to use swap agreements in a desired tax strategy. It is possible that developments in the swap markets and/or the laws relating to swap
agreements, including potential government
regulation, could adversely affect the Fund’s ability to benefit from using swap agreements, or could have adverse tax consequences. For more information about potentially changing regulation, see “Developing government regulation of
derivatives” below.
Risks
of uncleared swaps.
Uncleared swaps are typically executed bilaterally with a swap dealer rather than traded on exchanges. As a result, swap participants may not be as protected as participants on organized
exchanges. Performance of a swap agreement is the responsibility only of the swap counterparty and not of any exchange or clearinghouse. As a result, the Fund is subject to the risk that a counterparty will be unable or will refuse to perform under
such agreement, including because of the counterparty’s bankruptcy or insolvency. The Fund risks the loss of the accrued but unpaid amounts under a swap agreement, which could be substantial, in the event of a default, insolvency or bankruptcy
by a swap counterparty. In such an event, the Fund will have contractual remedies pursuant to the swap agreements, but bankruptcy and insolvency laws could affect the Fund’s rights as a creditor. If the counterparty’s creditworthiness
declines, the value of a swap agreement would likely decline, potentially resulting in losses. The Adviser will only approve a swap agreement counterparty for the Fund if the Adviser deems the counterparty to be creditworthy. However, in unusual or
extreme market conditions, a counterparty’s creditworthiness and ability to perform may deteriorate rapidly, and the availability of suitable replacement counterparties may become limited.
Risks of cleared swaps.
As noted above, under recent financial reforms, certain types of swaps are, and others eventually are expected to be, required to be cleared through a central counterparty, which may affect counterparty risk and other
risks faced by the Fund.
Central clearing is designed to
reduce counterparty credit risk and increase liquidity compared to uncleared swaps because central clearing interposes the central clearinghouse as the counterparty to each participant’s swap, but it does not eliminate those risks completely
and may involve additional costs and risks not involved with uncleared swaps. There is also a risk of loss by the Fund of the initial and variation margin deposits in the event of bankruptcy of the FCM with which the Fund has an open position, or
the central counterparty in a swap contract. The assets of the Fund may not be fully protected in the event of the bankruptcy of the FCM or central counterparty because the Fund might be limited to recovering only a pro rata share of all available
funds and margin segregated on behalf of an FCM’s customers. If the FCM does not provide accurate reporting, the Fund is also subject to the risk that the FCM could use the Fund’s assets, which are held in an omnibus account with assets
belonging to the FCM’s other customers, to satisfy its own financial obligations or the payment obligations of another customer to the central counterparty. Credit risk of cleared swap participants is concentrated in a few clearinghouses, and
the consequences of insolvency of a clearinghouse are not clear.
With cleared swaps, the Fund may not
be able to obtain terms as favorable as it would be able to negotiate for a bilateral, uncleared swap. In addition, an FCM may unilaterally amend the terms of its agreement with the Fund, which may include the imposition of position limits or
additional margin requirements with respect to the Fund’s investment in certain types of swaps. Central counterparties and FCMs can require termination of existing cleared swap transactions upon the occurrence of certain events, and can also
require increases in margin above the margin that is required at the initiation of the swap agreement. Currently, depending on a number of factors, the margin required under the rules of the clearinghouse and FCM may be in excess of the collateral
required to be posted by the Fund to support its obligations under a similar uncleared swap. However, regulators have proposed and are expected to adopt rules imposing certain margin requirements on uncleared swaps in the near future, which are
likely to impose higher margin requirements on uncleared swaps.
Finally, the Fund is subject to the
risk that, after entering into a cleared swap with an executing broker, no FCM or central counterparty is willing or able to clear the transaction. In such an event, the Fund may be required to break the trade and make an early termination payment
to the executing broker.
Developing government regulation of
derivatives.
The regulation of cleared and uncleared swaps,
as well as other derivatives, is a rapidly changing area of law and is subject to modification by government and
judicial action. In addition, the SEC, CFTC and the exchanges are authorized to take extraordinary actions in the event of a market emergency, including, for example, the implementation or reduction of speculative position limits, the implementation
of higher margin requirements, the establishment of daily price limits and the suspension of trading.
It is not possible to predict fully the effects of current or future regulation. However, it is possible
that developments in government regulation of various types of derivative instruments,
such as speculative position limits on certain types of derivatives, or limits or restrictions on the counterparties with
which the Fund engages in derivative transactions, may limit or prevent the Fund from using or limit the Fund’s use of these instruments effectively as a part of its investment strategy, and could adversely affect the Fund’s ability to
achieve its investment goal(s). The Adviser will continue to monitor developments in the area, particularly to the extent regulatory changes affect the Fund’s ability to enter into desired swap agreements. New requirements, even if not
directly applicable to the Fund, may increase the cost of the Fund’s investments and cost of doing business.
Other Investment Companies
The Fund may invest in the securities of other
investment companies, including open- and closed-end funds and ETFs. Investments in the securities of other investment companies may involve duplication of advisory fees and certain other expenses. By investing in another investment company, the
Fund becomes a shareholder of that investment company. As a result, Fund
shareholders indirectly will bear the Fund’s
proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses Fund shareholders bear in connection with the Fund’s own operations.
The Fund intends
to limit its investments in securities issued by other investment companies in accordance with the 1940 Act. Section 12(d)(1) of the 1940 Act precludes the Fund from acquiring (i) more than 3% of the total outstanding shares of another investment
company; (ii) shares of another investment company having an aggregate value in excess of 5% of the value of the total assets of the Fund; or (iii) shares of another registered investment company and all other investment companies having an
aggregate value in excess of 10% of the value of the total assets of the Fund. In addition, the Fund is subject to Section 12(d)(1)(C), which provides that the Fund may not acquire shares of a closed-end fund if, immediately after such acquisition,
the Fund and other investment companies having the same adviser as the Fund would hold more than 10% of the closed-end fund’s total outstanding voting stock.
Section 12(d)(1)(F) of the 1940 Act
provides that the provisions of paragraph 12(d)(1)(A) and (B) shall not apply to securities purchased or otherwise acquired by the Fund if (i) immediately after such purchase or acquisition not more than 3% of the total outstanding shares of such
investment company is owned by the Fund and all affiliated persons of the Fund; and (ii) the Fund has not offered or sold, and is not proposing to offer or sell its shares through a principal underwriter or otherwise at a public or offering price
that includes a sales load of more than 1 1/2%. If the Fund invests in investment companies pursuant to Section 12(d)(1)(F), it must comply with the following voting restrictions: when the Fund exercises voting rights, by proxy or otherwise, with
respect to investment companies owned by the Fund, the Fund will either seek instruction from the Fund's shareholders with regard to the voting of all proxies and vote in accordance with such instructions, or vote the shares held by the Fund in the
same proportion as the vote of all other holders of such security. In addition, an investment company purchased by the Fund pursuant to Section 12(d)(1)(F) shall not be required to redeem its shares in an amount exceeding 1% of such investment
company’s total outstanding shares in any period of less than thirty days. Also, to the extent that an ETF has exemptive relief under Section 12(d)(1)(J), the Fund may rely on that exemptive relief to exceed the limits imposed by Section
12(d)(1)(A).
Shares of
another investment company or ETF that has received exemptive relief from the SEC to permit other funds to invest in its shares without these limitations are excluded from such restrictions to the extent that the Fund has complied with the
requirements of such orders. To the extent that the Fund invests in open-end or closed-end investment companies that invest primarily in the securities of companies located outside the United States, see the risks related to foreign securities set
forth above.
Exchange-Traded Products
. The Fund may invest in Exchange Traded Products (“ETPs”), which include ETFs, partnerships, commodity pools or trusts that are bought
and sold on a securities exchange. The Fund may also invest in exchange-traded notes (“ETNs”), which are structured debt securities, whereby the issuer of the ETN promises to pay ETN holders the return on an index or market segment over
a certain period of time and then return the principal of the investment at maturity. Whereas ETPs’ liabilities are secured by their portfolio securities, ETNs’ liabilities are unsecured general obligations of the issuer. Therefore, ETNs
are subject to the credit risk of the issuer of the ETN, which is different than other ETPs. The value of an ETN security should also be expected to fluctuate with the credit rating of the issuer. Most ETPs and ETNs are designed to track a
particular market segment or index, although an ETP or ETN may be actively managed. ETPs and ETNs share expenses associated with their operation, typically including advisory fees and other management expenses. When the Fund invests in an ETP or
ETN, in addition to directly bearing expenses associated with its own operations, it will bear its pro rata portion of the ETP’s or ETN’s expenses. ETPs and ETNs trade like stocks on a securities exchange at market prices rather than NAV
and as a result ETP or ETN shares may trade at a price greater than NAV (premium) or less than NAV (discount). The risks of owning an ETP or ETN generally reflect the risks of owning the underlying securities the ETP or ETN is designed to track,
although lack of liquidity in an ETP or ETN could result in it being more volatile than the underlying portfolio of securities. In addition, because of ETP or ETN expenses, compared to owning the underlying securities directly, it may be more costly
to own an ETP or ETN.
Additionally, the Fund may invest in
swap agreements referencing ETFs. If the Fund invests in ETFs or swap agreements referencing ETFs, the underlying ETFs may not necessarily track the Index.
Money Market Funds
. Money market funds are open-end registered investment companies which have historically traded at a stable $1.00 per share price. In October 2016, the
SEC implemented amendments to money market fund regulations (“Amendments”) intended to address perceived systemic risks associated with money market funds and to improve transparency for money market fund investors. In general, the
Amendments require money market funds that do not meet the definitions of a retail money market fund or government money market fund to transact at a floating NAV per share (similar to all other non-money market mutual funds), instead of at a $1
stable share price, as has traditionally been the case. The Amendments also permit all money market funds to impose liquidity fees and redemption gates for use in times of market stress. The SEC also implemented additional diversification, stress
testing, and disclosure measures. The Amendments represented significant departures from the traditional operation of money market funds. Any impact on the trading and value of money market instruments may negatively affect the Fund’s yield
and return potential.
The Fund may enter into
repurchase agreements with banks that are members of the Federal Reserve System or securities dealers who are members of a national securities exchange or are primary dealers in U.S. government securities. Repurchase agreements generally are for a
short period of time, usually less than a week. Under a repurchase agreement, the Fund purchases a U.S. government security and simultaneously agrees to sell the security back to the seller at a mutually agreed-upon future price and date, normally
one day or a few days later. The resale price is greater than the purchase price, reflecting an agreed-upon market interest rate during the Fund’s holding period. While the maturities of the underlying securities in repurchase agreement
transactions may be more than one year, the term of each repurchase agreement always will be less than one year. Repurchase agreements with a maturity of more than seven days are considered to be illiquid investments. The Fund may not enter into
such a repurchase agreement if, as a result, more than 15% of the value of its net assets would then be invested in such repurchase agreements and other illiquid investments. See “Illiquid Investments and Restricted Securities”
above.
The Fund will always
receive, as collateral, securities whose market value, including accrued interest, at all times will be at least equal to 100% of the dollar amount invested by the Fund in each repurchase agreement. In the event of default or bankruptcy by the
seller, the Fund will liquidate those securities (whose market value, including accrued interest, must be at least 100% of the amount invested by the Fund) held under the applicable repurchase agreement, which securities constitute collateral for
the seller’s obligation to repurchase the security. If the seller defaults, the Fund might incur a loss if the value of the collateral securing the repurchase agreement declines and might incur disposition costs in connection with liquidating
the collateral. In addition, if bankruptcy or similar proceedings are commenced with respect to the seller of the security, realization upon the collateral by the Fund may be delayed or limited.
Reverse Repurchase Agreements
The Fund may borrow by entering
into reverse repurchase agreements with the same parties with whom it may enter into repurchase agreements. Under a reverse repurchase agreement, the Fund sells securities and agrees to repurchase them at a mutually agreed to price. At the time the
Fund enters into a reverse repurchase agreement, it will establish and maintain a segregated account with an approved custodian containing liquid high-grade securities, marked-to-market daily, having a value not less than the repurchase price
(including accrued interest). Reverse repurchase agreements involve the risk that the market value of securities retained in lieu of sale by the Fund may decline below the price of the securities the Fund has sold but is obliged to repurchase. If
the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Fund’s obligation to repurchase
the securities. During that time, the Fund’s use of the proceeds of the reverse repurchase agreement effectively may be restricted. Reverse repurchase agreements create leverage, a speculative factor, and are considered borrowings for the
purpose of the Fund’s limitation on borrowing.
The Fund may lend portfolio
securities to certain borrowers that Rafferty determines to be creditworthy. The borrowers provide collateral that is maintained in an amount at least equal to the current market value of the securities loaned, marked to market daily. Borrowers
continuously secure their obligations to return securities on loan from the Fund by depositing any combination of short-term U.S. government securities and cash as collateral with the Fund. No securities loan will be made on behalf of the Fund if,
as a result, the aggregate value of all securities loaned by the Fund exceeds one-third of the value of the Fund's total assets (including the value of the collateral received) or such lower limit as set by Rafferty or the Board. The Fund may
terminate a loan at any time and obtain the return of the securities loaned. The Fund receives, by way of substitute payment, the value of any interest or cash or non-cash distributions paid on the loaned securities that it would have received if
the securities were not on loan. Any gain or loss in the market price of the borrowed securities that occurs during the term of the loan inures to the lending Fund and that Fund’s shareholders.
With respect to loans that are
collateralized by cash, the borrower may be entitled to receive a fee based on the amount of cash collateral. The Fund is typically compensated by the difference between the amount earned on the reinvestment of cash collateral and the fee paid to
the borrower. In the case of collateral other than cash, the Fund is typically compensated by a fee paid by the borrower equal to a percentage of the market value of the loaned securities. A Fund may also receive such fees on “special”
loans that are cash-collateralized. Any cash collateral may be reinvested in money market funds. Such money market fund shares will not be subject to a sales load, redemption fee, distribution fee or service fee. However, such investments are
subject to investment risk.
Securities lending involves exposure
to certain risks, including operational risk (
i.e.
, the risk of losses resulting from problems in the settlement and accounting process), “gap” risk (
i.e.
,
the risk of a mismatch between the return of cash collateral reinvestments and the fees the Fund has agreed to pay a borrower), and credit, legal, counterparty and market risk. If a securities lending counterparty were to default, the Fund would be
subject to the risk of a possible delay in receiving collateral
or in recovering the loaned securities, or to a
possible loss of rights in the collateral. In the event a borrower does not return the Fund’s securities as agreed, the Fund could experience losses if the proceeds received from liquidating the collateral do not at least equal the value of
the loaned security at the time the collateral is liquidated, plus the transaction costs incurred in purchasing replacement securities. This event could trigger adverse tax consequences for the Fund. The Fund could lose money if its investment of
cash collateral declines in value over the period of the loan. Substitute payments for dividends received by the Fund while its securities are loaned out will not be considered qualified dividend income.
The Fund may
engage in short sale transactions under which the Fund sells a security it does not own. To complete such a transaction, the Fund must borrow the security to make delivery to the buyer. The Fund then is obligated to replace the security borrowed by
purchasing the security at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Fund. Until the security is replaced, the Fund is required to pay to the lender
amounts equal to any dividends that accrue during the period of the loan. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet the margin requirements, until the short position is closed out. The Fund will
also incur transactions costs when conducting short sales.
Until the Fund closes its short
position or replaces the borrowed stock, the Fund will: (1) maintain an account containing cash or liquid assets at such a level that (a) the amount deposited in the account plus the amount deposited with the broker as collateral will equal the
current value of the stock sold short and (b) the amount deposited in the account plus the amount deposited with the broker as collateral will not be less than the market value of the stock at the time the stock was sold short; or (2) otherwise
cover the Fund’s short position.
The Fund will incur a loss as a
result of a short sales or short exposure to reference assets utilizing derivatives if the price of the security or reference asset increases between the date of the short sale or exposure and the date on which the Fund replaces the borrowed
security or terminates the derivatives providing short exposure. The Fund will realize a gain if the price of a security or reference asset declines in price between those dates. The amount of any gain will be decreased, and the amount of any loss
will be increased, by the amount of the premium, dividends or interest the Fund may be required to pay, if any, in connection with a short sale or derivatives that provide short exposure.
U.S. Government Securities
The Fund may invest in securities
issued or guaranteed by the U.S. government or its agencies or instrumentalities (“U.S. government securities”) in pursuit of its investment objective, in order to deposit such securities as initial or variation margin, as
“cover” for the investment techniques it employs, as part of a cash reserve or for liquidity purposes.
U.S. government securities are
high-quality instruments issued or guaranteed as to principal or interest by the U.S. Treasury Department (“U.S. Treasury”) or by an agency or instrumentality of the U.S. government. Not all U.S. government securities are backed by the
full faith and credit of the United States. Some are backed by the right of the issuer to borrow from the U.S. Treasury; others are backed by discretionary authority of the U.S. government to purchase the agencies’ obligations; while others
are supported only by the credit of the instrumentality. In the case of securities not backed by the full faith and credit of the United States, the investor must look principally to the agency issuing or guaranteeing the obligation for ultimate
repayment.
Yields on short-,
intermediate- and long-term U.S. government securities are dependent on a variety of factors, including the general conditions of the money and bond markets, the size of a particular offering and the maturity of the obligation. Debt securities with
longer maturities tend to produce higher capital appreciation and depreciation than obligations with shorter maturities and lower yields. The market value of U.S. government securities generally varies inversely with changes in the market interest
rates. An increase in interest rates, therefore, generally would reduce the market value of the Fund’s portfolio investments in U.S. government securities, while a decline in interest rates generally would increase the market value of the
Fund’s portfolio investments in these securities. U.S. government securities include U.S. Treasury obligations, which includes U.S. Treasury Bills (which mature within one year of the date they are issued), U.S. Treasury Notes (which have
maturities of one to ten years) and U.S. Treasury Bonds (which generally have maturities of more than 10 years). All such U.S. Treasury obligations are backed by the full faith and credit of the United States.
U.S. government securities also
include obligations issued by U.S. government agencies and instrumentalities (“GSEs”) that are backed by the full faith and credit of the U.S. government (such as securities issued or guaranteed by the Federal Housing Administration, the
Government National Mortgage Association (“Ginnie Mae
®
”), the Export-Import Bank of the United States, the General Services
Administration and the Maritime Administration and certain securities issued by the Small Business Administration).
Also, U.S.
government securities include securities that are guaranteed by U.S. government-sponsored entities that are not backed by the full faith and credit of the U.S. government (such as Fannie Mae
®
, Freddie Mac
®
, or the Federal Home Loan Banks).
These U.S. government-sponsored entities, although chartered and sponsored by the U.S. Congress, are not guaranteed, nor insured, by the U.S. government. They are supported only by the credit of the issuing agency, instrumentality or
corporation.
Since 2008, Fannie
Mae
®
and Freddie Mac
®
have been in
conservatorship and have received significant capital support through U.S. Treasury preferred stock purchases, as well as U.S. Treasury and Federal Reserve purchases of their mortgage backed securities (“MBS”). The Federal Housing
Finance Agency ("FHFA") and the U.S. Treasury (through its agreement to purchase Fannie Mae
®
and Freddie Mac
®
preferred stock) have imposed strict limits on the size of their mortgage portfolios. The MBS purchase programs technically ended in 2010 but the U.S.
Treasury has continued its support for the entities’ capital as necessary to prevent a negative net worth through at least 2012 and other governmental entities have provided significant support to Fannie Mae
®
and Freddie Mac
®
. There is no guarantee, however,
that they will continue to do so. An FHFA stress test suggested that in a “severely adverse scenario” additional Treasury support of between $42.1 billion and $77.6 billion (depending on the treatment of deferred tax assets) might be
required. Since then Congress has permanently reduced the corporate income tax rate from 35% to 21% starting January 1, 2018. This reduction could cause a substantial net loss and net worth deficit for the year in which the legislation is enacted.
Should they experience such a net worth deficit, they could be required to draw additional funds from the U.S. Treasury to avoid being placed in receivership. Accordingly, no assurance can be given that Fannie Mae
®
and Freddie Mac
®
will remain successful in
meeting their obligations with respect to the debt and MBSs that they issue.
In addition, the problems faced by
Fannie Mae
®
and Freddie Mac
®
, resulting in
their being placed into federal conservatorship and receiving significant U.S. government support, have sparked serious debate among federal policy makers regarding the continued role of the U.S. government in providing liquidity for mortgage loans.
In December 2011, Congress enacted the Temporary Payroll Tax Cut Continuation Act (“TCCA”) of 2011 which, among other provisions, requires that Fannie Mae
®
and Freddie Mac
®
increase their single-family
guaranty fees by at least 10 basis points and remit this increase to Treasury with respect to all loans acquired by Fannie Mae
®
or Freddie Mac
®
on or after April 1, 2012 and before January 1, 2022. Nevertheless, discussions among policymakers have continued as to whether Fannie Mae
®
and Freddie Mac
®
should be nationalized,
privatized, restructured, or eliminated altogether. Fannie Mae reported in the third quarter of 2018 that there was “significant uncertainty regarding the future of our company.” Freddie Mac faces similar uncertainty about its future
role. Fannie Mae
®
and Freddie Mac
®
also are the
subject of several continuing legal actions and investigations related to certain accounting, disclosure, or corporate governance matters, which (along with any resulting financial restatements) may continue to have an adverse effect on the
guaranteeing entities. Congress is currently considering several pieces of legislation that would reform GSEs, proposing to address their structure, mission, portfolio limits, and guarantee fees, among other issues.
U.S. Government Sponsored Enterprises
(“GSEs”)
GSE securities are securities
issued by the U.S. government or its agencies or instrumentalities. Some obligations issued by GSEs are supported by the discretionary authority of the U.S. government to purchase certain obligations of the agency or instrumentality and others only
by the credit of the agency or instrumentality. Those securities bear fixed, floating or variable rates of interest. Interest may fluctuate based on generally recognized reference rates or the relationship of rates. While the U.S. government
currently provides financial support to such GSEs or instrumentalities, no assurance can be given that it will always do so, since it is not so obligated by law.
Certain U.S. government debt
securities, such as securities of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury. Others, such as securities issued by Fannie Mae
®
and Freddie Mac
®
, are supported only by the
credit of the corporation. In the case of securities not backed by the full faith and credit of the United States, a fund must look principally to the agency issuing or guaranteeing the obligation in the event the agency or instrumentality does not
meet its commitments. The U.S. government may choose not to provide financial support to GSEs or instrumentalities if it is not legally obligated to do so. A fund will invest in securities of such instrumentalities only when Rafferty is satisfied
that the credit risk with respect to any such instrumentality is comparatively minimal.
The Fund may enter into firm
commitment agreements for the purchase of securities on a specified future date. The Fund may purchase, for example, new issues of fixed-income instruments on a when-issued basis, whereby the payment obligation, or yield to maturity, or coupon rate
on the instruments may not be fixed at the time of transaction. The Fund will not purchase securities on a when-issued basis if, as a result, more than 15% of its net assets would be so invested. If the Fund enters into a firm commitment agreement,
liability for the purchase price and the rights and risks of ownership of the security accrue to the Fund at the time it becomes obligated to purchase such security, although delivery and payment occur at a later date. Accordingly, if the market
price of the security should decline, the effect of such an agreement would be to obligate the Fund to purchase the security at a price above the current market price on the date of delivery and payment. During the time the Fund is obligated to
purchase such a security, it will be required to segregate assets with an approved custodian in an amount sufficient to settle the transaction.
Zero-Coupon, Payment-In-Kind and Strip
Securities
The Fund
may invest in zero-coupon, payment-in-kind and strip securities of any rating or maturity. Zero-coupon securities make no periodic interest payment but are sold at a deep discount from their face value, otherwise known as “original issue
discount” or “OID.” The buyer earns a rate of return determined by the gradual appreciation of the security, which is redeemed at face value on a specified maturity date. The OID varies depending on the time remaining until
maturity, as well as market interest rates, liquidity of the security, and the issuer’s perceived credit quality. If the issuer defaults, the Fund may not receive any return on its investment. Because zero-coupon securities bear no interest
and compound semi-annually at the rate fixed at the time of issuance, their value generally is more volatile than the value of other fixed-income securities. Since zero-coupon security holders do not receive interest payments, when interest rates
rise, zero-coupon securities fall more dramatically in value than securities paying interest on a current basis. When interest rates fall, zero-coupon securities rise more rapidly in value because the securities reflect a fixed rate of return.
Payment-in-kind securities allow the issuer, at its option, to make current interest payments either in cash or in additional debt obligations of the issuer. Both zero-coupon securities and payment-in-kind securities allow an issuer to avoid the
need to generate cash to meet current interest payments.
An investment in zero-coupon
securities and delayed interest securities (which do not make interest payments until after a specified time) may cause the Fund to recognize income and be required to make distributions thereof to shareholders before it receives any cash payments
on its investment. Moreover, even though payment-in-kind securities do not pay current interest in cash, the Fund nonetheless is required to accrue interest income on these investments and to distribute the interest income at least annually to
shareholders. See “Dividends, Other Distributions and Taxes
–
Income from Zero Coupon and Payment-in-Kind Securities.” Thus, the Fund could be required at
times to liquidate other investments to satisfy distribution requirements.
The Fund may also invest in strips,
which are debt securities whose interest coupons are taken out and traded separately after the securities are issued but otherwise are comparable to zero-coupon securities. Like zero-coupon securities and payment-in-kind securities, strips are
generally more sensitive to interest rate fluctuations than interest paying securities of comparable term and quality.
Other Investment Risks and Practices
Borrowing
. The Fund may borrow money for investment purposes, which is a form of leveraging. Leveraging investments, by purchasing securities with borrowed money, is a
speculative technique that increases investment risk while increasing investment opportunity. Leverage will magnify changes in the Fund’s NAV and on the Fund’s investments. Although the principal of such borrowings will be fixed, the
Fund’s assets may change in value during the time the borrowing is outstanding. Leverage also creates interest expenses for the Fund. To the extent the income derived from securities purchased with borrowed funds exceeds the interest the Fund
will have to pay, that Fund’s net income will be greater than it would be if leverage were not used. Conversely, if the income from the assets obtained with borrowed funds is not sufficient to cover the cost of leveraging, the net income of
the Fund will be less than it would be if leverage were not used, and therefore the amount available for shareholders will be reduced.
The Fund may borrow money to
facilitate management of the Fund’s portfolio by enabling the Fund to meet redemption requests when the liquidation of portfolio instruments would be inconvenient or disadvantageous. Such borrowing is not for investment purposes and will be
repaid by the borrowing Fund promptly.
As required by the 1940 Act, the Fund
must maintain continuous asset coverage (total assets, including assets acquired with borrowed funds, less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If at any time the value of the required asset coverage declines as a
result of market fluctuations or other reasons, the Fund may be required to sell some of its portfolio investments within three days to reduce the amount of its borrowings and restore the 300% asset coverage, even though it may be disadvantageous
from an investment standpoint to sell portfolio instruments at that time.
Under current pronouncements, certain
obligations under futures contracts, forward contracts and swap agreements to the extent that the “covers” its obligations as discussed in the “Futures Contracts, Options, and Other Derivatives Strategies” section will not be
considered a “senior security” and, therefore, will not be subject to the 300% asset coverage requirements otherwise applicable to borrowings.
Portfolio Turnover
. The Trust anticipates that the Fund’s annual portfolio turnover will vary. The Fund’s portfolio turnover rate is calculated by the value of
the securities purchased or securities sold, excluding all securities whose terms-to-maturity at the time of acquisition were less than 397 days, divided by the average monthly value of such securities owned during the year. Based on this
calculation, instruments with remaining terms-to-maturity of less than 397 days are excluded from the portfolio turnover rate. Such instruments generally would include futures contracts and options, since such contracts generally have remaining
terms-to-maturity of less than 397 days. In any given period, all of the Fund’s investments may have remaining terms-to-maturity of less than 397 days; in that case, the portfolio turnover rate for that period would be equal to zero. However,
the Fund’s portfolio turnover rate calculated with all securities whose terms-to-maturity were less than 397 days is anticipated to be unusually high.
High portfolio
turnover involves correspondingly greater expenses to the Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities. The trading costs and tax effects
associated with portfolio turnover may adversely affect the Fund’s performance.
Correlation and Tracking Risk
Several factors may affect the
Fund's ability to track the performance of the Index. Among these factors are: (1) Fund expenses, including brokerage expenses and commissions and financing costs related to derivatives (which may be increased by high portfolio turnover); (2) less
than all of the securities in the Index being held by the Fund and securities not included in the Index being held by the Fund; (3) an imperfect correlation between the performance of instruments held by the Fund, such as other investment companies,
including ETFs, futures contracts and options, and the performance of the underlying securities in the cash market comprising an index; (4) bid-ask spreads; (5) the Fund holding instruments that are illiquid or the market for which becomes
disrupted; (6) the need to conform the Fund’s portfolio holdings to comply with the Fund’s investment restrictions or policies, or regulatory or tax law requirements; and (7) disruptions and illiquidity in the markets for securities or
derivatives held by the Fund.
While index futures and options
contracts closely correlate with the applicable indices over long periods, shorter-term deviation, such as on a daily basis, does occur with these instruments. As a result, the Fund’s short-term performance will reflect such deviation from the
Index. The Fund may use a combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not
closely track the performance of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk
and may not achieve as high a degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the
Fund’s return.
Since the use of technology has
become more prevalent in the course of business, the Fund may be more susceptible to operational risks through breaches in cybersecurity. A cybersecurity incident may refer to either intentional or unintentional events that allow an unauthorized
party to gain access to fund assets, customer data, or proprietary information, or cause the Fund or a Fund service provider to suffer data corruption or lose operational functionality. A cybersecurity incident could, among other things, result in
the loss or theft of customer data or funds, customers or employees being unable to access electronic systems (“denial of services”), loss or theft of proprietary information or corporate data, physical damage to a computer or network
system, or remediation costs associated with system repairs. Any of these results could have a substantial impact on the Fund. For example, if a cybersecurity incident results in a denial of service, Fund shareholders could lose access to their
electronic accounts for an unknown period of time, and employees could be unable to access electronic systems to perform critical duties for the Fund, such as trading, NAV calculation, shareholder accounting or fulfillment of Fund share purchases
and redemptions. Cybersecurity incidents could cause the Fund or the Fund's Adviser or distributor to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures, or financial loss of a
significant magnitude. They may also cause the Fund to violate applicable privacy and other laws. The Fund's service providers have established risk management systems that seek to reduce the risks associated with cybersecurity, and business
continuity plans in the event there is a cybersecurity breach. However, there is no guarantee that such efforts will succeed, especially since the Fund does not directly control the cybersecurity systems of the issuers of securities in which the
Fund invests or the Fund's third party service providers (including the Fund's transfer agent and custodian).
Potential Substantial After-Tax Correlation and
Tracking Risk
The
Fund will be subject to taxation on its taxable income. The Fund’s NAV will also be reduced by the accrual of any current or deferred tax liabilities. The Index, however, is calculated without any deductions for taxes. As a result, the
Fund’s after tax performance could differ significantly from the Index, even if the pretax performance of the Fund and the performance of the Index are closely correlated.
The Trust, on behalf of the Fund,
has adopted the following investment policies which are fundamental policies that may not be changed without the affirmative vote of a majority of the outstanding voting securities of the Fund. As defined by the 1940 Act, a “vote of a majority
of the outstanding voting securities of the Fund” means the affirmative vote of the lesser of (1) more than 50% of the outstanding shares of the Fund or (2) 67% or more of the shares present at a shareholders’ meeting, if more than 50%
of the outstanding shares are represented at the meeting in person or by proxy.
For purposes of the following
limitations, all percentage limitations apply immediately after a purchase or initial investment. Except with respect to borrowing money, if a percentage limitation is adhered to at the time of the investment, a later increase or decrease in the
percentage resulting from any change in value or net assets will not result in a violation of such restrictions. If at any time the Fund’s borrowings exceed its limitations due to a decline in net assets, such borrowings will be reduced within
three days (not including Sundays and holidays), or such longer period as may be permitted by the 1940 Act, to the extent necessary to comply with the one-third limitation.
The Fund may not:
1.
|
Borrow money, except to
the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
2.
|
Issue senior securities,
except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
3.
|
Make loans, except to the
extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
4.
|
Purchase the
securities of any issuer (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities) if, as a result, 25% or more of the Fund’s total assets would be invested in the securities of companies
whose principal business activities are in the same industry. However, the Fund, which tracks an underlying index, will only concentrate its investment in a particular industry or group of industries to approximately the same extent that its
underlying index is so concentrated.
|
5.
|
Purchase or sell real
estate, except that, to the extent permitted by applicable law, the Fund may (a) invest in securities or other instruments directly secured by real estate, and (b) invest in securities or other instruments issued by issuers that invest in real
estate.
|
6.
|
Purchase or sell
commodities or commodity contracts unless acquired as a result of ownership of securities or other instruments issued by persons that purchase or sell commodities or commodities contracts; but this shall not prevent the Fund from purchasing, selling
and entering into financial futures contracts (including futures contracts on indices of securities, interest rates and currencies), and options on financial futures contracts (including futures contracts on indices of securities, interest rates and
currencies), warrants, swaps, forward contracts, foreign currency spot and forward contracts and other financial instruments.
|
7.
|
Underwrite
securities issued by others, except to the extent that the Fund may be considered an underwriter within the meaning of the 1933 Act in the disposition of restricted securities or other investment company securities.
|
Portfolio Transactions and Brokerage
Subject to the general
supervision by the Trustees, Rafferty is responsible for decisions to buy and sell securities for the Fund, the selection of broker-dealers to effect the transactions, and the negotiation of brokerage commissions, if any. Rafferty expects that the
Fund may execute brokerage or other agency transactions through registered broker-dealers, for a commission, in conformity with the 1940 Act, the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.
When selecting a broker or dealer to
execute portfolio transactions, Rafferty considers many factors, including the rate of commission or the size of the broker-dealer’s “spread,” the size and difficulty of the order, the nature of the market for the security,
operational capabilities of the broker-dealer and the research, statistical and economic data furnished by the broker-dealer to Rafferty.
In effecting portfolio transactions
for the Fund, Rafferty seeks to receive the closing prices of securities that are in line with those of the securities included in the Index and seeks to execute trades of such securities at the lowest commission rate reasonably available. With
respect to agency transactions, Rafferty may execute trades at a higher rate of commission if reasonable in relation to brokerage and research services provided to the Fund or Rafferty. Such services may include the following: information as to the
availability of securities for purchase or sale; statistical or factual information or opinions pertaining to investment; wire services; and appraisals or evaluations of portfolio securities. The Fund believes that the requirement to always seek the
lowest possible commission cost could impede effective portfolio management and preclude the Fund and Rafferty from obtaining a high quality of brokerage and research services. In seeking to determine the reasonableness of brokerage commissions paid
in any transaction, Rafferty relies upon its experience and knowledge regarding commissions generally charged by various brokers and on its judgment in evaluating the brokerage and research services received from the broker effecting the
transaction.
Rafferty may use
research and services provided to it by brokers in servicing the Fund; however, not all such services may be used by Rafferty in connection with the Fund. While the receipt of such information and services is useful in varying degrees and may reduce
the amount of research or services otherwise provided to the Fund by Rafferty, the receipt of such information and these services does not reduce the investment advisory fee paid by the Fund.
Purchases and sales of U.S.
government securities normally are transacted through issuers, underwriters or major dealers in U.S. government securities acting as principals. Such transactions are made on a net basis and do not involve payment of brokerage commissions. The cost
of securities purchased from an underwriter usually includes a commission paid by the issuer to the underwriters; transactions with dealers normally reflect the spread between bid and asked prices.
Aggregate brokerage commissions paid by
the Fund for the fiscal periods shown are set forth in the table below:
Direxion
Zacks MLP High Income Index Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$40,953
|
Year
Ended October 31, 2017
|
$45,530
|
Year
Ended October 31, 2016
|
$75,100
|
Portfolio Holdings Information
The Fund’s
portfolio holdings are disclosed on the Fund's website at www.direxioninvestments.com each day the Fund is open for business. In addition, disclosure of the Fund’s complete holdings is required to be made quarterly within 60 days of the end of
each fiscal quarter in the Annual Report and Semi-Annual Report to Fund shareholders and in the quarterly holdings report on Form N-Q. These reports are available, free of charge, on the EDGAR database on the SEC’s website at
www.sec.gov.
The
portfolio composition file (“PCF”), which contains portfolio holdings information and the IOPV, which contains certain pricing information related to the Fund’s portfolio holdings, are also made available daily, including to the
Fund's service providers to facilitate the provision of services to the Fund and to certain other entities as necessary for transactions in Creation Units. Such entities include: (i) National Securities Clearing Corporation (“NSCC”)
members; (ii) subscribers to various fee-based services, including entities that publish and/or analyze such information in connection with the process of purchasing or redeeming Creation Units or trading shares of Fund in the secondary market;
(iii) investors that have entered into an “Authorized Participant Agreement” with the Distributor and the transfer agent or purchase Creation Units through a dealer that has entered into such an agreement (“Authorized
Participants”); and (iv) certain personnel of service providers that are involved in portfolio management and providing administrative, operational, or other support to portfolio management including personnel of the Adviser and the Fund's
distributor, administrator, custodian and fund accountant who are involved in functions which may require such information to conduct business in the ordinary course.
In addition, the Fund's Chief
Compliance Officer (“CCO”) may grant exceptions to permit additional disclosure of the complete portfolio holdings information at differing times and with differing lag times to rating agencies and to the parties noted above, provided
that (1) the Fund has a legitimate business purpose for doing so; (2) it is in the best interests of shareholders; (3) the recipient is subject to a confidentiality agreement; and (4) the recipient is subject to a duty not to trade on the nonpublic
information. In this regard, from time to time, rating and ranking organizations such as Standard & Poor’s
®
and Morningstar
®
, Inc. may request such information. The CCO shall report any disclosures made pursuant to this exception to the Board.
The Board of Trustees
The Trust is governed by its Board
of Trustees (the “Board”). The Board is responsible for and oversees the overall management and operations of the Trust and the Fund, which includes the general oversight and review of the Fund's investment activities, in accordance with
federal law and the law of the State of Delaware, as well as the stated policies of the Fund. The Board oversees the Trust’s officers and service providers, including Rafferty, which is responsible for the management of the day-to-day
operations of the Fund based on policies and agreements reviewed and approved by the Board. In carrying out these responsibilities, the Board regularly interacts with and receives reports from senior personnel of service providers, including
personnel from Rafferty and USBFS. The Board also is assisted by the Trust’s independent auditor (who reports directly to the Trust’s Audit Committee), independent counsel and other professionals as appropriate.
Risk Oversight
Consistent with its responsibility
for oversight of the Trust and the Fund, the Board oversees the management of risks relating to the administration and operation of the Trust and the Fund. Rafferty, as part of its responsibilities for the day-to-day operations of the Fund, is
responsible for day-to-day risk management for the Fund. The Board, in the exercise of its reasonable business judgment performs its risk management oversight directly and, as to certain matters, through its committees (described below) and through
the Board members who are not “interested persons” of the Fund as defined in Section 2(a)(19) of the 1940 Act (“Independent Trustees.”) The following provides an overview of the principal, but not all, aspects of the
Board’s oversight of risk management for the Trust and the Fund.
The Board has adopted, and
periodically reviews, policies and procedures designed to address risks to the Trust and the Fund. In addition, under the general oversight of the Board, Rafferty and other service providers to the Fund have themselves adopted a variety of policies,
procedures and controls designed to address particular risks to the Fund. Different processes, procedures and controls are employed with respect to different types of risks.
The Board also
oversees risk management for the Trust and the Fund through review of regular reports, presentations and other information from officers of the Trust and other persons. The Trust’s CCO and senior officers of Rafferty regularly report to the
Board on a range of matters, including those relating to risk management. The Board also regularly receives reports from Rafferty and USBFS with respect to the Fund's investments. In addition to regular reports from these parties, the Board also
receives reports regarding other service providers to the Trust, either directly or through Rafferty, USBFS or the CCO, on a periodic or regular basis. At least annually, the Board receives a report from the CCO regarding the effectiveness of the
Fund's compliance program. Also, on an annual basis, the Board receives reports, presentations and other information from Rafferty in connection with the Board’s consideration of the renewal of each of the Trust’s agreements with
Rafferty and the Trust’s distribution plan under Rule 12b-1 under the 1940 Act.
The CCO reports regularly to the
Board on Fund valuation matters. The Audit Committee receives regular reports from the Trust’s independent registered public accounting firm on internal control and financial reporting matters. On at least a quarterly basis, the Independent
Trustees meet with the CCO to discuss matters relating to the Fund's compliance program.
Board Structure and Related Matters
Independent Trustees constitute
two-thirds of the Board. The Trustees discharge their responsibilities collectively as a Board, as well as through Board committees, each of which operates pursuant to a charter approved by the Board that delineates the specific responsibilities of
that committee. The Board has established three standing committees: the Audit Committee, the Nominating and Governance Committee and the Qualified Legal Compliance Committee. For example, the Audit Committee is responsible for specific matters
related to oversight of the Fund's independent auditors, subject to approval of the Audit Committee’s recommendations by the Board. The members and responsibilities of each Board committee are summarized below.
The Board
periodically evaluates its structure and composition as well as various aspects of its operations. The Chairman of the Board is not an Independent Trustee and the Board has chosen not to have a lead Independent Trustee. However, the Board believes
that its leadership structure, including its Independent Trustees and Board committees, is appropriate for the Trust in light of, among other factors, the asset size and nature of the Fund, the number of series overseen by the Board, the
arrangements for the conduct of the Fund's operations, the number of Trustees, and the Board’s responsibilities. On an annual basis, the Board conducts a self-evaluation that considers, among other matters, whether the Board and its committees
are functioning effectively and whether, given the size and composition of the Board and each of its committees, the Trustees are able to oversee effectively the number of series in the complex.
The Trust is part of the Direxion
Family of Investment Companies, which is comprised of the 120 portfolios within the Trust, 15 portfolios within the Direxion Funds and no portfolios within the Direxion Insurance Trust. The same persons who constitute the Board also constitute the
Board of Trustees of the Direxion Funds and the Direxion Insurance Trust.
The Board holds four regularly
scheduled in-person meetings each year. The Board may hold special meetings, as needed, either in person or by telephone, to address matters arising between regular meetings. During a portion of each in-person meeting, the Independent Trustees meet
outside of management’s presence. The Independent Trustees may hold special meetings, as needed, either in person or by telephone.
The Trustees of
the Trust are identified in the tables below, which provide information regarding their age, business address and principal occupation during the past five years including any affiliation with Rafferty, the length of service to the Trust, and the
position, if any, that they hold on the board of directors of companies other than the Trust as of the date of this SAI. Each of the Trustees of the Trust also serve on the Board of the Direxion Funds and Direxion Insurance Trust, the other
registered investment companies in the Direxion mutual fund complex. Rafferty is also the sole owner of Direxion Advisors, LLC ("Direxion"), investment adviser to certain series of the Trust. Unless otherwise noted, an individual’s business
address is 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019.
Interested
Trustee
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(2)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
Daniel
D. O’Neill
(1)
Age: 50
|
Chairman
of the Board of Trustees
|
Lifetime
of Trust until removal or resignation;
Since 2008
|
Managing
Director of Rafferty Asset Management, LLC, January 1999 –
January 2019 and Direxion Advisors, LLC, November 2017
–
January 2019.
|
135
|
None.
|
Independent Trustees
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(3)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
Gerald
E. Shanley III
Age: 75
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2008
|
Retired,
since 2002; Business Consultant, 1985-present; Trustee of Trust Under Will of Charles S. Payson, 1987-present; C.P.A., 1979-present.
|
135
|
None.
|
John
A. Weisser
Age: 77
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2008
|
Retired,
since 1995; Salomon Brothers, Inc., 1971-1995, most recently as Managing Director.
|
135
|
Director
until December 2016: The MainStay Funds Trust, The MainStay Funds, MainStay VP Fund Series, Mainstay Defined Term Municipal Opportunities Fund; Private Advisors Alternative Strategy Fund; Private Advisors Alternative Strategies Master Fund.
|
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(3)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
David
L. Driscoll
Age: 49
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2014
|
Partner,
King Associates, LLP, since 2004; Board Advisor, University Common Real Estate, since 2012; Principal, Grey Oaks LLP since 2003; Member, Kendrick LLC, since 2006.
|
135
|
None.
|
Jacob
C. Gaffey
Age: 71
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2014
|
Managing
Director of Loomis & Co. since 2012; Partner, Bay Capital Advisors, LLC
2008
–
2012.
|
135
|
None.
|
Henry
W. Mulholland
Age: 55
|
Trustee
|
Lifetime
of Trust until removal or resignation; Since 2017
|
Grove
Hill Partners LLC, since 2016 as Managing Partner; Bank of America Merrill Lynch, 1990-2015, most recently as Managing Director and Head of Equities for Americas.
|
135
|
None.
|
(1)
|
Mr. O’Neill is
affiliated with Rafferty and Direxion. Mr. O’Neill owns a beneficial interest in Rafferty.
|
(2)
|
The Direxion Family of
Investment Companies consists of the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 93 of the 120 funds registered with the SEC, the Direxion Funds which, as of the date of this SAI, offers for sale to the
public 15 funds registered with the SEC and the Direxion Insurance Trust which, as of the date of this SAI, does not have any funds registered with the SEC.
|
In addition to the information set
forth in the tables above and other relevant qualifications, experience, attributes or skills applicable to a particular Trustee, the following provides further information about the qualifications and experience of each Trustee.
Daniel D.
O’Neill: Mr. O’Neill has extensive experience in the investment management business, including as managing director of Rafferty and Direxion. Mr. O’Neill was the Managing Director of Rafferty from 1999 through January 2019 and
Managing Director of Direxion from its inception in November 2017 through January 2019.
Gerald E. Shanley III: Mr. Shanley
has extensive audit experience and spent ten years in the tax practice of an international public accounting firm. He is a certified public accountant and has a JD degree. He has extensive business experience as the president of a closely held
manufacturing company, a director of several closely held companies, a business and tax consultant and a trustee of a private investment trust. He has served on the boards of several charitable and not for profit organizations. He also has multiple
years of service as a Trustee.
John A. Weisser: Mr. Weisser has
extensive experience in the investment management business, including as managing director of an investment bank and a director of other registered investment companies. He also has multiple years of service as a Trustee.
David L. Driscoll: Mr. Driscoll has
extensive experience with risk assessment and strategic planning as a partner and manager of various real estate partnerships and companies.
Jacob C. Gaffey: Mr. Gaffey has
extensive experience with providing investment banking and valuation services to various companies. Mr. Gaffey has been a director and a member of an audit committee of a public company since 2011.
Henry W. Mulholland: Mr. Mulholland has
extensive experience with equity trading, risk management, equity market structure as well as managing regulatory and compliance matters.
Board Committees
The Trust has an
Audit Committee, consisting of Messrs. Weisser, Shanley, Driscoll, Gaffey and Mulholland. The members of the Audit Committee are Independent Trustees. The primary responsibilities of the Trust’s Audit Committee are, as set forth in its
charter, to make recommendations to the Board Members as to: the engagement or discharge of the Trust’s independent registered public accounting firm (including the audit fees charged by the auditors); the supervision of investigations into
matters relating to audit matters; the review with the independent registered public accounting firm of the results of audits; and addressing any other matters regarding audits. The Audit Committee met three times during the Trust’s most
recent fiscal year.
The Trust also has a Nominating and
Governance Committee, consisting of Messrs. Weisser, Shanley, Driscoll, Gaffey and Mulholland each of whom is an Independent Trustee. The primary responsibilities of the Nominating and Governance Committee are to make recommendations to the Board on
issues related to the composition and operation of the Board, and communicate with management on those issues. The Nominating and Governance Committee also evaluates and nominates Board member candidates. The Nominating and Governance Committee will
consider nominees recommended by shareholders. Such recommendations should be in writing and addressed to the Fund with attention to the Nominating and Governance Committee Chair. The recommendations must include the following Preliminary
Information regarding the nominee: (1) name; (2) date of birth; (3) education; (4) business professional or other relevant experience and areas of expertise; (5) current business and home addresses and contact information; (6) other board positions
or prior experience; and (7) any knowledge and experience relating to investment companies and investment company governance. The Nominating and Governance Committee met three times during the Trust’s most recent fiscal year.
The Trust has a Qualified Legal
Compliance Committee, consisting of Messrs. Weisser, Shanley, Driscoll, Gaffey and Mulholland. The members of the Qualified Legal Compliance Committee are Independent Trustees of the Trust. The primary responsibility of the Trust’s Qualified
Legal Compliance Committee is to receive, review and take appropriate action with respect to any report (“Report”) made or referred to the Committee by an attorney of evidence of a material violation of applicable U.S. federal or state
securities law, material breach of a fiduciary duty under U.S. federal or state law or a similar material violation by the Trust or by any officer, director, employee or agent of the Trust. The Qualified Legal Compliance Committee did not meet
during the Trust’s most recent fiscal year.
Principal Officers of the Trust
The officers of the Trust conduct
and supervise its daily business. Unless otherwise noted, an individual’s business address is 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019. As of the date of this SAI, the officers of the Trust, their ages,
their business address and their principal occupations during the past five years are as follows:
Name,
Address
and Age
|
Position(s)
Held with
Fund
|
Term
of
Office and
Length of
Time Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in the
Direxion
Family of
Investment
Companies
Overseen
by Trustee
(1)
|
Other
Trusteeships/
Directorships Held
by Trustee During
Past Five Years
|
Robert
D. Nestor
Age: 50
|
President
|
One
Year;
Since 2018
|
President,
Rafferty Asset Management, LLC and Direxion Advisors, LLC, since April 2018; Blackrock, Inc. (May 2007-April 2018), most recently as Managing Director.
|
N/A
|
N/A
|
Patrick
J. Rudnick
Age: 45
|
Principal
Executive
Officer
Principal Financial
Officer
|
One
Year;
Since 2018
One Year;
Since 2010
|
Senior
Vice President, since March 2013, Rafferty Asset Management, LLC; Senior Vice President, since November 2017, Direxion Advisors, LLC.
|
N/A
|
N/A
|
Name,
Address
and Age
|
Position(s)
Held with
Fund
|
Term
of
Office and
Length of
Time Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in the
Direxion
Family of
Investment
Companies
Overseen
by Trustee
(1)
|
Other
Trusteeships/
Directorships Held
by Trustee During
Past Five Years
|
Angela
Brickl
Age: 42
|
Chief
Compliance
Officer
Secretary
|
One
Year;
Since 2018
One Year;
Since 2011
|
General
Counsel, Rafferty Asset Management LLC, since October 2010 and Direxion Advisors, LLC, since November 2017; Chief Compliance Officer, Rafferty Asset Management, LLC, since September 2012 and Direxion Advisors, LLC, since November 2017.
|
N/A
|
N/A
|
(1)
|
The Direxion Family of
Investment Companies consists of the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 93 of the 120 funds registered with the SEC, the Direxion Funds which, as of the date of this SAI, offers for sale to the
public 15 funds registered with the SEC and the Direxion Insurance Trust which, as of the date of this SAI, does not have any funds registered with the SEC.
|
The following table shows the amount
of equity securities owned in the Fund and the Direxion Family of Investment Companies by the Trustees as of the calendar year ended December 31, 2018:
Dollar
Range of Equity Securities Owned:
|
Interested
Trustee:
|
Independent
Trustees:
|
|
Daniel
D.
O’Neill
|
Gerald
E.
Shanley III
|
John
Weisser
|
David
L.
Driscoll
|
Jacob
C.
Gaffey
|
Henry
W.
Mulholland
|
Direxion
Zacks MLP High Income Index Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Aggregate
Dollar Range of Equity Securities in the Direxion Family of Investment Companies
(1)
|
Over
$100,000
|
$0
|
$1-$10,000
|
$0
|
$0
|
$0
|
(1)
|
The Direxion Family of
Investment Companies consists of the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 93 of the 120 funds registered with the SEC, the Direxion Funds which, as of the date of this SAI, offers for sale to the
public 15 funds registered with the SEC and the Direxion Insurance Trust which, as of the date of this SAI, does not have any funds registered with the SEC.
|
The Trust’s Trust Instrument
provides that the Trustees will not be liable for errors of judgment or mistakes of fact or law. However, they are not protected against any liability to which they would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of their office.
No officer,
director or employee of Rafferty receives any compensation from the Fund for acting as a Trustee or officer of the Trust. The following table shows the compensation earned by each Trustee for the Trust’s fiscal year ended October 31,
2018:
Name
of Person,
Position
|
Aggregate
Compensation
From the
Trust
(1)
|
Pension
or
Retirement Benefits
Accrued As Part of
the Trust’s
Expenses
|
Estimated
Annual Benefits
Upon Retirement
|
Aggregate
Compensation
From the Direxion
Family of
Investment
Companies Paid
to the Trustees
(2)
|
Interested
Trustee
|
Daniel
D. O’Neill
|
$0
|
$0
|
$0
|
$0
|
Independent
Trustees
|
Gerald
E. Shanley III
|
$93,438
|
$0
|
$0
|
$124,583
|
John
A. Weisser
|
$93,438
|
$0
|
$0
|
$124,583
|
David
L. Driscoll
|
$92,188
|
$0
|
$0
|
$122,917
|
Jacob
C. Gaffey
|
$92,188
|
$0
|
$0
|
$122,917
|
Henry
W. Mulholland
(3)
|
$85,938
|
$0
|
$0
|
$114,583
|
(1)
Trustee compensation is
allocated across the operational Funds of the Trust based on the proportion of the Fund’s net assets to the total net assets of the operational Funds of the Trust.
(2)
For the fiscal year ended
October 31, 2018, Trustees’ fees and expenses in the amount of $457,190 were incurred by the Trust.
(3)
Mr. Mulholland was
elected as a Trustee December 1, 2017.
Principal Shareholders, Control Persons and
Management Ownership
A principal shareholder is any
person who owns of record or beneficially 5% or more of the outstanding shares of the Fund. A control person is a shareholder that owns beneficially or through controlled companies more than 25% of the voting securities of a company or acknowledges
the existence of control. Shareholders owning voting securities in excess of 25% may determine the outcome of any matter affecting and voted on by shareholders of the Fund.
As of February 1,
2019, the following shareholders were considered to be either a principal shareholder or control person of the Fund:
Direxion Zacks MLP High Income Index
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
24.48%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
11.11%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
10.13%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
9.43%
|
Record
|
Interactive
Brokers
8 Greenwich Office Park 2nd Floor
Greenwich, CT 06831
|
N/A
|
N/A
|
7.67%
|
Record
|
Pershing
LLC
1 Pershing Plaza
Jersey City, NJ 07399
|
N/A
|
N/A
|
6.49%
|
Record
|
LPL
Financial Corp.
9785 Towne Centre Drive
San Diego, CA 92121
|
N/A
|
N/A
|
6.02%
|
Record
|
Morgan
Stanley & Co.
Harbourside Financial Center Plaza 3, 1st Floor
Jersey City, NJ 07311
|
N/A
|
N/A
|
5.76%
|
Record
|
The
Bank of New York Mellon
One Wall Street
New York, NY 10286
|
N/A
|
N/A
|
5.41%
|
Record
|
In addition, as of
February 1, 2019, the Trustees and Officers as a group owned less than 1% of the outstanding shares of the Fund.
Rafferty, 1301 Avenue of the
Americas (6th Avenue), 28th Floor, New York, New York 10019, provides investment advice to the Fund. Rafferty was organized as a New York limited liability company in June 1997. Lawrence C. Rafferty controls Rafferty through his ownership in
Rafferty Holdings, LLC and Daniel D. O'Neill controls Rafferty through his ownership in Minakian Partners, LLC.
Under an Investment Advisory
Agreement (“Advisory Agreement”) between Rafferty and the Trust, on behalf of the Fund dated August 13, 2008, Rafferty provides a continuous investment program for the Fund’s assets in accordance with its investment objectives,
policies and limitations, and oversees the day-to-day operations of the Fund, subject to the supervision of the Trustees. Rafferty bears all costs associated with providing these advisory services and the expenses of the Trustees who are affiliated
with or interested persons of Rafferty. The Trust bears all other expenses that are not assumed by Rafferty as described in the Prospectus. The Trust also is liable for nonrecurring expenses as may arise, including litigation to which the Fund may
be a party. The Trust also may have an obligation to indemnify its Trustees and officers with respect to any such litigation.
The Advisory
Agreement was initially approved by the Trustees (including all Independent Trustees) and Rafferty, as sole shareholder of the Fund in compliance with the 1940 Act. After an initial approval period of two years, the Advisory Agreement is renewable
at least annually with respect to the Fund, so long as its continuance is approved (1) by the vote, cast in person at a meeting called for that purpose, of a majority of the Independent Trustees of the Trust; and (2) by the majority vote of either
the full Board or the vote of a majority of the outstanding shares of the Fund. The Advisory Agreement automatically terminates on assignment and is terminable upon a 60-day written notice either by the Trust or Rafferty.
Pursuant to the Advisory Agreement, the
Fund pays Rafferty a fee at an annualized rate based on a percentage of its average daily net assets of 0.50%.
The table below shows
the advisory fees incurred by the Fund and the amount of fees waived and/or reimbursed by Rafferty for the fiscal years ended October 31.
Direxion
Zacks MLP High Income Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$289,850
|
$105,972
|
$183,878
|
Year
Ended October 31, 2017
|
$433,549
|
$213,526
|
$220,023
|
Year
Ended October 31, 2016
|
$341,028
|
$194,584
|
$146,444
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $43,621.
|
Pursuant to a separate Management
Services Agreement, Rafferty performs certain administrative services on behalf of the Fund, such as negotiating, coordinating and implementing the Trust’s contractual obligations with the Fund's service providers; monitoring, overseeing and
reviewing the performance of such service providers to ensure adherence to applicable contractual obligations; and preparing or coordinating reports and presentations to the Board of Trustees with respect to such service providers as requested or as
deemed necessary; and other services that are described in the Management Services Agreement. For these services, the Trust pays to Rafferty a fee at the annual rate of 0.026% on the first $10 billion of the aggregate average daily net assets of the
Funds in the Trust and 0.024% on the aggregate net assets above $10 billion. This Management Services Fee may be waived under the Operating Expense Limitation Agreement that Rafferty has entered into with the Fund. This arrangement may be terminated
at any time by the Board.
The Fund is responsible for its
own operating expenses. Rafferty has entered into an Operating Expense Limitation Agreement with the Fund. Under this Operating Expense Limitation Agreement, Rafferty has contractually agreed to cap all or a portion of its advisory and management
services fees and/or reimburse the Fund for Other Expenses (excluding, as applicable, among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses,
brokerage commissions and extraordinary expenses) through September 1, 2020 to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.65% of the Fund’s average daily net assets. Any expense waiver or reimbursement is
subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This agreement may be
terminated or revised at any time at the discretion of the Board upon notice to the Adviser and without the approval of Fund shareholders.
Rafferty shall not be liable to
the Trust or any Fund for anything done or omitted by it, except acts or omissions involving willful misfeasance, bad faith, negligence or reckless disregard of the duties imposed upon it by its agreement with the Trust or for any losses that may be
sustained in the purchase, holding or sale of any security.
Pursuant to Section 17(j) of the 1940
Act and Rule 17j-1 thereunder, the Trust, Rafferty and the Fund's distributor have adopted Codes of Ethics. These codes permit portfolio managers and other access persons of the Fund to invest in securities that may be owned by the Fund, subject to
certain restrictions.
Paul Brigandi and
Tony Ng are jointly and primarily responsible for the day-to-day management of the Fund. An investment trading team of Rafferty employees assists Mr. Brigandi and Mr. Ng in the day-to-day management of the Fund subject to their primary
responsibility and oversight. The Portfolio Managers work with the investment trading team to decide the target allocation of the Fund’s investments and on a day-to-day basis, an individual portfolio trader executes transactions for the Fund
consistent with the target allocation. The members of the investment trading team rotate periodically among the various series of the Trust, including the Fund, so that no single individual is assigned to a specific Fund for extended periods of
time.
In addition to the Fund, Mr.
Brigandi and Mr. Ng manage the following other accounts as of October 31, 2018:
Accounts
|
Total
Number
of Accounts
|
Total
Assets
(In Billions)
|
Total
Number of
Accounts with
Performance
Based Fees
|
Total
Assets
of Accounts
with Performance
Based Fees
|
Registered
Investment Companies
|
90
|
$12.7
|
0
|
$0
|
Other
Pooled Investment Vehicles
|
0
|
$
0
|
0
|
$0
|
Other
Accounts
|
0
|
$
0
|
0
|
$0
|
Rafferty
manages no other accounts with investment objectives similar to those of the Fund. In addition, two or more funds advised by Rafferty may invest in the same securities but the nature of each investment (long or short) may be opposite and in
different proportions. Generally, due to the nature of the various Funds advised by Rafferty, if the Fund with a leveraged investment objective increases in value, the performance of the Fund with an inverse or an inverse leveraged investment
objective will decrease in value and vice versa. Rafferty ordinarily executes transactions for the Fund “market-on-close,” in which funds purchasing or selling the same security receive the same closing price.
Rafferty has not identified any
additional material conflicts between the Fund and other accounts managed by the investment team. However, other actual or apparent conflicts of interest may arise in connection with the day-to-day management of the Fund and other accounts. The
management of the Fund and other accounts may result in unequal time and attention being devoted to the Fund and other accounts. Rafferty’s management fees for the services it provides to other accounts varies and may be higher or lower than
the advisory fees it receives from the Fund. This could create potential conflicts of interest in which the portfolio manager may appear to favor one investment vehicle over another resulting in an account paying higher fees or one investment
vehicle out performing another.
The investment team’s
compensation is paid by Rafferty. Their compensation primarily consists of a fixed base salary and a bonus. The investment team’s salary is reviewed annually and increases are determined by factors such as performance and seniority. Bonuses
are determined by the individual performance of an employee including factors such as attention to detail, process, and efficiency, and are impacted by the overall performance of the firm. The investment team’s salary and bonus are not based
on the Fund’s performance and as a result, no benchmarks are used. Along with all other employees of Rafferty, the investment team may participate in the firm’s 401(k) retirement plan where Rafferty may make matching contributions up to
a defined percentage of their salary.
Mr. Brigandi and Mr.
Ng did not own any shares of the Fund as of October 31, 2018.
Proxy Voting Policies and Procedures
The Board has
adopted policies and procedures with respect to voting proxies (the “Proxy Policy”) related to portfolio securities of the Fund. Pursuant to these policies and procedures the Board of the Trust has delegated responsibility for voting
such proxies to the Adviser, subject to the Board’s continuing oversight.
The Proxy Policy is intended to
protect shareholder interests and comply with applicable state and federal corporate and securities laws. It applies to any voting rights with respect to securities held in accounts of the Fund. To assist the Adviser in its responsibility for voting
proxies and administering the overall proxy voting process, the Adviser has retained Institutional Shareholder Services (“ISS”) as an expert in the proxy voting and corporate governance area. ISS is a subsidiary of Vestar Capital
Partners VI, L.P.; a leading U.S. middle market private equity firm. The services provided by ISS include in-depth research, global issuer analysis, and voting recommendations as well as vote execution, reporting and record keeping. ISS issues
monthly reports which are reviewed by the Adviser to assure proxies are being voted properly. The Adviser and ISS also perform checks on a quarterly basis to match the voting activity with available shareholder meeting information. ISS’
management meets on a regular basis to discuss its
approach to new developments and amendments to existing proxy voting guidelines (the “Guidelines”). Information on such developments and amendments are then provided to the Adviser.
The Guidelines are maintained and
implemented by ISS and are an extensive list of common proxy voting issues with recommended voting actions based on the overall goal of achieving maximum shareholder value and protection of shareholder interests and rights. Generally, proxies are
voted in accordance with the voting recommendations contained in the Guidelines. If necessary, the Adviser will be consulted by ISS on non-routine issues. Proxy issues and factors considered when resolving proxy issues in the Guidelines include, but
are not limited to:
•
|
Election of Directors
–
considering all factors such as director qualifications, term of office and age limits.
|
•
|
Proxy Contests
–
considering factors such as voting nominees in contested elections and reimbursement of expenses.
|
•
|
Election of Auditors
–
considering factors such as independence and reputation of the auditing firm.
|
•
|
Proxy Contest Defenses
–
considering factors such as board structure and cumulative voting.
|
•
|
Tender Offer Defenses
–
considering factors such as poison pills (stock purchase rights plans) and fair price provisions.
|
•
|
Miscellaneous Governance
Issues
–
considering factors such as confidential voting and equal access.
|
•
|
Capital Structure
–
considering factors such as common stock authorization and stock distributions.
|
•
|
Executive and Director
Compensation
–
considering factors such as performance goals and employee stock purchase plans.
|
•
|
State of Incorporation
–
considering factors such as state takeover statutes and voting on reincorporation proposals.
|
•
|
Mergers and Corporate
Restructuring
–
considering factors such as spin-offs and asset sales.
|
•
|
Mutual Fund Proxy Voting
–
considering factors such as election of directors and proxy contests.
|
•
|
Social
and Corporate Responsibility Issues
–
considering factors such as social, environmental, and labor issues.
|
A full description of the Guidelines and
voting policy is maintain by the Adviser, and a complete copy of the Guidelines is available without charge, upon request by calling the Adviser at 866-476-7523.
Conflicts
of Interest
From time
to time, proxy issues may pose a material conflict of interest between the Fund's shareholders and the Adviser, the Distributor or any affiliates thereof. Due to the limited nature of the Adviser’s activities
(
e.g.
, no underwriting business, no publicly-traded affiliates, no investment banking activities, and no research recommendations), conflicts of interest are likely to be infrequent. Nevertheless, it shall be
the duty of the Adviser to monitor potential conflicts of interest. In the event a conflict of interest arises, the Adviser will direct ISS to use its independent judgment to vote affected proxies in accordance with approved guidelines.
Proxy
Voting Recordkeeping
The Adviser, with the assistance of
ISS, maintains for a period of at least five years, a record of each proxy statement received and materials that were considered when the proxy was voted during the calendar year. Information on how the Fund voted proxies relating to portfolio
securities for the 12-month (or shorter) period ended June 30 is available without charge, upon request, by calling the Adviser at 866-476-7523 or on the SEC’s website at
http://www.sec.gov
.
Fund Administrator, Fund Accounting Agent, Transfer
Agent and Custodian
U.S. Bancorp Fund Services, LLC,
615 East Michigan Street, Milwaukee, Wisconsin 53202, serves as the Fund’s administrator. Bank of New York Mellon, 101 Barclay Street, New York, New York 10286, serves as the Fund’s transfer agent, fund accountant, custodian and index
receipt agent. Rafferty also performs certain administrative services for the Fund.
Pursuant to a Fund Administration
Servicing Agreement between the Trust and USBFS, USBFS provides the Trust with administrative and management services (other than investment advisory services). As compensation for these services, the Trust pays USBFS a fee based on the
Trust’s total average daily net assets. USBFS also is entitled to certain out-of-pocket expenses. The amount of fees paid by the Trust to USBFS pursuant to the Fund Administration Servicing Agreement for the fiscal years indicated is set forth
in the table below.
|
Fees
paid to the Administrator
|
Year
Ended October 31, 2018
|
$2,046,515
|
Year
Ended October 31, 2017
|
$2,402,024
|
Year
Ended October 31, 2016
|
$2,302,972
|
Effective November 1, 2017, the Fund
is included in a Fund Accounting Agreement between the Trust and BNYM, whereby BNYM provides the Fund, as well as all other series of the Trust, with accounting services, including portfolio accounting services, tax accounting services and
furnishing financial reports. As compensation for these accounting services, the Trust pays BNYM a fee based on the Trust’s total average daily net assets. BNYM also is entitled to certain out-of-pocket expenses
for the services
mentioned above, including pricing expenses. The amount of fees paid by the Trust to BNYM pursuant to the Fund Accounting Agreement for the fiscal year indicated is set forth in the table below.
|
Fees
paid to the Fund Accounting Agent
|
Year
Ended October 31, 2018
|
$1,876,840
|
From the inception of the Fund until
October 31, 2017, the Fund and USBFS were parties to a Fund Accounting Servicing Agreement, whereby USBFS provided the Fund and another series of the Trust with accounting services, including portfolio accounting services, tax accounting services
and furnishing financial reports. As compensation for these accounting services, the Trust paid USBFS a fee based on the Trust’s total average daily net assets. USBFS also was entitled to certain out-of-pocket expenses for the services
mentioned above, including pricing expenses. The amount of fees paid by the Trust to USBFS pursuant to the Fund Accounting Servicing Agreement for the fiscal periods indicated is set forth in the table below.
|
Fees
paid to the Fund Accounting Agent
|
Year
Ended October 31, 2017
|
$25,401
|
Year
Ended October 31, 2016
|
$24,296
|
Effective
November 1, 2017, the Fund is included in a Custody Agreement between the Trust and BNYM, whereby BNYM serves as the custodian of the Fund, along with the rest of the Funds in the Trust. The custodian holds and administers the assets in the
Fund’s portfolio. Pursuant to the Custody Agreement, the custodian receives an annual fee based on the Fund’s total average daily net assets and certain settlement charges. The custodian is also entitled to certain out-of-pocket
expenses. The amount of fees paid by the Trust to BNYM pursuant to the Custody Agreement for the fiscal year indicated is set forth in the table below.
|
Fees
paid to the Custodian
|
Year
Ended October 31, 2018
|
$1,132,612
|
From the inception of the Fund until
October 31, 2017, the Fund and U.S. Bank, N.A. were parties to a Custody Agreement, whereby U.S. Bank, N.A. served as the custodian of the Fund’s assets. The custodian held and administered the assets in the Fund’s portfolio. Pursuant to
the Custody Agreement, the custodian received an annual fee based on the Fund’s total average daily net assets and certain settlement charges. The custodian also was entitled to certain out-of-pocket expenses. The amount of fees paid by the
Trust pursuant to the agreement for the fiscal periods indicated is set forth in the table below.
|
Fees
paid to the Custodian
|
Year
Ended October 31, 2017
|
$8,729
|
Year
Ended October 31, 2016
|
$7,675
|
Effective
November 1, 2017, the Fund is included in a Transfer Agency and Service Agreement between the Trust and BNYM, whereby BNYM provides the Fund with transfer agent services, which includes Creation and Redemption Unit order processing. As compensation
for these transfer agent services, the Trust pays BNYM a fee based on the Fund’s daily net assets. BNYM also is entitled to certain out-of-pocket expenses for the services mentioned above. The amount of fees paid by the Trust to BNYM pursuant
to the Transfer Agency and Service Agreement for the fiscal year indicated is set forth in the table below.
|
Fees
paid to the Transfer Agent
|
Year
Ended October 31, 2018
|
$1,171,567
|
From the inception of the Fund until
October 31, 2017, the Fund and USBFS were parties to a Transfer Agency and Service Agreement between the Trust and USBFS, whereby USBFS provided the Fund with transfer agent services, which included Creation and Redemption Unit order processing. As
compensation for these transfer agent services, the Trust paid USBFS a fee based on the Fund’s daily net assets. USBFS also was entitled to certain out-of-pocket expenses for the services mentioned above. The amount of fees paid by the Trust
pursuant to the Transfer Agency and Service Agreement for the fiscal periods indicated is set forth in the table below.
|
Fees
paid to the Transfer Agent
|
Year
Ended October 31, 2017
|
$22,953
|
Year
Ended October 31, 2016
|
$21,629
|
Effective August 25, 2017, the Fund
has entered into a Securities Lending Authorization Agreement with BNYM (the “Securities Lending Agreement”) whereby BNYM will be the Lending Agent for the Fund. The Fund retains a portion of the securities lending income and remits the
remaining portion to BNYM as compensation for its services as securities lending agent. Securities lending income is generally equal to the net income earned from the reinvestment of cash collateral after payment of cash collateral fees, and any
fees or other payments from borrowers of securities.
BNYM acts as agent to the Trust to
lend available securities with any person on its list of approved borrowers. BNYM determines whether a loan shall be made and negotiates and establishes the terms and conditions of the loan with the borrower. BNYM ensures that all substitute
interest, dividends, and other distributions paid with respect to loan securities is credited to the Fund’s relevant account on the date such amounts are delivered by the borrower to BNYM. BNYM receives and holds, on the Fund’s behalf,
collateral from borrowers to secure obligations of borrowers with respect to any loan of available securities. BNYM marks loaned securities and collateral to their market value each business day based upon the market value of the collateral and
loaned securities at the close of business employing the most recently available pricing information and receives and delivers collateral in order to maintain the value of the collateral at no less than 102% of the market value of the loaned
securities. At the termination of the loan, BNYM returns the collateral to the borrower upon the return of the loaned securities to BNYM. BNYM invests cash collateral in accordance with the Securities Lending Agreement. BNYM maintains such records
as are reasonably necessary to account for loans that are made and the income derived therefrom and makes available to the Fund a monthly statement describing the loans made, and the income derived from the loans, during the period. The Fund shall
receive the net securities lending revenue based on the securities lent from its holdings. The Fund may also pay custodial fees and other expenses associated with a loan.
As of October 31, 2018, the dollar
amounts of gross and net income from securities lending activities received and the related fees and/or compensation paid by the Fund were as follows:
Fees
and/or Compensation for Securities Lending Activities and Related Services
|
Fund
Name
|
Gross
Income
from
Securities
Lending
Activities
|
Fees
Paid
to
Securities
Lending
Agent
from the
Revenue
Split
|
Fees
Paid for
any Cash
Collateral
Manage-
ment
Service
(Including
Fees
Deducted
from a
Pooled
Cash
Collateral
Reinvest-
ment
Vehicle)
that are
not
Included
in the
Revenue
Split
|
Admin-
istrative
Fees not
Included
in the
Revenue
Split
|
Indem-
nification
Fees
not
Included
in the
Revenue
Split
|
Borrower
Rebates
|
Other
Fees not
Included
in the
Revenue
Split
(specify)
|
Aggregate
Fees/
Comp-
ensation
for Securities
Lending
Activities
|
Net
Income
from
Securities
Lending
Activities
|
Direxion
Zacks MLP High Income Index Shares
|
$357,680
|
$107,390
|
$-
|
$-
|
$-
|
$-
|
$-
|
$107,390
|
$250,290
|
Foreside Fund
Services, LLC, located at 3 Canal Plaza, Suite 100, Portland, Maine 04101, serves as the distributor (“Distributor”) in connection with the continuous offering of the Fund’s shares. The Distributor is a broker-dealer registered
with the SEC under the Securities Exchange Act of 1934 and a member of the Financial Industry Regulatory Authority. The Trust offers Shares of the Fund for sale through the Distributor in Creation Units, as described below. The Distributor will not
sell or redeem Shares in quantities less than Creation Units. The Distributor will deliver a Prospectus to persons purchasing Creation Units and will maintain records of Creation Unit orders placed and confirmations furnished by it. Pursuant to a
written agreement, the Adviser pays the Distributor for distribution-related services. For the fiscal year ended October 31, 2018, the Distributor received $1,046,468 as compensation from Rafferty for distribution services provided to the Trust,
including the Fund. For the fiscal year ended October 31, 2018, Foreside did not receive any underwriting commission or discounts, compensation on redemptions and repurchases, or brokerage commissions from the Fund.
The Adviser may pay certain
broker-dealers, banks and other financial intermediaries for participating in activities that are designed to make registered representatives and other professionals more knowledgeable about exchange traded products,
including the Fund, or for other activities such as
participating in marketing activities and presentations, educational training programs, conferences, the development of technology platforms and reporting systems. The Adviser had arrangements to make payments based on an annual fee for its
services, as well as based on the average daily assets held by Schwab customers in certain funds managed by the Adviser, for services other than for the educational programs and marketing activities described above, only to Charles Schwab & Co.,
Inc. (“Schwab”). Pursuant to the arrangement with Schwab, Schwab has agreed to promote select funds managed by the Adviser, to Schwab’s customers and not to charge certain of its customers any commissions when those customers
purchase or sell shares of those funds. Payments to a broker-dealer or intermediary may create potential conflicts of interest between the broker-dealer or intermediary and its clients. These amounts, which may be significant, are paid by the
Adviser from its own resources and not from the assets of funds managed by the Adviser. Although a portion of the Adviser’s revenue comes directly or indirectly in part from fees paid by the Fund, other ETFs advised by the Adviser or other
exchange-traded products, these payments do not increase the price paid by investors for the purchase of shares of, or the cost of owning, the Fund or other funds managed by the Adviser.
Rule 12b-1 under the 1940 Act, as
amended, (the “Rule”) provides that an investment company may bear expenses of distributing its shares only pursuant to a plan adopted in accordance with the Rule. The Trustees have adopted a Rule 12b-1 Distribution Plan (“Rule
12b-1 Plan”) pursuant to which the Fund may pay certain expenses incurred in the distribution of its shares and the servicing and maintenance of existing shareholder accounts. The Distributor, as the Fund's principal underwriter, and Rafferty
may have a direct or indirect financial interest in the Rule 12b-1 Plan or any related agreement. Pursuant to the Rule 12b-1 Plan, the Fund may pay a fee of up to 0.25% of the Fund’s average daily net assets. No Rule 12b-1 fee is currently
being charged to the Fund.
The
Rule 12b-1 Plan was approved by the Board, including a majority of the Independent Trustees of the Fund. In approving the Rule 12b-1 Plan, the Trustees determined that there is a reasonable likelihood that the Rule 12b-1 Plan will benefit the Fund
and its shareholders. The Trustees will review quarterly and annually a written report provided by the Treasurer of the amounts expended under the Rule 12b-1 Plan and the purpose for which such expenditures were made.
The Rule 12b-1 Plan permits payments
to be made by the Fund to the Distributor or other third parties for expenditures incurred in connection with the distribution of Fund shares to investors and the provision of certain shareholder services. The Distributor or other third parties are
authorized to engage in advertising, the preparation and distribution of sales literature and other promotional activities on behalf of the Fund. In addition, the Rule 12b-1 Plan authorizes payments by the Fund to the Distributor or other third
parties for the cost related to selling or servicing efforts, preparing, printing and distributing Fund prospectuses, statements of additional information, and shareholder reports to investors.
Independent Registered Public Accounting Firm
Ernst & Young
LLP (“EY”), 220 South Sixth Street, Suite 1400, Minneapolis, Minnesota 55402, is the independent registered public accounting firm for the Trust. The Financial Statements of the Fund for the fiscal year ended October 31, 2018, audited by
EY, have been included in reliance on their report given on their authority as experts in accounting and auditing.
The Trust has selected K&L Gates
LLP, 1601 K Street, N.W., Washington, DC 20006, as its legal counsel.
Determination of Net Asset Value
A fund’s share price is
known as its NAV. The Fund’s share price is calculated as of the close of regular trading on the NYSE, usually 4:00 p.m. Eastern Time (“Valuation Time”), each day the NYSE is open for business (“Business Day”). The NYSE
is open for business Monday through Friday, except in observation of the following holidays: New Year’s Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The NYSE may close early on the business day before each of these holidays and on the day after Thanksgiving Day. NYSE holiday schedules are subject to change without notice.
If the exchange or market on which
the Fund’s investments are primarily traded closes early, the NAV may be calculated prior to its normal calculation time. Creation/redemption transaction order time cutoffs would also be accelerated. The value of the Fund’s assets that
trade in markets outside the United States or in currencies other than the U.S. Dollar may fluctuate when foreign markets are open but the Fund is not open for business.
A security listed
or traded on an exchange, domestic or foreign, is valued at its last sales price or settlement price on the principal exchange on which it is traded prior to the time when assets are valued. If no sale is reported at that time, the mean of the last
bid and asked prices is used. Securities primarily traded on the NASDAQ Global Market
®
(“NASDAQ
®
”)
for which market quotations are readily available
shall be valued using the NASDAQ
®
Official Closing Price (“NOCP”) provided by NASDAQ
®
each Business Day. The NOCP is the most recently reported price as of 4:00:02 p.m. Eastern Time, unless that price is outside the range of the
“inside” bid and asked prices’ in that case, NASDAQ
®
will adjust the price to equal the inside bid or asked price, whichever is
closer. If the NOCP is not available, such securities shall be valued at the last sale price on the day of valuation, or if there has been no sale on such day, at the mean between the bid and asked prices.
For
purposes of determining NAV per share of the Fund, options and futures contracts are valued based on market quotations, the last sales or settlement price of the exchange on which an asset trades. The value of a futures contract equals the
unrealized gain or loss on the contract that is determined by marking the contract to the last sale price for a like contract acquired on the day on which the futures contract is being valued. The value of options on futures contracts is determined
based upon the last sale price for a like option acquired on the day on which the option is being valued. A last sale price may not be used for the foregoing purposes if the market makes a limited move with respect to a particular instrument.
For valuation purposes,
quotations of foreign securities or other assets denominated in foreign currencies are translated to U.S. Dollar equivalents using the net foreign exchange rate in effect at the close of the stock exchange in the country where the security is
issued. Short-term debt instruments having a maturity of 60 days or less are valued at amortized cost, which approximates market value. If the Board determines that the amortized cost method does not represent the fair value of the short-term debt
instrument, the investment will be valued at fair value as determined by procedures as adopted by the Board. U.S. government securities are valued at the mean between the closing bid and asked price provided by an independent third party pricing
service (“Pricing Service”).
OTC securities held by the Fund will
be valued at the last sales price or, if no sales price is reported, the mean of the last bid and asked price is used. The portfolio securities of the Fund that are listed on national exchanges are valued at the last sales price of such securities;
if no sales price is reported, the mean of the last bid and asked price is used.
Swaps are valued based upon prices from
third party vendor models or quotations from market makers to the extent available.
Dividend income and other distributions
are recorded on the ex-distribution date.
Illiquid securities, securities for
which reliable quotations or pricing services are not readily available, all other assets not valued in accordance with the foregoing principles or for which pricing information is deemed unreliable, or to the Adviser’s knowledge, does not
reflect a significant event occurring in the market, the security or asset will be valued at their respective fair value as determined in good faith by, or under procedures established by, the Trustees, which procedures may include the delegation of
certain responsibilities regarding valuation to Rafferty or the officers of the Trust. The officers of the Trust report, as necessary, to the Trustees regarding portfolio valuation determinations. The Trustees, from time to time, will review these
methods of valuation and will recommend changes that may be necessary to assure that the investments of the Fund are valued at fair value.
Additional Information Concerning Shares
Organization and Description of
Shares of Beneficial Interest
The Trust is a Delaware statutory
trust and registered investment company. The Trust was organized on April 23, 2008, and has authorized capital of unlimited Shares of beneficial interest of no par value which may be issued in more than one class or series. Currently, the Trust
consists of multiple separately managed series. The Board may designate additional series of beneficial interest and classify Shares of a particular series into one or more classes of that series.
All Shares of the Trust are freely
transferable. The Shares do not have preemptive rights or cumulative voting rights, and none of the Shares have any preference to conversion, exchange, dividends, retirements, liquidation, redemption, or any other feature. Shares have equal voting
rights, except that, in a matter affecting a particular series or class of Shares, only Shares of that series of class may be entitled to vote on the matter. Trust shareholders are entitled to require the Trust to redeem Creation Units of their
Shares. The Trust Instrument confers upon the Broad of Trustees the power, by resolution, to alter the number of Shares constituting a Creation Unit or to specify that Shares of the Trust may be individually redeemable. The Trust reserves the right
to adjust the stock prices of Shares of the Trust to maintain convenient trading ranges for investors. Any such adjustments would be accomplished through stock splits or reverse stock splits which would have no effect on the net assets of the
applicable Fund.
Under Delaware
law, the Trust is not required to hold an annual shareholders meeting if the 1940 Act does not require such a meeting. Generally, there will not be annual meetings of Trust shareholders. Trust shareholders may remove Trustees from office by votes
cast at a meeting of Trust shareholders or by written consent. If requested by shareholders of at least 10% of the outstanding Shares of the Trust, the Trust will call a meeting of the Fund’s shareholders for the purpose of voting upon the
question of removal of a Trustee of the Trust and will assist in communications with other Trust shareholders.
The Trust Instrument disclaims
liability of the shareholders of the officers of the Trust for acts or obligations of the Trust which are binding only on the assets and property of the Trust. The Trust Instrument provides for indemnification from the Trust’s property for all
loss and expense of any Fund shareholder held personally liable for the obligations of the Trust.
The risk of a Trust shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which the Fund would not be able to meet the Trust’s obligations and this risk, thus, should be considered remote.
If the Fund does not grow to a size to
permit it to be economically viable, the Fund may cease operations. In such an event, investors may be required to liquidate or transfer their investments at an inopportune time.
Book Entry Only System
The Depository Trust Company
(“DTC”) acts as securities depositary for the Shares. Shares of the Fund are represented by global securities registered in the name of DTC or its nominee and deposited with, or on behalf of, DTC. Except as provided below, certificates
will not be issued for Shares.
DTC has advised the Trust as follows:
it is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing
agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities of its participants (“DTC Participants”) and to facilitate the clearance and settlement of securities transactions
among the DTC Participants in such securities through electronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the NYSE, the AMEX and the
Financial Industry Regulatory Authority. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or
indirectly (“Indirect Participants”). DTC agrees with and represents to DTC Participants that it will administer its book-entry system in accordance with its rules and by-laws and requirements of law. Beneficial ownership of Shares is
limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in Shares (owners of such beneficial interests are referred to herein as
“Beneficial owners”) is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and
Beneficial owners that are not DTC Participants). Beneficial owners will receive from or through the DTC Participant a written confirmation relating to their purchase of Shares. The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such laws may impair the ability of certain investors to acquire beneficial interests in Shares.
Beneficial owners of Shares are not
entitled to have Shares registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive form and are not considered the registered holder thereof. Accordingly, each Beneficial owner must rely on
the procedures of DTC, the DTC Participant and any Indirect Participant through which such Beneficial owner holds its interests, to exercise any rights of a holder of Shares. The Trust understands that under existing industry practice, in the event
the Trust requests any action of holders of Shares, or a Beneficial owner desires to take any action that DTC, as the record owner of all outstanding Shares, is entitled to take, DTC would authorize the DTC Participants to take such action and that
the DTC Participants would authorize the Indirect Participants and Beneficial owners acting through such DTC Participants to take such action and would otherwise act upon the instructions of Beneficial owners owning through them. As described above,
the Trust recognizes DTC or its nominee as the owner of all Shares for all purposes. Conveyance of all notices, statements and other communications to Beneficial owners is effected as follows. Pursuant to the Depositary Agreement between the Trust
and DTC, DTC is required to make available to the Trust upon request and for a fee to be charged to the Trust a listing of Share holdings of each DTC Participant. The Trust shall inquire of each such DTC Participant as to the number of Beneficial
owners holding Shares, directly or indirectly, through such DTC Participant. The Trust shall provide each such DTC Participant with copies of such notice, statement or other communication, in such form, number and at such place as such DTC
Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or indirectly, to such Beneficial owners. In addition, the Trust shall pay to each such DTC Participant a
fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements.
Distributions of Shares shall be
made to DTC or its nominee, Cede & Co., as the registered holder of all Shares. DTC or its nominee, upon receipt of any such distributions, shall credit immediately DTC Participants’ accounts with payments in amounts proportionate to their
respective beneficial interests in Shares as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial owners of Shares held through such DTC Participants will be governed by standing
instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in a “street name,” and will be the responsibility of such DTC Participants. The Trust has no
responsibility or liability for any aspects of the records relating to or notices to Beneficial owners, or payments made on account of beneficial ownership interests in such Shares, or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants and the Indirect Participants and Beneficial owners owning through such DTC
Participants.
DTC may determine
to discontinue providing its service with respect to Shares at any time by giving reasonable notice to the Trust and discharging its responsibilities with respect thereto under applicable law. Under such circumstances, the Trust
shall take action either to find a replacement for
DTC to perform its functions at a comparable cost or, if such a replacement is unavailable, to issue and deliver printed certificates representing ownership of Shares, unless the Trust makes other arrangements with respect thereto satisfactory to
the Exchange. The Trust will not make the DTC book-entry Dividend Reinvestment Service available for use by Beneficial Owners for reinvestment of their cash proceeds but certain brokers may make a dividend reinvestment service available to their
clients. Brokers offering such services may require investors to adhere to specific procedures and timetables in order to participate. Investors interested in such a service should contact their broker for availability and other necessary
details.
Purchases and Redemptions
The Trust issues and redeems
Shares of the Fund only in aggregations of Creation Units. The number of Shares of the Fund that constitute a Creation Unit for the Fund and the value of such Creation Unit as of the Fund’s inception were 50,000 and $2,000,000,
respectively.
See
“Purchase and Issuance of Creation Units” and “Redemption of Creation Units” below for more information about transacting in the Shares. The Board reserves the right to declare a split or a consolidation in the number of
Shares outstanding of the Fund, and may make a corresponding change in the number of Shares constituting a Creation Unit, in the event that the per Shares price in the secondary market rises (or declines) to an amount that falls outside the range
deemed desirable by the Board for any other reason.
Purchase and Issuance of Creation
Units
The Trust issues and sells
Shares only in Creation Units on a continuous basis through the Distributor, without a sales load, at their NAV next determined after receipt, on any Business Day (as defined above), of an order in proper form.
Creation Units of Shares may be
purchased only by or through an Authorized Participant by depositing a basket of securities and/or cash with the Fund. The consideration for purchase of a Creation Unit of Shares of the Fund consists of either cash or the Deposit Securities (defined
below) that may be a representative sample of the securities in the Index, the Balancing Amount, and the appropriate Transaction Fee (collectively, the “Portfolio Deposits”). The “Balancing Amount” will be the amount equal to
the differential, if any, between the total aggregate market value of the Deposit Securities and the NAV of the Creation Unit(s) being purchased and will be paid to, or received from, the Trust after the NAV has been calculated. BNYM or Rafferty
makes available through the NSCC on each Business Day, either immediately prior to the opening of business on the Exchange or the night before, the list of the names and the required number of shares of each security (“Deposit
Securities”) to be included in a current Creation Unit purchase (based on information at the end of the previous Business Day) for the Fund. The identity and number of shares of the Deposit Securities required for a Creation Unit will change
from time to time. The Fund reserves the right to permit or require the substitution of an amount of cash
–
i.e.
, a “cash
in lieu” amount
–
to be added to the Balancing Amount to replace any Deposit Security that may not be available in sufficient quantity for delivery, eligible for
transfer through the clearing process (discussed below) or the Federal Reserve System or eligible for trading by an Authorized Participant or the investor for which it is acting. For such custom orders, “cash in lieu” may be added to the
Balancing Amount. You must also pay a Transaction Fee, as described in the Prospectus, in cash.
The identity and number of shares of
the Deposit Securities required for the Fund changes as rebalancing adjustments and corporate action events are reflected from time to time by Rafferty with a view to the investment objective of the Fund. The composition of the Deposit Securities
may also change in response to adjustments to the weighting or composition of the securities constituting the relevant securities index or may be a representative sample of the securities in the Index. In addition, the Trust reserves the right to
permit or require the substitution of an amount of cash (
i.e
., a “cash in lieu” amount) to be added to the Balancing Amount to replace any Deposit Security which may not be available in sufficient
quantity for delivery or for other similar reasons. The adjustments described above will reflect changes, known to Rafferty on the date of announcement to be in effect by the time of delivery of the Portfolio Deposit, in the composition of the
subject index being tracked by the Fund, or resulting from stock splits and other corporate actions. In addition to the list of names and numbers of securities constituting the current Deposit Securities of a Creation Unit, on each Business Day, the
Balancing Amount effective through and including the previous Business Day, per outstanding Share of the Fund, will be made available.
An Authorized Participant will agree
pursuant to the terms of such Authorized Participant Agreement on behalf of itself or any investor on whose behalf it will act, as the case may be, to certain conditions, including that such Authorized Participant will make available an amount of
cash sufficient to pay the Balancing Amount and the Transaction Fee described in the Prospectus. The Authorized Participant may require the investor to enter into an agreement with such Authorized Participant with respect to certain matters,
including payment of the Balancing Amount. Investors who are not Authorized Participants must make appropriate arrangements with an Authorized Participant. Investors should be aware that their particular broker may not be a DTC Participant or may
not have executed an Authorized Participant Agreement, and that therefore orders to purchase Creation Units of Shares may have to be placed by the investor’s broker through an Authorized Participant.
As a result,
purchase orders placed through an Authorized Participant may result in additional charges to such investor. An Authorized Participant may place an order to purchase (or redeem) Creation Units (i) through the Continuous Net Settlement clearing
processes of NSCC as such processes have been enhanced to effect purchases (and redemptions) of Creation Units, such processes being referred to herein as the “Enhanced Clearing Process,” or (ii) outside the Enhanced Clearing Process,
being referred to herein as the “Manual Clearing Process”.
A purchase order must be received in
good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent’s automated system, telephone, facsimile or other means permitted under the Authorized Participant Agreement, in order to
receive that day's NAV per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day.
All questions as to the number of
shares of each security in the Deposit Securities and the validity, form, eligibility and acceptance for deposit of any securities to be delivered shall be determined by the Trust, and the Trust’s determination shall be final and
binding.
Purchases through the
Enhanced Clearing Process
To purchase or redeem through the Enhanced Clearing
Process, an Authorized Participant must be a member of NSCC that is eligible to use the Continuous Net Settlement system. For purchase orders placed through the Enhanced Clearing Process, in the Authorized Participant Agreement, the Participant
authorizes the transfer agent to transmit to the NSCC, on behalf of an Authorized Participant, such trade instructions as are necessary to effect the Authorized Participant’s purchase order. Pursuant to such trade instructions to the NSCC, the
Authorized Participant agrees to deliver the Portfolio Deposit and such additional information as may be required by the transfer agent or the Distributor.
Purchases through the Manual Clearing
Process
An Authorized
Participant that wishes to place an order to purchase Creation Units outside the Enhanced Clearing Process must state that it is not using the Enhanced Clearing Process and that the purchase instead will be effected through a transfer of securities
and cash either through the Federal Reserve System (for cash and U.S. government securities) or directly through DTC. Purchases (and redemptions) of Creation Units of the Fund settled outside the Enhanced Clearing Process will be subject to a higher
Transaction Fee than those settled through the Enhanced Clearing Process. Purchase orders effected outside the Enhanced Clearing Process are likely to require transmittal by the Authorized Participant earlier on the Transmittal Date than orders
effected using the Enhanced Clearing Process. Those persons placing orders outside the Enhanced Clearing Process should ascertain the deadlines applicable to DTC and the Federal Reserve System (for cash and U.S. government securities) by contacting
the operations department of the broker or depository institution effectuating such transfer of the Portfolio Deposit.
Shares may be issued in advance of
receipt by the Trust of all or a portion of the applicable Deposit Securities as described below. In these circumstances, the initial deposit will have a greater value than the NAV of the Shares on the date the order is placed in proper form since,
in addition to the available Deposit Securities, cash must be deposited in an amount equal to the sum of (i) the Balancing Amount, plus (ii) 115% of the market value of the undelivered Deposit Securities (the “Additional Cash Deposit”).
An additional amount of cash shall be required to be deposited with the Trust, pending delivery of the missing Deposit Securities to the extent necessary to maintain the Additional Cash Deposit with the Trust in an amount at least equal to 115% of
the daily marked to market value of the missing Deposit Securities. The Authorized Participant Agreement will permit the Trust to buy the missing Deposit Securities any time. Authorized Participants will be liable to the Trust for the costs incurred
by the Trust in connection with any such purchases. These costs will be deemed to include the amount by which the actual purchase price of the Deposit Securities exceeds the market value of such Deposit Securities on the day the purchase order was
deemed received by the Distributor plus the brokerage and related transaction costs associated with such purchases. The Trust will return any unused portion of the Additional Cash Deposit once all of the missing Deposit Securities have been properly
received by the custodian bank or purchased by the Trust and deposited into the Trust. In addition, a transaction fee, as listed below, will be charged in all cases. The delivery of Shares so purchased will occur no later than the third Business Day
following the day on which the purchase order is deemed received by the Distributor. Due to the schedule of holidays in certain countries, however, the delivery of Shares may take longer than three Business Days following the day on which the
purchase order is received. In such cases, the local market settlement procedures will not commence until the end of local holiday periods. A list of local holidays in the foreign countries or markets relevant to the international funds is set forth
under “Regular Foreign Holidays” below.
Rejection of Purchase Orders
The Trust reserves the absolute
right to reject a purchase order transmitted to it by the Distributor in respect of the Fund if (a) the purchaser or group of purchasers, upon obtaining the shares ordered, would own 80% or more of the currently outstanding Shares of the Fund; (b)
the Deposit Securities delivered are not as specified by Rafferty and Rafferty has not consented to acceptance of an in-kind deposit that varies from the designated Deposit Securities; (c) acceptance of the purchase transaction order would have
certain adverse tax consequences to the Fund; (d) the acceptance of the purchase transaction order would, in the opinion of counsel, be unlawful; (e) the acceptance of the purchase transaction order would otherwise, in the discretion of the Trust or
Rafferty, have an adverse effect on the Trust or the rights of beneficial owners;
(f) the value of a “Cash Purchase
Amount”, or the value of the Balancing Amount to accompany an in-kind deposit exceed a purchase authorization limit extended to an Authorized Participant by the custodian and the Authorized Participant has not deposited an amount in excess of
such purchase authorization with the custodian by 4:00 p.m. Eastern Time on the Transmittal Date; or (g) in the event that circumstances outside the control of the Trust, the Distributor and Rafferty make it impractical to process purchase orders.
The Trust shall notify a prospective purchaser of its rejection of the order. The Trust and the Distributor are under no duty, however, to give notification of any defects or irregularities in the delivery of purchase transaction orders nor shall
either of them incur any liability for the failure to give any such notification.
Redemption of Creation Units
Shares may be redeemed only in
Creation Units at their NAV next determined after receipt of a redemption request in proper form by the Distributor on any Business Day. The Trust will not redeem Shares in amounts less than Creation Units. Beneficial owners also may sell Shares in
the secondary market, but must accumulate enough Shares to constitute a Creation Unit in order to have such Shares redeemed by the Trust. There can be no assurance, however, that there will be sufficient liquidity in the public trading market at any
time to permit assembly of a Creation Unit of Shares. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of Shares to constitute a redeemable Creation Unit.
Generally, Creation Units of Shares
are redeemed by or through an Authorized Participant. Such Authorized Participant will agree pursuant to the terms of such Authorized Participant Agreement on behalf of itself or any investor on whose behalf it will act, as the case may be, to
certain conditions, including that such Authorized Participant will make available an amount of cash sufficient to pay the Balancing Amount and the Transaction Fee described above. The Authorized Participant may require the investor to enter into an
agreement with such Authorized Participant with respect to certain matters, including payment of the Balancing Amount. Investors who are not Authorized Participants must make appropriate arrangements with an Authorized Participant. Investors should
be aware that their particular broker may not be a DTC Participant or may not have executed an Authorized Participant Agreement, and that therefore orders to purchase Creation Units of Shares may have to be placed by the investor’s broker
through an Authorized Participant. As a result, redemption orders placed through an Authorized Participant may result in additional charges to such investor.
In certain instances, Authorized
Participants may create and redeem Creation Unit aggregations of the same Fund on the same trade date. In this instance, the Trust reserves the right to settle these transactions on a net basis.
The redemption proceeds for a
Creation Unit consist of either cash or Redemption Securities on any Business Day, plus the Balancing Amount. BNYM or Rafferty makes available through the NSCC on each Business Day, either immediately prior to the opening of business on the Exchange
or the night before, the list of the names and the required number of shares of each security (“Redemption Securities”) to be included in a current Creation Unit redemption (based on information at the end of the previous Business Day)
for the Fund. The identity and number of shares of the Redemption Securities required for a Creation Unit redemption will change from time to time. For such custom orders, “cash in lieu” may be added to the Balancing Amount. You must
also pay a Transaction Fee, described in the Prospectus, in cash. The redemption Transaction Fee is deducted from such redemption proceeds. The Redemption Securities may, at times, not be identical to Deposit Securities which are applicable to a
purchase of Creation Units. In addition, an investor may request a redemption in cash which the Fund may, in its sole discretion, permit. A Fund may also, in its sole discretion, upon request of a shareholder, provide such redeemer a portfolio of
securities that differs from the exact composition of the Fund securities but does not differ in NAV.
A Fund may in its discretion exercise
its option to redeem such Shares in cash, and the redeeming shareholder will be required to receive its redemption proceeds in cash. In addition, an investor may request a redemption in cash which the Fund may, in its sole discretion, permit. A Fund
may also, in its sole discretion, upon request of a shareholder, provide such redeemer a portfolio of securities that differs from the exact composition of the Fund securities but does not differ in NAV.
The right of redemption may be
suspended or the date of payment postponed with respect to the Fund (1) for any period during which the NYSE is closed (other than customary weekend and holiday closings); (2) for any period during which trading on the NYSE is suspended or
restricted; (3) for any period during which an emergency exists as a result of which disposal of the shares of the Fund’s portfolio securities or determination of its NAV is not reasonably practicable; or (4) in such other circumstance as is
permitted by the SEC.
An
Authorized Participant may place an order to redeem Creation Units (i) through the Enhanced Clearing Process as such processes have been enhanced to effect redemptions of Creation Units, or (ii) through the Manual Clearing Process.
Placement of Redemption Orders Using
Enhanced Clearing Process
Orders to redeem Creation Units of
the Fund through the Enhanced Clearing Process must be delivered through an Authorized Participant that is a member of NSCC that is eligible to use the Continuous Net Settlement System. A redemption order must be received in good order by the
transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent's automated system, telephone, facsimile or other means permitted under the Authorized Participant Agreement, in order to receive that day’s NAV
per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day.
Placement of Redemption Orders outside the
Enhanced Clearing Process
Orders to redeem Creation Units of
the Fund outside the Enhanced Clearing Process must be delivered through a DTC Participant that has executed the Authorized Participant Agreement. A DTC Participant who wishes to place an order for redemption of Creation Units of the Fund to be
effected outside the Enhanced Clearing Process need not be an Authorized Participant, but such orders must state that the DTC Participant is not using the Enhanced Clearing Process and that redemption of Creation Units will instead be effected
through transfer of Shares directly through DTC or the Federal Reserve System (for cash and U.S. government securities). A redemption order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail,
through the transfer agent's automated system, telephone, facsimile or other means permitted under the Authorized Participant Agreement, in order to receive that day's NAV per Share. All other procedures set forth in the Authorized Participant
Agreement must be followed in order for you to receive the NAV determined on that day. The order must be accompanied or preceded by the requisite number of Shares of the Fund specified in such order, which delivery must be made through DTC or the
Federal Reserve System to the custodian by the third Business Day following such Transmittal Date (“DTC Cut-Off Time”); and (iii) all other procedures set forth in the Authorized Participant Agreement must be properly followed.
After the transfer agent has deemed
an order for redemption of the Fund’s shares outside the Enhanced Clearing Process received, the transfer agent will initiate procedures to transfer the requisite Redemption Securities, which are expected to be delivered within three Business
Days, and the Balancing Amount minus the Transaction Fee. In addition, for redemptions honored in cash, the redeeming party will receive the “Cash Redemption Amount” by the third Business Day following the Transmittal Date on which such
redemption order is deemed received by the Transfer Agent. Due to the schedule of holidays in certain countries, however, the receipt of the Cash Redemption Amount may take longer than three Business Days following the Transmittal Date. In such
cases, the local market settlement procedures will not commence until the end of local holiday periods. See below for a list of local holidays in the foreign countries or markets relevant to the international funds.
The Fund generally intends to
effect deliveries of Creation Units and portfolio securities on a basis of “T” plus two Business Days (
i.e.
, days on which the national securities exchange is open). The Fund may effect deliveries
of Creation Units and portfolio securities on a basis other than T plus two in order to accommodate local holiday schedules, to account for different treatment among foreign and U.S. markets of dividend record dates and ex-dividend dates or under
certain other circumstances. The ability of the Trust to effect in-kind creations and redemptions within two Business Days of receipt of an order in good form is subject, among other things, to the condition that, within the time period from the
date of the order to the date of delivery of the securities, there are no days that are holidays in the applicable foreign market. For every occurrence of one or more intervening holidays in the applicable foreign market that are not holidays
observed in the U.S. equity market, the redemption settlement cycle will be extended by the number of such intervening holidays. In addition to holidays, other unforeseeable closings in a foreign market due to emergencies may also prevent the Trust
from delivering securities within normal settlement periods. The securities delivery cycles currently practicable for transferring portfolio securities to redeeming Authorized Participants, coupled with foreign market holiday schedules, will require
a delivery process longer than seven calendar days for the international funds, in certain circumstances. The applicable holidays for certain foreign markets are listed in the table below. The proclamation of new holidays, the treatment by market
participants of certain days as “informal holidays” (
e.g.
, days on which no or limited securities transactions occur, as a result of substantially shortened trading hours), the elimination of
existing holidays or changes in local securities delivery practices could affect the information set forth herein at some time in the future.
The dates from
January 1, 2019 to December 31, 2019 in which the regular holidays affecting the relevant securities markets of the below listed countries are as follows:
Australia
|
|
Austria
|
|
Belgium
|
|
Brazil
|
|
Canada
|
|
Chile
|
|
China
|
January
1
January 28
April 19
April 22
April 25
June 10
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
May 1
June 10
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
May 1
May 30
June 10
August 15
November 1
December 24
December 25
December 26
December 31
|
|
January
1
January 25
March 4
March 5
March 6
April 19
May 1
June 20
July 9
November 15
November 20
December 25
|
|
January
1
January 2
February 18
April 19
May 20
June 24
July 1
August 5
September 2
October 14
November 11
December 25
December 26
|
|
January
1
April 19
May 1
May 21
July 16
August 15
September 18
September 19
September 20
October 31
November 1
December 25
December 31
|
|
January
1
January 21
February 4
February 5
February 6
February 7
February 8
February 18
April 5
April 19
April 22
May 1
May 13
May 27
June 7
July 1
July 4
September 2
September 13
October 1
October 2
October 3
October 4
October 7
October 14
November 11
November 28
December 25
December 26
|
Colombia
|
|
Czech
Republic
|
|
Denmark
|
|
Egypt
|
|
Finland
|
|
France
|
|
Germany
|
January
1
January 7
March 25
April 18
April 19
May 1
June 3
June 24
July 1
August 7
August 19
October 14
November 4
November 11
December 25
|
|
January
1
April 19
April 22
May 1
May 8
July 5
October 28
December 24
December 25
December 26
|
|
January
1
April 18
April 19
April 22
May 1
May 17
May 30
May 31
June 5
June 10
December 24
December 25
December 26
December 31
|
|
January
1
January 7
April 25
April 28
April 29
May 1
June 4
June 5
July 1
July 23
August 11
August 12
October 6
|
|
January
1
April 19
April 22
May 1
May 30
June 21
December 6
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
May 1
May 30
June 10
August 15
November 1
November 11
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
May 1
May 30
June 10
June 20
August 15
October 3
October 31
November 1
November 20
December 24
December 25
December 26
December 31
|
Greece
|
|
Hong
Kong
|
|
Hungary
|
|
India
|
|
Indonesia
|
|
Ireland
|
|
Israel
|
January
1
March 11
March 25
April 19
April 22
April 26
April 29
May 1
June 17
August 15
October 28
December 24
December 25
December 26
|
|
January
1
February 4
February 5
February 6
February 7
April 5
April 19
April 22
May 1
May 13
June 7
July 1
October 1
October 7
December 24
December 25
December 26
December 31
|
|
January
1
March 15
April 19
April 22
May 1
June 10
August 10
August 19
August 20
October 23
November 1
December 7
December 14
December 24
December 25
December 26
December 27
December 31
|
|
February
19
March 4
March 21
April 1
April 17
April 19
May 1
June 5
August 12
August 15
September 2
September 10
October 2
October 8
October 28
November 12
December 25
|
|
January
1
February 5
March 7
April 3
April 19
May 1
May 30
June 3
June 4
June 5
June 6
June 7
December 24
December 25
December 31
|
|
January
1
January 21
February 18
March 18
April 19
April 22
May 1
May 6
May 27
June 3
July 4
August 5
August 26
September 2
October 14
October 28
November 11
November 28
December
24
December 25
December 26
December 31
|
|
March
21
April 21
April 22
April 23
April 24
April 25
April 26
May 8
May 9
June 9
August 11
September 29
September 30
October 1
October 8
October 9
October 13
October 14
October
15
October 16
October 17
October 20
October 21
|
Italy
|
|
Japan
|
|
Korea
|
|
Malaysia
|
|
Mexico
|
|
Morocco
|
|
The
Netherlands
|
January
1
April 19
April 22
May 1
August 15
December 24
December 25
December 26
December 31
|
|
January
1
January 2
January 3
January 14
February 11
March 21
April 29
April 30
May 1
May 2
May 3
May 6
July 15
August 12
September 16
September 23
October 14
October 22
November 4
December 31
|
|
January
1
February 4
February 5
February 6
March 1
May 1
May 6
June 6
August 15
September 12
September 13
October 3
October 9
December 25
December 31
|
|
January
1
January 21
February 1
February 4
February 5
February 6
May 1
May 20
May 22
June 4
June 5
June 6
August 12
September 2
September 9
September 16
October 28
December 25
|
|
January
1
February 4
March 18
April 18
April 19
May 1
September 16
November 18
December 12
December 25
|
|
January
1
January 11
May 1
June 4
June 5
July 30
August 12
August 13
August 14
August 20
August 21
September 2
November 6
November 11
November 12
November 18
|
|
January
1
April 19
April 22
May 1
May 30
June 10
November 1
December 24
December 25
December 26
December 31
|
New
Zealand
|
|
Norway
|
|
Peru
|
|
Philippines
|
|
Poland
|
|
Portugal
|
|
Russia
|
January
1
January 2
January 21
January 28
February 6
April 19
April 22
April 25
June 3
October 28
December 25
December 26
|
|
January
1
April 17
April 18
April 19
April 22
May 1
May 17
May 30
June 10
December 24
December 25
December 26
December 31
|
|
January
1
April 18
April 19
May 1
July 29
August 30
October 8
November 1
December 25
|
|
January
1
February 5
February 25
April 9
April 18
April 19
May 1
June 12
August 21
August 26
November 1
December 24
December 25
December 30
December 31
|
|
January
1
April 19
April 22
May 1
May 3
June 20
August 15
November 1
November 11
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
April 25
May 1
June 10
June 13
June 20
August 15
November 1
December 25
December 26
|
|
January
1
January 2
January 3
January 4
January 7
January 8
March 8
May 1
May 2
May 3
May 9
May 10
June 12
November 4
|
Singapore
|
|
South
Africa
|
|
Spain
|
|
Sweden
|
|
Switzerland
|
|
Taiwan
|
|
Thailand
|
January
1
February 4
February 5
February 6
April 19
May 1
May 20
June 5
August 9
August 12
October 28
December 25
|
|
January
1
March 21
April 19
April 22
May 1
June 17
August 9
September 24
December 16
December 25
December 26
|
|
January
1
March 19
April 18
April 19
April 22
May 1
August 15
November 1
December 6
December 25
December 26
|
|
January
1
April 18
April 19
April 22
April 30
May 1
May 29
May 30
November 1
December 24
December 25
December 26
December 31
|
|
January
1
January 2
April 8
April 19
April 22
May 1
May 30
June 10
August 1
September 9
December 24
December 25
December 26
December 31
|
|
January
1
January 31
February 1
February 4
February 5
February 6
February 7
February 8
February 28
March 1
April 4
April 5
May 1
June 7
September 13
October 10
October 11
|
|
January
1
February 19
April 8
April 15
April 16
May 1
May 20
July 16
July 29
August 12
October 14
October 23
December 5
December 10
December 31
|
Turkey
|
|
United
Kingdom
|
January
1
April 23
May 1
June 3
June 4
June 5
June 6
July 15
August 12
August 13
August 14
August 30
October 28
October 29
|
|
January
1
January 21
February 18
April 19
April 22
May 1
May 6
May 27
July 4
August 26
September 2
October 14
November 11
November 28
December 24
December 25
December 26
December 31
|
The longest redemption cycle for the
Fund is a function of the redemption cycles of the countries whose stocks are held by the Fund.
Transaction fees are imposed as
set forth in the table in the Prospectus. Transaction Fees payable to the Trust are imposed to compensate the Trust for the transfer and other transaction costs of the Fund associated with the issuance and redemption of Creation Units of Shares.
There is a fixed and a variable component to the total Transaction Fee. A fixed Transaction Fee is applicable to each creation or redemption transaction, regardless of the number of Creation Units purchased or redeemed. In addition, a variable
Transaction Fee based upon the value of each Creation Unit also is applicable to each redemption transaction. The Transaction Fee applicable to the redemption of Creation Units will not exceed 2% of the value of the redemption proceeds.
Purchasers of Creation Units of a
Fund for cash are required to pay an additional charge to compensate the Fund for brokerage and market impact expenses relating to investing in portfolios securities. Where the Trust permits an in-kind purchaser to substitute cash in lieu of
depositing a portion of the Deposit Securities, the purchaser may be assessed an additional charge for cash purchases.
Purchasers of Shares in Creation
Units are responsible for the costs of transferring the securities constituting the Deposit Securities to the account of the Trust. Investors will also bear the costs of transferring securities from the Fund to their account or on their order.
Investors who use the services of a broker or other such intermediary may be charged a fee for such services. In addition, Rafferty may, from time to time, at its own expense, compensate purchasers of Creation Units who have purchased substantial
amounts of Creation Units and other financial institutions for administrative or marketing services.
The method by which Creation
Units of Shares are created and traded may raise certain issues under applicable securities laws. Because new Creation Units of Shares are issued and sold by the Trust on an ongoing basis, at any point a “distribution,” as such term is
used in the Securities Act, may occur. Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants in a distribution in a manner which could render
them statutory underwriters and subject them to the prospectus delivery and liability provisions of the Securities Act. For example, a broker-dealer firm or its client may be deemed a statutory underwriter if it takes Creation Units after placing an
order with the Distributor, breaks them down into constituent Shares, and sells some or all of the Shares comprising such Creation Units directly to its customers; or if it chooses to couple the creation of a supply of new Shares with an active
selling effort involving solicitation of secondary market demand for Shares. A determination of whether a person is an underwriter for the purposes of the Securities Act depends upon all the facts and circumstances pertaining to that person’s
activities. Thus, the examples mentioned above should not be considered a complete description of all the activities that could lead to a categorization as an underwriter. Broker-dealer firms should also note that dealers who are effecting
transactions in Shares, whether or not participating in the distribution of Shares, are generally required to deliver a prospectus. This is because the prospectus delivery exemption in Section 4(3) of the Securities Act is not available in respect
of such transactions as a result of Section 24(d) of the 1940 Act. Broker-dealer firms should note that dealers who are not “underwriters” but are participating in a distribution (as contrasted to ordinary secondary market transaction),
and thus dealing with Shares that are part of an “unsold allotment” within the meaning of section 4(3)(C) of the Securities Act, would be unable to take advantage of the prospectus delivery exemption provided by section 4(3) of the
Securities Act. Firms that incur a prospectus-delivery obligation with respect to Shares are reminded that under Securities Act Rule 153 a prospectus delivery obligation under Section 5(b)(2) of the Securities Act owed to a national securities
exchange member in connection with a sale on the national securities exchange is satisfied by the fact that the Fund’s prospectus is available at the national securities exchange on which the Shares of such Fund trade upon request. The
prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions on a national securities exchange and not with respect to “upstairs” transactions.
Dividends, Other Distributions and Taxes
Dividends and other
Distributions
As stated in
the Prospectus, the Fund declares and distributes dividends to its shareholders from its net investment income at least annually; for these purposes, net investment income includes dividends, accrued interest, and accretion of original issue
discount (or “OID”) and market discount, less amortization of market premium and estimated expenses, and is calculated immediately prior to the determination of the Fund’s NAV per share. The Fund may realize net capital gain (
i.e.
, the excess of net long-term capital gain over net short-term capital loss) and thus anticipates making annual distributions thereof. The Trustees may revise this distribution policy, or postpone the payment
of distributions, if the Fund has or anticipates any large unexpected expense, loss or fluctuation in net assets that, in the Trustees' opinion, might have a significant adverse effect on its shareholders.
Investors should be aware that if
shares are purchased shortly before the record date for any dividend or capital gain distribution, the shareholder will pay full price for the shares and receive some portion of the purchase price back as a taxable distribution (with the tax
consequences described in the Prospectus).
Taxes
The Fund is taxed
as a regular corporation under Subchapter C of the Internal Revenue Code of 1986, as amended (the “Code”) for federal income tax purposes and as such is obligated to pay federal and applicable state, local, and foreign corporate taxes on
its taxable income. This differs from most investment companies, which elect to be treated as “regulated investment companies” under the Code in order to avoid paying entity level income taxes. Under current law, the Fund is not eligible
to elect treatment as a regulated investment company due to its investments primarily in MLPs invested in energy assets. As a result, the Fund will be obligated to pay federal and state taxes on its taxable income as opposed to most other investment
companies which are not so obligated.
The Tax Cuts and Jobs Act (the
“Tax Act”) makes significant changes to the U.S. Federal income tax rules for taxation of individuals and corporations, generally effective for taxable years beginning after December 31, 2017. Many of the changes applicable to
individuals are not permanent and only apply to taxable years beginning after December 31, 2017 and before January 1, 2026. The Tax Act makes changes to the tax rules affecting shareholders and the Fund, including various investments that the Fund
may make. Potential investors are urged to consult their own tax advisors for more detailed information.
As discussed below, the Fund expects
that a portion of the distribution it receives from MLPs may be treated as a tax-deferred return of capital, thus reducing the Fund’s current tax liability. However, the amount of taxes currently paid by the Fund
will vary depending on the amount of income and gains
derived from investments and/or sales of MLP interests and such taxes will reduce your return from an investment in the Fund.
The Fund invests its assets primarily
in MLPs, which generally are treated as partnerships for federal income tax purposes. As a partner in the MLPs, the fund must report its allocable share of the MLPs’ taxable income in computing its taxable income, regardless of the extent (if
any) to which the MLPs make distributions. Based upon the Adviser’s review of the historic results of the types of MLPs in which the Fund invests, the Adviser expects that the cash flow received by the Fund with respect to its MLP investments
will generally exceed the taxable income allocated to the Fund (and this excess generally will not be currently taxable to the Fund but, rather, will result in a reduction of the Fund’s adjusted tax basis in each MLP as described in the
following paragraph). This is the result of a variety of factors, including significant non-cash deductions, such as accelerated depreciation. There is no assurance that the Adviser’s expectation regarding the tax character of MLP
distributions will be realized. If this expectation is not realized, there may be greater tax expense borne by the Fund and less cash available to distribute to you or to pay to expenses.
The Fund will also be subject to U.S.
federal income tax at the regular graduated corporate tax rates on any gain recognized by the Fund on any sale of equity securities of an MLP. Cash distributions from an MLP to the Fund that exceed Fund’s allocable share of such MLP’s
net taxable income will reduce the Fund’s adjusted tax basis in the equity securities of the MLP. These reductions in Fund’s adjusted tax basis in the MLP equity securities will increase the amount of any taxable gain (or decrease the
amount of any tax loss) recognized by the Fund on a subsequent sale of the securities.
The Fund will
accrue deferred income taxes for any future tax liability associated with (i) that portion of MLP distributions considered to be a tax-deferred return of capital and (ii) capital appreciation of its investments. Upon the sale of MLP security, the
Fund may be liable for previously deferred taxes, and an adjustment to the deferred income tax liability will be made at such time to reflect the actual taxes paid. The Fund will rely to some extent on information provided by the MLPs which is not
necessarily timely, to estimate deferred tax liability for purposes of financial statement reporting and determining the NAV. From time to time, the Adviser will modify the estimates or assumptions regarding the Fund’s deferred tax liability
as new information becomes available. The Fund will generally compute deferred income taxes based on the federal income tax rate applicable to corporations, currently 21%, and an assumed rate attributable to state taxes.
Distributions made to you by the
Fund (other than distributions in redemption of shares subject to Section 302(b) of the Code) will generally constitute dividends to the extent of your allocable share of the Fund’s current or accumulated earnings and profits, as calculated
for federal income tax purposes. Generally, a corporation’s earnings and profits are computed based upon taxable income, with certain specified adjustments. Based upon the historic performance of the types of MLPs in which the Fund intends to
invest, the Adviser anticipates that the cash distributed from the MLPs generally will exceed the Fund’s Share of the MLPs’ taxable income. Consequently, the Adviser anticipates that only a portion of the Fund’s distributions will
be treated as dividend income to you. To the extent that distributions to you exceed your allocable share of the Fund’s current and accumulated earnings and profits, your tax basis in the Fund’s Shares with respect to which the
distribution is made will be reduced, which will increase the amount of any taxable gain (or decrease the amount of any tax loss) realized upon a subsequent sale or redemption of such shares. To the extent you hold such shares as a capital asset and
have no further basis in the shares to offset the distribution, you will report the excess as capital gain.
Distributions treated as dividends
under the foregoing rules generally will be taxable as ordinary income to you but may be treated as “qualified dividend income.” Under current federal income tax law, qualified dividend income received by individuals and other
non-corporate shareholders is taxed at long-term capital gain rates, which currently reach a maximum of 15% (20% for taxpayers with taxable income exceeding certain thresholds). For a dividend to constitute qualified dividend income, the shareholder
generally must hold the shares paying the dividend for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date, although a longer period may apply if the shareholder engages in certain risk reduction transactions
with respect to the common stock.
Deferred income taxes reflect (1)
taxes on unrealized gains/(losses) which are attributable to the difference between the fair market value and tax basis of the Fund’s investments and (2) the tax benefit of accumulated capital or net operating losses. The Fund will accrue a
net deferred tax liability if its future tax liability on its unrealized gains exceeds the tax benefit of its accumulated capital or net operating losses, if any. The Fund does not currently intend to accrue a net deferred tax asset. However, the
Fund may in the future determine to accrue a net deferred tax asset if the Fund’s future tax liability on unrealized gains is less than the tax benefit of the Fund’s accumulated capital or net operating losses or if the Fund has net
unrealized losses on its investments.
To the extent we have a net deferred
tax asset, consideration is given as to whether or not a valuation allowance is required. The need to establish a valuation allowance for deferred tax assets is assessed periodically based on the criteria established by the Statement of Financial
Standards, Accounting for Income Taxes (ASC 740) that it is more likely than not that some portion or all of the deferred tax asset will not be realized. In our assessment for a valuation allowance, consideration is given to all positive and
negative evidence related to the realization of the deferred tax asset. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability (which are highly
dependent on future MLP cash distributions), the duration of statutory carryforward periods and the associated risk that capital or net operating loss carryforwards may expire unused. If a valuation allowance is required to
reduce the deferred tax asset in the future, it could
have a material impact on the Fund’s NAV and results of operations in the period it is recorded.
A sale or exchange of shares in the
Fund may give rise to a gain or loss. In general, any gain or loss realized upon a taxable disposition of shares will be treated as long-term capital gain or loss if the shares have been held for more than one year. Otherwise, the gain or loss on
the taxable disposition of shares will be treated as short-term capital gain or loss. All or a portion of any loss realized upon a taxable disposition of shares will be disallowed if other substantially identical shares of the Fund are purchased
(through reinvestment of dividends or otherwise) within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss.
Income from Foreign Securities
. Dividends and interest the Fund receives, and gains it realizes, on foreign securities may be subject to income, withholding, or other taxes
imposed by foreign countries and U.S. possessions that would reduce the yield and/or total return on its securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by foreign investors.
Gains or losses (1) from the
disposition of foreign currencies, including forward currency contracts, (2) on the disposition of each foreign-currency-denominated debt security that are attributable to fluctuations in the value of the foreign currency between the dates of
acquisition and disposition of the security, and (3) that are attributable to fluctuations in exchange rates that occur between the time the Fund accrues dividends, interest, or other receivables, or expenses or other liabilities, denominated in a
foreign currency and the time the Fund actually collects the receivables or pays the liabilities, generally will be treated as ordinary income or loss.
The Fund may invest in the stock of
“passive foreign investment companies” (“PFICs”). A PFIC is any foreign corporation (with certain exceptions) that, in general, meets either of the following tests for a taxable year: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held for the production of, passive income. Under certain circumstances, the Fund will be subject to federal income tax on a portion of any “excess distribution” it
receives on the stock of a PFIC or of any gain on its disposition of the stock, plus interest thereon.
If the Fund invests in a PFIC and
elects to treat the PFIC as a “qualified electing fund” (“QEF”), then, in lieu of the foregoing tax and interest obligation, the Fund would be required to include in income each taxable year its pro rata share of the
QEF’s annual ordinary earnings and net capital gain even if the Fund did not receive those earnings and gain from the QEF. In most instances it will be very difficult, if not impossible, to make this election because of certain requirements
thereof.
The Fund may elect to
“mark to market” its stock in any PFIC whose shares are traded on an established exchange or other qualified market. “Marking-to-market,” in this context, means including in gross income each taxable year (and treating as
ordinary income) the excess, if any, of the fair market value of the PFIC’s stock over the Fund’s adjusted basis therein as of the end of that year. Pursuant to the election, the Fund also would be allowed to deduct (as an ordinary, not
a capital, loss) the excess, if any, of its adjusted basis in PFIC stock over the fair market value thereof as of the taxable year-end, but only to the extent of any net mark-to-market gains with respect to that stock the Fund included in income for
prior taxable years under the election. The Fund’s adjusted basis in each PFIC’s stock with respect to which it makes this election would be adjusted to reflect the amounts of income included and deductions taken thereunder.
Derivatives Strategies
. The use of derivatives strategies, such as writing (selling) and purchasing options and futures contracts and entering into forward contracts,
involves complex rules that will determine for income tax purposes the amount, character, and timing of recognition of the gains and losses the Fund realizes in connection therewith.
Some futures
contracts, foreign currency contracts that are traded in the interbank market, and “nonequity” options (i.e., certain listed options, such as those on a “broad-based” securities
index)
—
except any “securities futures contract” that is not a “dealer securities futures contract” (both as defined in the Code) and any
interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement
—
in which the Fund invests may be subject to Code section 1256 (collectively “section 1256 contracts”). Section 1256 contracts that the Fund holds at the end of its taxable year must be “marked to
market” (that is, treated as having been sold at that time for their fair market value) for federal income tax purposes, with the result that unrealized gains or losses will be treated as though they were realized. Sixty percent of any net
gain or loss recognized on these deemed sales, and 60% of any net realized gain or loss from any actual sales of section 1256 contracts, will be treated as long-term capital gain or loss, and the balance will be treated as short-term capital gain or
loss. The Fund may elect not to have the foregoing rules apply to any “mixed straddle” (that is, a straddle, which the Fund clearly identifies in accordance with applicable regulations, at least one (but not all) of the positions of
which are section 1256 contracts), although doing so may have the effect of increasing the relative proportion of short-term capital gain. As the Fund is a taxable corporation under Subchapter C, short-term and long-term capital gain it receives are
subject to federal income tax at the same tax rates.
Code section 1092 (dealing with
straddles) also may affect the taxation of options, futures, and forward contracts in which the Fund may invest. That section defines a “straddle” as offsetting positions with respect to actively traded personal property; for these
purposes, options, futures, and forward contracts are positions in personal property. Under that section, any loss from the disposition of a position in a straddle may be deducted only to the extent the loss exceeds the unrealized gain
on the offsetting position(s) of the straddle. In
addition, these rules may postpone the recognition of loss that otherwise would be recognized under the mark-to-market rules discussed above. The regulations under section 1092 also provide certain “wash sale” rules, which apply to
transactions where a position is sold at a loss and a new offsetting position is acquired within a prescribed period, and “short sale” rules applicable to straddles. If the Fund makes certain elections, the amount, character, and timing
of recognition of gains and losses from the affected straddle positions would be determined under rules that vary according to the elections made. Because only a few of the regulations implementing the straddle rules have been promulgated, the tax
consequences to the Fund of straddle transactions are not entirely clear.
If a call option written by the Fund
lapses (
i.e.
, terminates without being exercised), the amount of the premium it received for the option will be short-term capital gain. If the Fund enters into a closing purchase transaction with respect to a
written call option, it will have a short-term capital gain or loss based on the difference between the premium it received for the option it wrote and the premium it pays for the option it buys. If such an option is exercised and the Fund thus
sells the securities or futures contract subject to the option, the premium the Fund received will be added to the exercise price to determine the gain or loss on the sale. If a call option purchased by the Fund lapses, it will realize short-term or
long-term capital loss, depending on its holding period for the option. If the Fund exercises a purchased call option, the premium it paid for the option will be added to the basis in the subject securities or futures contract.
If the Fund has an “appreciated
financial position” - generally, an interest (including an interest through an option, futures, or forward contract or short sale) with respect to any stock, debt instrument (other than “straight debt”), or partnership interest the
fair market value of which exceeds its adjusted basis - and enters into a “constructive sale” of the position, the Fund will be treated as having made an actual sale thereof, with the result that it will recognize gain at that time. A
constructive sale generally consists of a short sale, an offsetting notional principal contract, or a futures or forward contract the Fund or a related person enters into with respect to the same or substantially identical property. In addition, if
the appreciated financial position is itself a short sale or such a contract, acquisition of the underlying property or substantially identical property will be deemed a constructive sale. The foregoing will not apply, however, to any Fund’s
transaction during any taxable year that otherwise would be treated as a constructive sale if the transaction is closed within 30 days after the end of that year and the Fund holds the appreciated financial position unhedged for 60 days after that
closing (
i.e.
, at no time during that 60-day period is the Fund’s risk of loss regarding that position reduced by reason of certain specified transactions with respect to substantially identical or
related property, such as having an option to sell, being contractually obligated to sell, making a short sale, or granting an option to buy substantially identical stock or securities).
Income from Zero-Coupon and Payment-in-Kind Securities
. The Fund may acquire zero-coupon or other securities (such as strips) issued with OID. As a holder of those
securities, the Fund must include in its gross income the OID that accrues on the securities during the taxable year, even if it receives no corresponding payment on them during the year. Similarly, the Fund must include in its gross income
securities it receives as “interest” on payment-in-kind securities. With respect to “market discount bonds” (
i.e.
, bonds purchased at a price less than their issue price plus the
portion of OID previously accrued thereon), the Fund may elect to accrue and include in income each taxable year a portion of the bonds’ market discount.
Taxation
of Shareholders
.
Basis
Election and Reporting
. A shareholder’s basis in Shares of a Fund that he or she acquires after December 31, 2011 (“Covered Shares”), will be determined in accordance with the Fund’s default
method, which is average basis, unless the shareholder affirmatively elects in writing (which may be electronic) to use a different acceptable basis determination method, such as a specific identification method. The basis determination method a
Fund shareholder elects (or the default method) may not be changed with respect to a redemption of Covered Shares after the settlement date of the redemption.
In addition to the requirement to
report the gross proceeds from redemptions of shares, each Fund (or its administrative agent) must report to the Service and furnish to its shareholders the basis information for Covered Shares and indicate whether they had a short-term (one year or
less) or long-term (more than one year) holding period. Fund shareholders should consult with their tax advisers to decide the best Service-accepted basis determination method for their tax situation and to obtain more information about how the
basis reporting law applies to them.
Foreign Account
Tax Compliance Act (“FATCA”)
. As mentioned in the Prospectus, under FATCA “foreign financial institutions” (“FFIs”) or “non-financial foreign entities”
(“NFFEs”) that are Fund shareholders may be subject to a generally nonrefundable 30% withholding tax on income dividends. That withholding tax generally can be avoided, however, as discussed below.
An FFI can avoid FATCA withholding by
becoming a “participating FFI,” which requires the FFI to enter into a tax compliance agreement with the Service. Under such an agreement, a participating FFI agrees to (1) verify and document whether it has U.S. accountholders, (2)
report certain information regarding their accounts to the Service, and (3) meet certain other specified requirements.
The U.S. Treasury has negotiated
intergovernmental agreements (“IGAs”) with certain countries and is in various stages of negotiations with other foreign countries with respect to one or more alternative approaches to implement FATCA; entities in those countries may be
required to comply with the terms of the IGA instead of Treasury regulations. An FFI resident in a country that has entered into a Model I IGA with the United States must report to that country’s government (pursuant to the terms of the
applicable IGA and applicable law), which will, in turn, report to the Service. An FFI resident in a Model II IGA country generally must comply with U.S. regulatory requirements, with certain exceptions, including the treatment
of recalcitrant accountholders. An FFI resident in one
of those countries that complies with whichever of the foregoing applies will be exempt from FATCA withholding.
An NFFE that is the beneficial owner
of a payment from a Fund can avoid FATCA withholding generally by certifying its status as such and, in certain circumstances that it does not have any substantial U.S. owners or by providing the name, address, and taxpayer identification number of
each such owner. The NFFE will report to the Fund or other applicable withholding agent, which will, in turn, report information to the Service.
Those non-U.S. shareholders also may
fall into certain exempt, excepted, or deemed compliant categories established by Treasury regulations, IGAs, and other guidance regarding FATCA. An FFI or NFFE that invests in a Fund will need to provide the Fund with documentation properly
certifying the entity’s status under FATCA to avoid FATCA withholding. The requirements imposed by FATCA are different from, and in addition to, the tax certification rules to avoid backup withholding described above. Foreign investors are
urged to consult their tax advisers regarding the application of these requirements to their own situation and the impact thereof on their investment in a Fund.
Additional Information Regarding Deferred
Tax Liability
Because the
Fund is treated as a regular corporation, or “C” corporation, for U.S. federal income tax purposes, the Fund will incur tax expenses. In calculating the Fund’s daily NAV, the Fund will, among other things, account for its deferred
tax liability and/or asset balances. As a result, any deferred tax liability is reflected in the Fund’s daily NAV.
The Fund will accrue, in accordance
with generally accepted accounting principles, a deferred income tax liability balance at the currently effective statutory U.S. federal income tax rate (currently 21%) plus an assumed state and local income tax rate, for its future tax liability
associated with the capital appreciation of its investments and the distributions received by a Fund on equity securities of MLPs considered to be return of capital and for any net operating gains. The Fund’s current and deferred tax
liability, if any, will depend upon the Fund’s net investment gains and losses and realized and unrealized gains and losses on investments and therefore may vary greatly from year to year depending on the nature of the Fund’s
investments, the performance of those investments and general market conditions. Any deferred tax liability balance will reduce a Fund’s NAV.
The Fund also will
accrue, in accordance with generally accepted accounting principles, a deferred tax asset balance which reflects an estimate of the Fund’s future tax benefit associated with net operating losses and unrealized losses. Any deferred tax asset
balance will increase the Fund’s NAV. To the extent the Fund has a deferred tax asset balance, the Fund will assess, in accordance with generally accepted accounting principles, whether a valuation allowance, which would offset the value of
some or all of the Fund’s deferred tax asset balance, is required. Pursuant to Financial Accounting Standards Board Accounting Standards Codification 740 (FASB ASC 740), the Fund will assess a valuation allowance to reduce some or all of the
deferred tax asset balance if, based on the weight of all available evidence, both negative and positive, it is more likely than not that some or all of the deferred tax asset will not be realized. The Fund will use judgment in considering the
relative impact of negative and positive evidence. The weight given to the potential effect of negative and positive evidence will be commensurate with the extent to which such evidence can be objectively verified. The Fund’s assessment
considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability (which are dependent on, among other factors, future MLP cash distributions), the duration of statutory
carryforward periods and the associated risk that operating loss carryforwards may be limited or expire unused. However, this assessment generally may not consider the potential for market value increases with respect to the Fund’s investments
in equity securities of MLPs or any other securities or assets. Significant weight is given to the Fund’s forecast of future taxable income, which is based on, among other factors, the expected continuation of MLP cash distributions at or near
current levels. Consideration is also given to the effects of the potential of additional future realized and unrealized gains or losses on investments and the period over which deferred tax assets can be realized, as federal capital loss
carryforwards expire in five years. Among other significant changes to U.S. federal corporate taxation, the Tax Act contains significant changes and modifies several existing laws around federal net operating losses, including a limitation on the
deduction for net operating losses to 80% of current year taxable income as well as an indefinite carryover period for U.S. federal net operating losses. Both provisions are applicable for losses arising in tax years beginning after December 31,
2017. For these reasons, even if the Fund is profitable, its ability to utilize any net operating losses may be limited, potentially significantly so. To the extent the Fund’s use of net operating loss carryforwards is significantly limited,
its income could be subject to U.S. corporate income tax earlier and in amounts greater than it would if it were able to use net operating loss carryforwards, which could result in lower profits and reduced cash flows. Recovery of a deferred tax
asset is dependent on continued payment of the MLP cash distributions at or near current levels in the future and the resultant generation of taxable income. The Fund will assess whether a valuation allowance is required to offset some or all of any
deferred tax asset in connection with the calculation of a Fund’s NAV per share each day; however, to the extent the final valuation allowance differs from the estimates the Fund used in calculating the Fund’s daily NAV, the application
of such final valuation allowance could have a material impact on the Fund’s NAV.
The Fund’s deferred tax asset
and/or liability balances is estimated using estimates of effective tax rates expected to apply to taxable income in the years such balances are realized. The Fund will rely to some extent on information provided by MLPs in determining the extent to
which distributions received from MLPs constitute a return of capital, which information may not be provided to the Fund on a timely basis, in order to estimate deferred tax liability and/or asset balances for
purposes of financial statement reporting and
determining its NAV. If such information is not received from such MLPs on a timely basis, the Fund will estimate the extent to which distributions received from MLPs constitute a return of capital based on average historical tax characterization of
distributions made by MLPs. The Fund’s estimates regarding its deferred tax liability and/or asset balances are made in good faith; however, the daily estimate of a Fund’s deferred tax liability and/or asset balances used to calculate
the Fund’s NAV could vary dramatically from the Fund’s actual tax liability. Actual income tax expense, if any, will be incurred over many years, depending on if and when investment gains and losses are realized, the then-current basis
of the Fund’s assets and other factors. As a result, the determination of the Fund’s actual tax liability may have a material impact on the Fund’s NAV. The Fund’s daily NAV calculation will be based on then current estimates
and assumptions regarding the Fund’s deferred tax liability and/or asset balances and any applicable valuation allowance, based on all information available to the Fund at such time. From time to time, the Fund may modify its estimates or
assumptions regarding its deferred tax liability and/or asset balances and any applicable valuation allowance as new information becomes available. Modifications of the Fund’s estimates or assumptions regarding its deferred tax liability
and/or asset balances and any applicable valuation allowance, changes in generally accepted accounting principles or related guidance or interpretations thereof, limitations imposed on net operating losses (if any) and changes in applicable tax law
could result in increases or decreases in the Fund’s NAV per share, which could be material.
* * * * *
The foregoing is only a general
summary of some of the important federal tax considerations generally affecting the Fund. No attempt is made to present a complete explanation of the federal tax treatment of the Fund’s activities, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors are urged to consult their own tax advisers for more detailed information and for information regarding any state, local, or foreign taxes applicable to the Fund and to
distributions therefrom.
Capital Loss Carryforwards
. As of October 31, 2018, the Fund had the following net operating loss carryforward amounts and capital loss carryforward amount available to
offset future taxable income.
Capital
Loss
|
Amount
|
Expiration
|
Fiscal
year ended October 31, 2018
|
$
3,443,216
|
October
31, 2023
|
Fiscal
year ended October 31, 2017
|
$
—
|
October
31, 2022
|
Fiscal
year ended October 31, 2016
|
$22,254,486
|
October
31, 2021
|
Fiscal
year ended October 31, 2015
|
$20,242,025
|
October
31, 2020
|
Net
operating loss
|
Amount
|
Expiration
|
Fiscal
year ended October 31, 2018
|
$432,495
|
October
31, 2038
|
To the extent the Fund realizes
future net capital gains in any taxable year to which it has available capital loss carryforwards, those gains will be wholly or partly offset by those carryforwards. Because the Fund is taxed as a regular corporation, capital losses may be carried
over to each of the five taxable years succeeding the loss year.
The Fund's financial
statements for the fiscal year ended October 31, 2018, are incorporated herein by reference from the Fund's Annual Report to Shareholders dated October 31, 2018.
To receive a copy of the Prospectus or
Annual or Semi-Annual Report to shareholders, without charge, write to or call the Trust at the contact information listed below:
Write
to:
|
Direxion
Shares ETF Trust
1301 Avenue of the Americas (6th Avenue), 28th Floor
New York, New York 10019
|
Call:
|
866-476-7523
|
By
Internet:
|
www.direxioninvestments.com
|
APPENDIX A
Description of Corporate Bond Ratings
Moody’s
Investors Service and S&P Global Ratings are two prominent independent rating agencies that rate the quality of bonds. Following are expanded explanations of the ratings shown in the Prospectus and this SAI.
Moody’s Investors Service
–
Global Long-Term Ratings
Ratings assigned
on Moody’s global long-term rating scale are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and
public sector entities. Long-term ratings are assigned to issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a default or impairment on contractual financial obligations and the expected
financial loss suffered in the event of default or impairment. Such ratings have been published by Moody’s Investors Service, Inc. and Moody’s Analytics Inc.
Aaa
:
Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
Aa
:
Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A
:
Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
Baa
:
Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.
Ba
:
Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
B
:
Obligations rated B are considered speculative and are subject to high credit risk.
Caa
:
Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
Ca
:
Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C
:
Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody’s appends numerical
modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of that generic rating category. Additionally, a “(hyb)” indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms.*
* By their terms, hybrid securities
allow for the omission of scheduled dividends, interest, or principal payments, which can potentially result in impairment if such an omission occurs. Hybrid securities may also be subject to contractually allowable write-downs of principal that
could result in impairment. Together with the hybrid indicator, the long-term obligation rating assigned to a hybrid security is an expression of the relative credit risk associated with that security.
Moody’s Investors Service
–
National Scale Long-Term Ratings
Moody’ s long-term National
Scale Ratings (NSRs) are opinions of the relative creditworthiness of issuers and financial obligations within a particular country. NSRs are not designed to be compared among countries; rather, they address relative credit risk within a given
country. Moody’s assigns national scale ratings in certain local capital markets in which investors have found the global rating scale provides inadequate differentiation among credits or is inconsistent with a rating scale already in common
use in the country. In each specific country, the last two characters of the rating indicate the country in which the issuer is located (
e.g.
, Aaa.br for Brazil).
Aaa.n
:
Issuers or issues rated Aaa.n demonstrate the strongest creditworthiness relative to other domestic issuers.
Aa.n
:
Issuers or issues rated Aa.n demonstrate very strong creditworthiness relative to other domestic issuers.
A.n
:
Issuers or issues rated A.n present above-average creditworthiness relative to other domestic issuers.
Baa.n
:
Issuers or issues rated Baa.n represent average creditworthiness relative to other domestic issuers.
Ba.n
:
Issuers or issues rated Ba.n demonstrate below-average creditworthiness relative to other domestic issuers.
B.n
:
Issuers or issues rated B.n demonstrate weak creditworthiness relative to other domestic issuers.
Caa.n
:
Issuers or issues rated Caa.n demonstrate very weak creditworthiness relative to other domestic issuers.
Ca.n
:
Issuers or issues rated Ca.n demonstrate extremely weak creditworthiness relative to other domestic issuers.
C.n
:
Issuers or issues rated C.n demonstrate the weakest creditworthiness relative to other domestic issuers.
Note: Moody’s appends numerical
modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of that generic rating category. National scale long-term ratings of D.ar and E.ar may also be applied to Argentine obligations.
S&P Global Ratings
–
Long-Term Issue Credit Ratings*
An S&P Global Ratings issue
credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note
programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The
opinion reflects S&P Global Ratings' view of the obligor's capacity and willingness to meet its financial commitments as they come due, and this opinion may assess terms, such as collateral security and subordination, which could affect ultimate
payment in the event of default. Issue credit ratings can be either long-term or short-term. Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. Short-term ratings are also used to indicate
the creditworthiness of an obligor with respect to put features on long-term obligations. Medium-term notes are assigned long-term ratings.
Issue credit ratings are based, in
varying degrees, on S&P Global Ratings' analysis of the following considerations:
•
|
The likelihood of
payment--the capacity and willingness of the obligor to meet its financial commitments on an obligation in accordance with the terms of the obligation;
|
•
|
The nature and provisions
of the financial obligation, and the promise we impute; and
|
•
|
The
protection afforded by, and relative position of, the financial obligation in the event of a bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
|
Issue ratings are an assessment of
default risk, but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above.
(Such differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)
AAA
: An obligation rated 'AAA' has the highest rating assigned by S&P Global Ratings. The obligor's capacity to meet its financial commitments on the obligation is extremely strong.
AA
: An
obligation rated 'AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitments on the obligation is very strong.
A
: An
obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitments on the
obligation is still strong.
BBB
: An
obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments on the obligation.
BB; B; CCC; CC; and C
: Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposure to adverse conditions.
BB
:
An obligation rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to the obligor's inadequate
capacity to meet its financial commitments on the obligation.
B
: An
obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitments on the obligation. Adverse business, financial, or economic conditions will likely impair
the obligor's capacity or willingness to meet its financial commitments on the obligation.
CCC
:
An obligation rated 'CCC' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation. In the event of adverse business,
financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitments on the obligation.
CC
: An
obligation rated 'CC' is currently highly vulnerable to nonpayment. The 'CC' rating is used when a default has not yet occurred, but S&P Global Ratings expects default to be a virtual certainty, regardless of the anticipated time to
default.
C
: An obligation rated 'C' is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared with obligations that are rated
higher.
D
: An obligation rated 'D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the 'D' rating category is used when payments on an obligation are not made on the date due, unless S&P
Global Ratings believes that such payments will be made within five business days in the absence of a stated grace period or within the earlier of the stated grace period or 30 calendar days. The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligation's rating is lowered to 'D' if it is subject to a distressed exchange
offer.
NR
: This
indicates that no rating has been requested, or that there is insufficient information on which to base a rating, or that S&P Global Ratings does not rate a particular obligation as a matter of policy.
*The ratings from 'AA' to 'CCC' may be
modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
Moody’s Investors Service
–
Short Term Obligation Ratings
The Municipal Investment Grade (MIG)
scale is used to rate US municipal bond anticipation notes of up to three years maturity. Municipal notes rated on the MIG scale may be secured by either pledged revenues or proceeds of a take-out financing received prior to note maturity. MIG
ratings expire at the maturity of the obligation, and the issuer’s long-term rating is only one consideration in assigning the MIG rating. MIG ratings are divided into three levels
—
MIG 1 through MIG 3
—
while speculative grade short-term obligations are designated SG.
MIG 1
:
This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
MIG 2
:
This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
MIG 3
:
This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.
SG
: This
designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
S&P Global Ratings
–
Municipal Short-Term Note Ratings
An S&P Global
Ratings U.S. municipal note rating reflects S&P Global Ratings opinion about the liquidity factors and market access risks unique to the notes. Notes due in three years or less will likely receive a note rating. Notes with an original maturity
of more than three years will most likely receive a long-term debt rating. In determining which type of rating, if any, to assign, S&P Global Ratings analysis will review the following considerations:
•
|
Amortization
schedule--the larger the final maturity relative to other maturities, the more likely it will be treated as a note; and
|
•
|
Source
of payment--the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
|
SP-1
:
Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.
SP-2
:
Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
SP-3
:
Speculative capacity to pay principal and interest.
Moody’s Investors Service
–
Global Short Term Rating Scale
Ratings assigned
on Moody’s global short-term rating scale are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and
public sector entities. Short-term ratings are assigned to obligations with an original maturity of thirteen months or less and reflect both on the likelihood of a default or impairment on contractual financial obligations and the expected financial
loss suffered in the event of default or impairment.
P-1
:
Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
P-2
:
Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
P-3
:
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
NP
:
Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
S&P Global Ratings
–
Short-Term Issue Credit Ratings
A-1
:
A short-term obligation rated 'A-1' is rated in the highest category by S&P Global Ratings. The obligor's capacity to meet its financial commitments on the obligation is strong. Within this category, certain obligations are designated with a
plus sign (+). This indicates that the obligor's capacity to meet its financial commitments on these obligations is extremely strong.
A-2
:
A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial
commitments on the obligation is satisfactory.
A-3
: A
short-term obligation rated 'A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments on the
obligation.
B
: A
short-term obligation rated 'B' is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties that could lead to the
obligor's inadequate capacity to meet its financial commitments.
C
: A
short-term obligation rated 'C' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation.
D
: A
short-term obligation rated 'D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the 'D' rating category is used when payments on an obligation are not made on the date due, unless S&P Global Ratings believes
that such payments will be made within any stated grace period. However, any stated grace period longer than five business days will be treated as five business days. The 'D' rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action and where default on an obligation is a virtual certainty, for example, due to automatic stay provisions. An obligation’s rating is lowered to ‘D’ if it is subject to a distressed exchange
offer.
Dual ratings may
be assigned to debt issues that have a put option or demand feature. The first component of the rating addresses the likelihood of repayment of principal and interest as due, and the second component of the rating addresses only the demand feature.
The first component of the rating can relate to either a short-term or long-term transaction and accordingly use either short-term or long-term rating symbols. The second component of the rating relates to the put option and is assigned a short-term
rating symbol (for example, 'AAA/A-1+' or 'A-1+/A-1'). With U.S. municipal short-term demand debt, the U.S. municipal short-term note rating symbols are used for the first component of the rating (for example, 'SP-1+/A-1+').
Direxion Shares ETF Trust
1301
Avenue of the Americas (6th Avenue), 28th Floor
|
New York,
New York 10019
|
866-476-7523
|
www.direxioninvestments.com
1X BEAR FUNDS
Direxion Daily S&P 500
®
Bear 1X Shares (SPDN)
Direxion Daily Small Cap Bear 1X Shares
Direxion Daily 7-10 Year Treasury Bear 1X Shares
(TYNS)
Direxion Daily 20+ Year Treasury Bear 1X
Shares (TYBS)
Direxion Daily Municipal Bond Taxable
Bear 1X Shares
Direxion Daily Total Bond Market Bear
1X Shares (SAGG)
Direxion Daily CSI 300 China A
Share Bear 1X Shares (CHAD)
Direxion Daily MSCI
China A Bear 1X Shares
Direxion Daily CSI China
Internet Index Bear 1X Shares
Direxion Daily MSCI Real Estate Bear 1X Shares
February 28, 2019
The shares offered in this prospectus (each a "Fund" and
collectively the "Funds") are, or upon commencement of operations will be, listed and traded on the NYSE Arca, Inc.
The Funds seek
daily
inverse
investment results and are intended to be used as short-term trading vehicles. Each Fund attempts to provide daily investment results that correspond to the inverse (or opposite) of the performance of its underlying index.
The Funds are not intended to be used by, and are not appropriate
for, investors who do not intend to actively monitor and manage their portfolios. The Funds are very different from most mutual funds and exchange-traded funds. Investors should note that:
(1)
|
Each Fund pursues a
daily
investment objective that is inverse to the performance of its underlying index, a result opposite of most mutual funds and exchange-traded funds.
|
(2)
|
The
Funds seek
daily inverse
investment results that are subject to compounding and market volatility risk. The pursuit of their daily investment objective means that the return of a Fund for a period longer than
a full trading day will be the product of a series of daily returns, with daily repositioned exposure, for each trading day during the relevant period. As a consequence, especially in periods of market volatility, the volatility of the underlying
index may affect a Fund’s return as much as, or more than, the return of the underlying index. Further, the return for investors that invest for periods less than a full trading day will not be the product of the return of a Fund’s
stated daily inverse investment objective and the performance of the underlying index for the full trading day. During periods of high volatility, the Funds may not perform as expected and the Funds may have losses when an investor may have expected
gains if the Funds are held for a period that is different than one trading day.
|
The Funds are not suitable for all investors. The Funds are
designed to be utilized only by sophisticated investors, such as traders and active investors employing dynamic strategies. Investors in the Funds should:
(a)
|
understand the consequences
of seeking
daily inverse
investment results;
|
(b)
|
understand the risk of
shorting; and
|
(c)
|
intend
to actively monitor and manage their investments.
|
Investors who do not understand the Funds, or do not intend to
actively manage their funds and monitor their investments, should not buy the Funds.
There is no assurance that any Fund will achieve its daily
inverse investment objective and an investment in a Fund could lose money. No single Fund is a complete investment program.
IMPORTANT NOTE: Beginning on January 1,
2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of each Fund’s annual and semi-annual shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the
shareholder reports from your financial intermediary, such as a broker-dealer or bank. Instead, annual and semi-annual shareholder reports will be available on a website, and you will be notified by mail each time a report is posted and provided
with a website link to access the report.
You may
elect to receive all future annual and semi-annual shareholder reports in paper free of charge. To elect to continue to receive paper copies of shareholder reports through the mail or to otherwise change your delivery method, contact your financial
intermediary or follow the instructions included with this disclosure. Your election to receive shareholder reports in paper will apply to all funds that you hold through the financial intermediary. If you already elected to receive shareholder
reports electronically, you will not be affected by this change and you need not take any action.
These securities have not been approved or disapproved by
the U.S. Securities and Exchange Commission (“SEC”) or the U.S. Commodity Futures Trading Commission (“CFTC”), nor have the SEC or CFTC passed upon the adequacy of this Prospectus. Any representation to the contrary is a
criminal offense.
Direxion Daily
S&P 500
®
Bear 1X Shares
Important Information Regarding the
Fund
The Direxion Daily
S&P 500
®
Bear 1X Shares (“Fund”) seeks
daily inverse
investment results and
is very different from most other exchange-traded funds. The pursuit of daily inverse investment goals means that the return of the Fund for a period longer than a full trading day may have no resemblance to -100% of the return of the S&P 500
®
Index (the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each single
day’s compounded return over the period, which will very likely differ from -100% of the return of the Index for that period. As a consequence, longer holding periods and higher volatility of the Index increase the impact of compounding on an
investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest for periods less
than a trading day will not be -100% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse (-1X) investment results, understand the risks associated with the use of shorting and
are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will
lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 100% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.35%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.30%
|
Acquired
Fund Fees and Expenses
(1)
|
0.04%
|
Total
Annual Fund Operating Expenses
|
0.69%
|
Expense
Cap/Reimbursement
(2)
|
-0.20%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.49%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.45% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$50
|
$201
|
$364
|
$840
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate
1
|
Direxion Shares ETF
Trust Prospectus
|
is calculated without regard to cash instruments or
derivative transactions. If the Fund's extensive use of derivatives were reflected, the Fund's portfolio turnover rate would be significantly higher.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short exposure to the Index equal to at least 80% of the Fund’s net assets (plus
borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less
than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
Standard &
Poor’s
®
selects the stocks comprising the Index on the basis of market capitalization, financial viability of the company and the public
float, liquidity and price of a company’s shares outstanding. The Index is a float-adjusted, market capitalization-weighted index. As of December 31, 2018, the Index consisted of 505 constituents, which had a median total market capitalization
of $18.3 billion, total market capitalizations ranging from $2.3 billion to $785 billion and were concentrated in the information technology and healthcare sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate characteristics
similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index. Derivatives are
financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting securities in
order to gain inverse exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the
Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse investment objective. The impact of the Index’s movements during
the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund
should rise, meaning that the Fund’s exposure
will need to be increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The
terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -100% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily investment objective and the Fund’s performance for periods greater than a trading day will be the result of each
day's returns compounded over the period, which is very likely to differ from -100% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are leveraged and
that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -100% of the performance of the Index. The effect of compounding becomes more pronounced
as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during shareholder’s
holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s
investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance
will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse exposure; e) other Fund expenses; and f) dividends or interest paid with respect
Direxion Shares
ETF Trust Prospectus
|
2
|
to securities in the Index. The chart below
illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated Fund returns for a number of combinations of Index volatility and Index performance over a one-year period.
Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse exposure) of 0%. If Fund expenses
and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 6.04% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a significant loss of
value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 63.23% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -100% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -100% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-100%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
60%
|
148.55%
|
134.42%
|
95.28%
|
43.98%
|
-5.83%
|
-50%
|
50%
|
99.13%
|
87.77%
|
56.26%
|
15.23%
|
-24.77%
|
-40%
|
40%
|
66.08%
|
56.57%
|
30.21%
|
-4.08%
|
-37.57%
|
-30%
|
30%
|
42.43%
|
34.25%
|
11.56%
|
-17.98%
|
-46.76%
|
-20%
|
20%
|
24.67%
|
17.47%
|
-2.47%
|
-28.38%
|
-53.72%
|
-10%
|
10%
|
10.83%
|
4.44%
|
-13.28%
|
-36.52%
|
-58.79%
|
0%
|
0%
|
-0.25%
|
-6.04%
|
-22.08%
|
-42.90%
|
-63.23%
|
10%
|
-10%
|
-9.32%
|
-14.64%
|
-29.23%
|
-48.27%
|
-66.67%
|
20%
|
-20%
|
-16.89%
|
-21.75%
|
-35.24%
|
-52.72%
|
-69.67%
|
30%
|
-30%
|
-23.29%
|
-27.84%
|
-40.25%
|
-56.41%
|
-71.94%
|
40%
|
-40%
|
-28.78%
|
-33.01%
|
-44.63%
|
-59.81%
|
-74.32%
|
50%
|
-50%
|
-33.55%
|
-37.52%
|
-48.57%
|
-62.60%
|
-76.19%
|
60%
|
-60%
|
-37.72%
|
-41.51%
|
-51.96%
|
-65.19%
|
-78.12%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 13.23%. The Index’s highest volatility rate for any one calendar year during the five-year period was 17.11% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 8.49%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund,
see “Additional Information Regarding Investment
Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require
3
|
Direxion Shares ETF
Trust Prospectus
|
only a limited initial investment, the use of
derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will
subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the
agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment
held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its
inverse investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions
adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also seek inverse or
“short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of the underlying
short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund may be
required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various factors,
including regulatory
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ETF Trust Prospectus
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action, the Fund
may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its investment objective due to these factors. Any
income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse investment
objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of
the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the
Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for
the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the
Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large
movements of assets into and out of the Fund,
potentially resulting in the Fund being over- or under-exposed to the Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse investment objective.
The Fund may take or refrain from taking positions to improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Healthcare Sector Risk
—
The profitability of companies in the healthcare sector may be affected by extensive, costly and uncertain government
regulation, restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient services, limited number
of products,
industry innovation,
changes in technologies and other market
developments.
Many healthcare companies
are heavily dependent on patent protection. The expiration of patents may adversely
affect
the profitability of these companies.
Many healthcare companies are subject to extensive litigation based on product
liability and similar claims. Healthcare companies are subject to competitive forces that may make it difficult to raise prices and, in fact,
may result in price discounting.
Many new products in the healthcare sector may be subject to regulatory approvals. The process of obtaining such approvals may be long and costly with no guarantee that any product will come to
market.
Information
Technology Sector Risk
—
The value of stocks of information technology companies and companies that rely heavily on
technology is particularly vulnerable
to rapid changes in technology product cycles, rapid product obsolescence, government regulation and competition,
both domestically and internationally, including competition from competitors with lower production costs. Information technology companies and companies that rely heavily on technology, especially
those of smaller,
less-seasoned companies,
tend to be more volatile than the overall market. Information technology companies are
heavily dependent on patent and intellectual property rights, the loss or impairment of which may adversely affect profitability. Additionally, companies in the information technology sector may face dramatic and often unpredictable changes in
growth
rates and competition for the services of qualified personnel.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Mid-Capitalization
Company Risk
-
Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and
financial resources than more established, larger-capitalization companies. Furthermore, those companies often have limited
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product lines,
services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well known to the investing public, do not have significant institutional ownership and are followed by relatively few
security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether or not it is based on
fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result, the performance of mid-capitalization companies can be more volatile and they face greater risk of business failure, which could increase the
volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they
invest. There is no guarantee that money market
instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons.
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Extraordinary market volatility can lead to trading
halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange on which they trade, and the listing requirements may be amended
from time to time.
Fund
Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
Total Return
for the Calendar Years Ended December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 15.29% for the quarter ended December 31, 2018 and its lowest calendar quarter return was -6.41% for the quarter ended September 30, 2018. The year-to-date return
as of December 31, 2018 was 5.34%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(6/8/2016)
|
Return
Before Taxes
|
5.34%
|
-7.86%
|
Return
After Taxes on Distributions
|
4.77%
|
-8.12%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
3.14%
|
-6.01%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
9.08%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the since inception
period because the calculation recognizes a capital
loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in June 2016
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception in June 2016
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “S&P 500
®
Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard &
Poor’s
®
and S&P
®
are registered
trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones
Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones,
S&P, or their respective affiliates and none of such parties make
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Direxion Shares ETF
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any representation regarding the advisability of
investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500
®
Index.
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Direxion
Daily Small Cap Bear 1X Shares
Important Information Regarding the
Fund
The Direxion Daily Small
Cap Bear 1X Shares (“Fund”) seeks
daily inverse
investment results and is very different from most other exchange-traded funds. The pursuit of daily inverse investment goals means
that the return of the Fund for a period longer than a full trading day may have no resemblance to -100% of the return of the Russell 2000
®
Index
(the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each single day’s compounded return over the period, which will very likely differ from -100% of the return of the
Index for that period. As a consequence, longer holding periods and higher volatility of the Index increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect
the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -100% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse (-1X) investment results, understand the risks associated with the use of shorting and
are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will
lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 100% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.35%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
0.71%
|
Expense
Cap/Reimbursement
(2)
|
-0.11%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.60%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.45% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short exposure to the Index equal to at least 80% of the Fund’s net assets (plus
borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less
than 397
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Direxion Shares ETF
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days and exhibit high quality credit profiles,
including U.S. government securities and repurchase agreements.
The Index measures
the performance of approximately 2,000 small-capitalization companies in the Russell 3000
®
Index, based on a combination of their market
capitalization and current index membership. As of December 31, 2018, the Index consisted of 2,032 holdings, which had an average market capitalization of $1.1 billion, total market capitalizations ranging from $7.8 million to $6.2 billion and were
concentrated in the financial services and healthcare sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate characteristics
similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index. Derivatives are
financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting securities in
order to gain inverse exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the
Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse investment objective. The impact of the Index’s movements during
the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely,
if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms “daily,”
“day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -100% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even
possible that the Fund will lose money over time while
the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily investment objective and the Fund’s performance for periods greater than a trading day will be the result of each
day's returns compounded over the period, which is very likely to differ from -100% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are leveraged and
that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -100% of the performance of the Index. The effect of compounding becomes more pronounced
as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during shareholder’s
holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s
investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance
will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the chart below, the Fund
would be expected to lose 6.04% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a significant loss of value in the Fund,
even if
Direxion Shares
ETF Trust Prospectus
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the Index’s
return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 63.23% of its value, even if the cumulative Index return for the year was 0%. Areas shaded red (or dark gray) represent those
scenarios where the Fund can be expected to return less than -100% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return more than -100% of the performance of the
Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the returns shown below as a result of any of the
factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-100%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
60%
|
148.55%
|
134.42%
|
95.28%
|
43.98%
|
-5.83%
|
-50%
|
50%
|
99.13%
|
87.77%
|
56.26%
|
15.23%
|
-24.77%
|
-40%
|
40%
|
66.08%
|
56.57%
|
30.21%
|
-4.08%
|
-37.57%
|
-30%
|
30%
|
42.43%
|
34.25%
|
11.56%
|
-17.98%
|
-46.76%
|
-20%
|
20%
|
24.67%
|
17.47%
|
-2.47%
|
-28.38%
|
-53.72%
|
-10%
|
10%
|
10.83%
|
4.44%
|
-13.28%
|
-36.52%
|
-58.79%
|
0%
|
0%
|
-0.25%
|
-6.04%
|
-22.08%
|
-42.90%
|
-63.23%
|
10%
|
-10%
|
-9.32%
|
-14.64%
|
-29.23%
|
-48.27%
|
-66.67%
|
20%
|
-20%
|
-16.89%
|
-21.75%
|
-35.24%
|
-52.72%
|
-69.67%
|
30%
|
-30%
|
-23.29%
|
-27.84%
|
-40.25%
|
-56.41%
|
-71.94%
|
40%
|
-40%
|
-28.78%
|
-33.01%
|
-44.63%
|
-59.81%
|
-74.32%
|
50%
|
-50%
|
-33.55%
|
-37.52%
|
-48.57%
|
-62.60%
|
-76.19%
|
60%
|
-60%
|
-37.72%
|
-41.51%
|
-51.96%
|
-65.19%
|
-78.12%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 16.43%. The Index’s highest volatility rate for any one calendar year during the five-year period was 18.43% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 4.41%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
11
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Direxion Shares ETF
Trust Prospectus
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In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under
special resolutions adopted in the United States, the
European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Direxion Shares
ETF Trust Prospectus
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12
|
Intra-Day Investment
Risk
- The Fund seeks investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse investment
objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of
the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the
Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for
the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the
Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index. Activities
surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse investment objective. The Fund may take or refrain from taking positions to improve the tax efficiency or to
comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on
the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Healthcare Sector Risk
—
The profitability of companies in the healthcare sector may be affected by extensive, costly and uncertain government
regulation, restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient services, limited number of products, industry innovation, changes in
technologies and other market developments. Many healthcare companies are heavily dependent on patent protection. The expiration of patents may adversely affect the profitability of these companies. Many healthcare companies are subject to extensive
litigation based on product liability and similar claims. Healthcare companies are subject to competitive forces that may make it difficult to raise prices and, in fact, may result in price discounting. Many new products in the healthcare sector may
be subject to regulatory approvals. The process of obtaining such approvals may be long and costly with no guarantee that any product will come to market.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect
13
|
Direxion Shares ETF
Trust Prospectus
|
issuers of securities
in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a
limited number of securities. Its net asset value
and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they
Direxion Shares
ETF Trust Prospectus
|
14
|
trade, and the listing requirements may be amended from
time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The Russell 2000
®
Index is a trademark of Frank Russell Company (“Russell”) and has been licensed for use by the Trust. The Fund is not sponsored, endorsed,
sold or promoted by Russell. Russell makes no representation regarding the advisability of investing in the Fund.
15
|
Direxion Shares ETF
Trust Prospectus
|
Direxion
Daily 7-10 Year Treasury Bear 1X Shares
Important Information Regarding the
Fund
The Direxion Daily 7-10
Year Treasury Bear 1X Shares (“Fund”) seeks
daily inverse
investment results and is very different from most other exchange-traded funds. The pursuit of daily inverse investment
goals means that the return of the Fund for a period longer than a full trading day may have no resemblance to -100% of the return of the ICE U.S. Treasury 7-10 Year Bond Index (the “Index”). This means that the return of the Fund for a
period longer than a trading day will be the result of each single day’s compounded return over the period, which will very likely differ from -100% of the return of the Index for that period. As a consequence, longer holding periods and
higher volatility of the Index increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be -100% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse (-1X) investment results, understand the risks associated with the use of shorting and
are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will
lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 100% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.35%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
3.16%
|
Acquired
Fund Fees and Expenses
(1)
|
0.04%
|
Total
Annual Fund Operating Expenses
|
3.55%
|
Expense
Cap/Reimbursement
(2)
|
-3.06%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.49%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.45% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$50
|
$803
|
$1,578
|
$3,615
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives were
Direxion Shares
ETF Trust Prospectus
|
16
|
reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short exposure to the Index equal to at least 80% of the Fund’s net
assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is a
market value weighted index that includes publicly issued U.S. Treasury securities that have a remaining maturity of greater than seven years and less than or equal to ten years. Eligible securities must be fixed rate, denominated in U.S. dollars,
and have $300 million or more of outstanding face value, excluding amounts held by the Federal Reserve. Securities excluded from the Index are zero-coupon STRIPS, inflation linked securities, floating rate notes, cash management and Treasury bills,
and any government agency debt issued with or without a government guarantee. The Index is not adjusted for securities that may become eligible or ineligible for inclusion in the Index intra-month. The Index is reconstituted and rebalanced on the
last business day of each month. The Index was comprised of 20 constituents as of December 31, 2018.
The Fund may gain inverse exposure by
investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate characteristics similar to those of the
Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index. Derivatives are financial instruments that
derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting securities in order to gain inverse
exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the
Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse investment objective. The impact of the Index’s movements during
the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely,
if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms “daily,”
“day,” and “trading day,”
refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -100% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily investment objective and the Fund’s performance for periods greater than a trading day will be the result of each
day's returns compounded over the period, which is very likely to differ from -100% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are leveraged and
that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -100% of the performance of the Index. The effect of compounding becomes more pronounced
as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during shareholder’s
holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s
investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance
will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period.
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Performance shown in the chart assumes that: (i) no
dividends were paid with respect to the securities included in the Index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected,
the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 6.04% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a significant loss of
value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 63.23% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -100% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -100% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-100%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
60%
|
148.55%
|
134.42%
|
95.28%
|
43.98%
|
-5.83%
|
-50%
|
50%
|
99.13%
|
87.77%
|
56.26%
|
15.23%
|
-24.77%
|
-40%
|
40%
|
66.08%
|
56.57%
|
30.21%
|
-4.08%
|
-37.57%
|
-30%
|
30%
|
42.43%
|
34.25%
|
11.56%
|
-17.98%
|
-46.76%
|
-20%
|
20%
|
24.67%
|
17.47%
|
-2.47%
|
-28.38%
|
-53.72%
|
-10%
|
10%
|
10.83%
|
4.44%
|
-13.28%
|
-36.52%
|
-58.79%
|
0%
|
0%
|
-0.25%
|
-6.04%
|
-22.08%
|
-42.90%
|
-63.23%
|
10%
|
-10%
|
-9.32%
|
-14.64%
|
-29.23%
|
-48.27%
|
-66.67%
|
20%
|
-20%
|
-16.89%
|
-21.75%
|
-35.24%
|
-52.72%
|
-69.67%
|
30%
|
-30%
|
-23.29%
|
-27.84%
|
-40.25%
|
-56.41%
|
-71.94%
|
40%
|
-40%
|
-28.78%
|
-33.01%
|
-44.63%
|
-59.81%
|
-74.32%
|
50%
|
-50%
|
-33.55%
|
-37.52%
|
-48.57%
|
-62.60%
|
-76.19%
|
60%
|
-60%
|
-37.72%
|
-41.51%
|
-51.96%
|
-65.19%
|
-78.12%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 5.07%. The Index’s highest volatility rate for any one calendar year during the five-year period was 6.48% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 2.97%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track
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ETF Trust Prospectus
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the performance of the same, or a substantially
similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an
ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any
financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject
to the agreement with the counterparty. If the
counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline.
Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse investment objective.
The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the
European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments
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by the assets underlying the Fund’s short
positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse investment
objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of
the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the
Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important
to note that the correlation to these ETFs may vary
from the correlation to the Index due to embedded costs and other factors.
The Fund may have difficulty
achieving its daily inverse investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for
the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the
Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index. Activities
surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse investment objective. The Fund may take or refrain from taking positions to improve the tax efficiency or to
comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Debt Instrument Risk
—
The value of debt instruments may increase or decrease as a result of the following: market fluctuations; changes in
interest rates; actual or perceived inability of issuers, guarantors, or liquidity providers to make scheduled principal or interest payments; or illiquidity in debt securities markets. Debt instruments are also impacted by political, regulatory,
market and economic developments that impact the market in general and specific economic sectors, industries or segments of the fixed income market. In general, rising interest rates lead to a decline in the value of debt securities and debt
securities with longer durations tend to be more sensitive to interest rate changes usually making their prices more volatile than those of securities with shorter durations. To the extent that interest rates rise, certain underlying obligations may
be paid off substantially slower than originally anticipated and the value of those securities may fall. Declining interest rates may lead to prepayment of obligations and cause reduced rates of return due to reinvestment of interest and principal
payments at lower interest rates.
U.S. Government Securities Risk
—
A security backed by the U.S. Treasury or the full faith and credit of the United States is guaranteed only as to the
timely payment of interest and principal when held to maturity. The market prices for such securities are not guaranteed and will fluctuate. In addition, because many types of U.S. government securities trade actively outside the United States,
their prices may rise and fall as changes in global economic conditions affect the demand for these securities. In addition, U.S. Treasury obligations may differ from other securities in their interest rates, maturities, times of issuance and other
characteristics. Changes in the financial condition or credit rating of the U.S government may cause the value of U.S. Treasury obligations to decline.
Credit Risk
—
The Fund could lose money if the issuer or guarantor of a debt security goes bankrupt or is unable or
Direxion Shares
ETF Trust Prospectus
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20
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unwilling to make
interest payments and/or repay principal. Changes in an issuer’s financial strength or in an issuer’s or debt security’s credit rating also may affect a security’s value and thus have an impact on Fund net asset value and
performance. Generally, the longer the maturity and the lower the credit quality of a security, the more sensitive it is to credit risk.
Interest Rate Risk
—
When interest rates
increase, fixed income securities or
instruments held
by the Fund will generally decline in value. The historically low interest rate environment,
together with recent
modest rate increases, heightens the risks associated with rising interest rates. A rising interest rate environment may adversely impact the liquidity of fixed-income securities and lead to increased volatility of fixed-income markets. Long-term
fixed income securities or instruments will normally have more price volatility because of this risk than short-term fixed income securities or instruments. The risks associated with changing interest rates may have unpredictable effects on the
markets and the Fund’s investments. Fluctuations in interest rates may also affect the liquidity of fixed income securities and instruments held by the Fund.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase
agreement. Money market instruments may be subject
to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the
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Direxion Shares ETF
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view of that exchange, make trading in Shares
inadvisable, such as extraordinary market volatility or other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will
continue to meet the listing requirements of the exchange on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
The performance shown prior to May 2,
2016, reflects the Fund’s previous daily inverse leveraged investment objective, before fees and expenses, of -100% of the NYSE 7-10 Year Treasury Bond Index. After May 2, 2016, the Fund began to seek a daily inverse leveraged investment
objective, before fees and expenses, of -100% of the ICE U.S. Treasury 7-10 Year Bond Index. If the Fund had continued to seek its previous investment objective, the calendar year performance of the Fund would have varied from that shown.
Total Return for the Calendar
Years Ended December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 5.76% for the quarter ended December 31, 2016 and its lowest calendar quarter return was -5.10% for the quarter ended June 30, 2012. The year-to-date return as of
December 31, 2018 was 0.92%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(3/23/2011)
|
Return
Before Taxes
|
0.92%
|
-3.63%
|
-4.26%
|
Return
After Taxes on Distributions
|
0.41%
|
-3.73%
|
-4.33%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
0.55%
|
-2.76%
|
-3.15%
|
ICE
U.S. Treasury 7-10 Year Bond Index
(reflects no deduction for fees, expenses or taxes)
|
0.90%
|
2.97%
|
3.45%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
11.19%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the five-year and since inception periods because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in March 2011
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or
Direxion Shares
ETF Trust Prospectus
|
22
|
investments made through tax-deferred arrangements
may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other ETFs.
Payments to Broker-Dealers and Other
Financial Intermediaries
If you purchase
shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a
conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
Index
Information
Interactive Data
Pricing and Reference Data, LLC
. Neither Rafferty nor the Fund is sponsored, endorsed, sold or promoted by Interactive Data Pricing and Reference Data, LLC or its affiliates (“Vendor”). Vendor makes no
representation or warranty regarding the advisability of investing in securities generally, in the Fund particularly, or the ability of the ICE U.S. Treasury 7-10 Year Bond Index to track general financial market performance.
VENDOR MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE ICE INDEX OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL VENDOR HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE,
INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
23
|
Direxion Shares ETF
Trust Prospectus
|
Direxion
Daily 20+ Year Treasury Bear 1X Shares
Important Information Regarding the
Fund
The Direxion Daily 20+
Year Treasury Bear 1X Shares (“Fund”) seeks
daily inverse
investment results and is very different from most other exchange-traded funds. The pursuit of daily inverse investment
goals means that the return of the Fund for a period longer than a full trading day may have no resemblance to -100% of the return of the ICE U.S. Treasury 20+ Year Bond Index (the “Index”). This means that the return of the Fund for a
period longer than a trading day will be the result of each single day’s compounded return over the period, which will very likely differ from -100% of the return of the Index for that period. As a consequence, longer holding periods and
higher volatility of the Index increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be -100% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse (-1X) investment results, understand the risks associated with the use of shorting and
are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will
lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 100% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.35%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.95%
|
Acquired
Fund Fees and Expenses
(1)
|
0.03%
|
Total
Annual Fund Operating Expenses
|
1.33%
|
Expense
Cap/Reimbursement
(2)
|
-0.85%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.48%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.45% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$49
|
$337
|
$647
|
$1,527
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives were
Direxion Shares
ETF Trust Prospectus
|
24
|
reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short exposure to the Index equal to at least 80% of the Fund’s net
assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is a
market value weighted index that includes publicly issued U.S. Treasury securities that have a remaining maturity of greater than 20 years. Eligible securities must be fixed rate, denominated in U.S. dollars, and have $300 million or more of
outstanding face value, excluding amounts held by the Federal Reserve. Securities excluded from the Index are zero-coupon STRIPS, inflation linked securities, floating rate notes, cash management and Treasury bills, and any government agency debt
issued with or without a government guarantee. The Index is not adjusted for securities that may become eligible or ineligible for inclusion in the Index intra-month. The Index is reconstituted and rebalanced on the last business day of each month.
As of December 31, 2018, the Index was comprised of 40 constituents.
The Fund may gain inverse exposure by
investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate characteristics similar to those of the
Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index. Derivatives are financial instruments that
derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting securities in order to gain inverse
exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the
Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse investment objective. The impact of the Index’s movements during
the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely,
if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms “daily,”
“day,” and “trading day,”
refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -100% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily investment objective and the Fund’s performance for periods greater than a trading day will be the result of each
day's returns compounded over the period, which is very likely to differ from -100% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are leveraged and
that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -100% of the performance of the Index. The effect of compounding becomes more pronounced
as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during shareholder’s
holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s
investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance
will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period.
25
|
Direxion Shares ETF
Trust Prospectus
|
Performance shown in the chart assumes that: (i) no
dividends were paid with respect to the securities included in the Index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected,
the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 6.04% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a significant loss of
value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 63.23% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -100% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -100% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-100%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
60%
|
148.55%
|
134.42%
|
95.28%
|
43.98%
|
-5.83%
|
-50%
|
50%
|
99.13%
|
87.77%
|
56.26%
|
15.23%
|
-24.77%
|
-40%
|
40%
|
66.08%
|
56.57%
|
30.21%
|
-4.08%
|
-37.57%
|
-30%
|
30%
|
42.43%
|
34.25%
|
11.56%
|
-17.98%
|
-46.76%
|
-20%
|
20%
|
24.67%
|
17.47%
|
-2.47%
|
-28.38%
|
-53.72%
|
-10%
|
10%
|
10.83%
|
4.44%
|
-13.28%
|
-36.52%
|
-58.79%
|
0%
|
0%
|
-0.25%
|
-6.04%
|
-22.08%
|
-42.90%
|
-63.23%
|
10%
|
-10%
|
-9.32%
|
-14.64%
|
-29.23%
|
-48.27%
|
-66.67%
|
20%
|
-20%
|
-16.89%
|
-21.75%
|
-35.24%
|
-52.72%
|
-69.67%
|
30%
|
-30%
|
-23.29%
|
-27.84%
|
-40.25%
|
-56.41%
|
-71.94%
|
40%
|
-40%
|
-28.78%
|
-33.01%
|
-44.63%
|
-59.81%
|
-74.32%
|
50%
|
-50%
|
-33.55%
|
-37.52%
|
-48.57%
|
-62.60%
|
-76.19%
|
60%
|
-60%
|
-37.72%
|
-41.51%
|
-51.96%
|
-65.19%
|
-78.12%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 11.77%. The Index’s highest volatility rate for any one calendar year during the five-year period was 15.74% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 6.32%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track
Direxion Shares
ETF Trust Prospectus
|
26
|
the performance of the same, or a substantially
similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an
ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any
financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject
to the agreement with the counterparty. If the
counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline.
Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse investment objective.
The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the
European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments
27
|
Direxion Shares ETF
Trust Prospectus
|
by the assets underlying the Fund’s short
positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse investment
objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of
the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the
Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important
to note that the correlation to these ETFs may vary
from the correlation to the Index due to embedded costs and other factors.
The Fund may have difficulty
achieving its daily inverse investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for
the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the
Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index. Activities
surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse investment objective. The Fund may take or refrain from taking positions to improve the tax efficiency or to
comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Debt Instrument Risk
—
The value of debt instruments may increase or decrease as a result of the following: market fluctuations; changes in
interest rates; actual or perceived inability of issuers, guarantors, or liquidity providers to make scheduled principal or interest payments; or illiquidity in debt securities markets. Debt instruments are also impacted by political, regulatory,
market and economic developments that impact the market in general and specific economic sectors, industries or segments of the fixed income market. In general, rising interest rates lead to a decline in the value of debt securities and debt
securities with longer durations tend to be more sensitive to interest rate changes usually making their prices more volatile than those of securities with shorter durations. To the extent that interest rates rise, certain underlying obligations may
be paid off substantially slower than originally anticipated and the value of those securities may fall. Declining interest rates may lead to prepayment of obligations and cause reduced rates of return due to reinvestment of interest and principal
payments at lower interest rates.
U.S. Government Securities Risk
—
A security backed by the U.S. Treasury or the full faith and credit of the United States is guaranteed only as to the
timely payment of interest and principal when held to maturity. The market prices for such securities are not guaranteed and will fluctuate. In addition, because many types of U.S. government securities trade actively outside the United States,
their prices may rise and fall as changes in global economic conditions affect the demand for these securities. In addition, U.S. Treasury obligations may differ from other securities in their interest rates, maturities, times of issuance and other
characteristics. Changes in the financial condition or credit rating of the U.S government may cause the value of U.S. Treasury obligations to decline.
Credit Risk
—
The Fund could lose money if the issuer or guarantor of a debt security goes bankrupt or is unable or
Direxion Shares
ETF Trust Prospectus
|
28
|
unwilling to make
interest payments and/or repay principal. Changes in an issuer’s financial strength or in an issuer’s or debt security’s credit rating also may affect a security’s value and thus have an impact on Fund net asset value and
performance. Generally, the longer the maturity and the lower the credit quality of a security, the more sensitive it is to credit risk.
Interest Rate Risk
—
When interest rates
increase, fixed income securities or
instruments held
by the Fund will generally decline in value. The historically low interest rate environment,
together with recent
modest rate increases, heightens the risks associated with rising interest rates. A rising interest rate environment may adversely impact the liquidity of fixed-income securities and lead to increased volatility of fixed-income markets. Long-term
fixed income securities or instruments will normally have more price volatility because of this risk than short-term fixed income securities or instruments. The risks associated with changing interest rates may have unpredictable effects on the
markets and the Fund’s investments. Fluctuations in interest rates may also affect the liquidity of fixed income securities and instruments held by the Fund.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase
agreement. Money market instruments may be subject
to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the
29
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Direxion Shares ETF
Trust Prospectus
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view of that exchange, make trading in Shares
inadvisable, such as extraordinary market volatility or other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will
continue to meet the listing requirements of the exchange on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
The performance shown prior to May 2,
2016, reflects the Fund’s previous daily inverse leveraged investment objective, before fees and expenses, of -100% of the NYSE 20 Year Plus Treasury Bond Index. After May 2, 2016, the Fund began to seek a daily inverse leveraged investment
objective, before fees and expenses, of -100% of the ICE U.S. Treasury 20+ Year Bond Index. If the Fund had continued to seek its previous investment objective, the calendar year performance of the Fund would have varied from that shown.
Total Return for the Calendar
Years Ended December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 13.65% for the quarter ended December 31, 2016 and its lowest calendar quarter return was -11.78% for the quarter ended June 30, 2012. The year-to-date return as of
December 31, 2018 was 3.59%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(3/23/2011)
|
Return
Before Taxes
|
3.59%
|
-7.37%
|
-8.16%
|
Return
After Taxes on Distributions
|
3.05%
|
-7.47%
|
-8.23%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
2.13%
|
-5.43%
|
-5.77%
|
ICE
U.S. Treasury 20+ Year Bond Index
(reflects no deduction for fees, expenses or taxes)
|
-1.98%
|
6.32%
|
6.48%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
11.19%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the five-year and since inception periods because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in March 2011
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or
Direxion Shares
ETF Trust Prospectus
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30
|
investments made through tax-deferred arrangements
may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other ETFs.
Payments to Broker-Dealers and Other
Financial Intermediaries
If you purchase
shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a
conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
Index
Information
Interactive Data
Pricing and Reference Data, LLC
. Neither Rafferty nor the Fund is sponsored, endorsed, sold or promoted by Interactive Data Pricing and Reference Data, LLC or its affiliates (“Vendor”). Vendor makes no
representation or warranty regarding the advisability of investing in securities generally, in the Fund particularly, or the ability of the ICE U.S. Treasury 20+ Year Bond Index to track general financial market performance.
VENDOR MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE ICE INDEX OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL VENDOR HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE,
INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
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Direxion Shares ETF
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Direxion
Daily Municipal Bond Taxable Bear 1X Shares
Important Information Regarding the
Fund
The Direxion Daily
Municipal Bond Taxable Bear 1X Shares (“Fund”) seeks
daily inverse
investment results and is very different from most other exchange-traded funds. The pursuit of daily inverse
investment goals means that the return of the Fund for a period longer than a full trading day may have no resemblance to -100% of the return of the S&P National AMT-Free Municipal Bond Index (the “Index”). This means that the return
of the Fund for a period longer than a trading day will be the result of each single day’s compounded return over the period, which will very likely differ from -100% of the return of the Index for that period. As a consequence, longer holding
periods and higher volatility of the Index increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the
return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -100% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse (-1X) investment results, understand the risks associated with the use of shorting and
are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will
lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 100% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.35%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
0.71%
|
Expense
Cap/Reimbursement
(2)
|
-0.11%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.60%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.45% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short exposure to the Index equal to at least 80% of the Fund’s net assets (plus
borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less
than 397
Direxion Shares
ETF Trust Prospectus
|
32
|
days and exhibit high quality credit profiles,
including U.S. government securities and repurchase agreements.
The Index is a
broad, market value-weighted index designed to measure the performance of the tax-exempt, investment-grade U.S. municipal bond market. A bond must meet all of the following criteria on the rebalancing date in order to be a bond eligible for
inclusion in the Index: the bond issuer is a state, local government, or agency such that interest on the bond is exempt from U.S. federal income tax and the federal alternative minimum tax; a bond must be rated by at least one of the three rating
agencies; have a rating of at least BBB- by S&P Global Ratings, Baa3 by Moody’s, or BBB- by Fitch; the bond must be denominated in U.S. Dollars (“USD”); each bond must be a constituent of a deal where the deal’s original
offering amount was at least $100 million USD; as of the next rebalancing date, the bond must have a minimum term to maturity and/or call date greater than or equal to one calendar month; the amount outstanding, or par amount, is used to determine
the weight of the bond in the Index; and the bond must have a minimum Par Amount of $25 million USD. At each monthly rebalancing, no issuer can represent more than 25% of the weight of the Index, and individual issuers that represent 5% of the
Index’s weight cannot account for more than 50% of the Index in aggregate.
As of December 31, 2018, the Index had
11,923 constituents and a weighted average maturity of 13.06 years.
The Fund may gain inverse exposure by
investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate characteristics similar to those of the
Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index. Derivatives are financial instruments that
derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting securities in order to gain inverse
exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the
Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse investment objective. The impact of the Index’s movements during
the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely,
if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms “daily,”
“day,” and “trading day,” refer to the period from the close
of the markets on one trading day to the close of the
markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -100% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily investment objective and the Fund’s performance for periods greater than a trading day will be the result of each
day's returns compounded over the period, which is very likely to differ from -100% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are leveraged and
that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -100% of the performance of the Index. The effect of compounding becomes more pronounced
as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during shareholder’s
holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s
investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance
will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends
33
|
Direxion Shares ETF
Trust Prospectus
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were paid with respect to the securities included in
the Index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those
shown.
As shown in the
chart below, the Fund would be expected to lose 6.04% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a significant loss of
value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 63.23% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -100% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -100% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-100%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
60%
|
148.55%
|
134.42%
|
95.28%
|
43.98%
|
-5.83%
|
-50%
|
50%
|
99.13%
|
87.77%
|
56.26%
|
15.23%
|
-24.77%
|
-40%
|
40%
|
66.08%
|
56.57%
|
30.21%
|
-4.08%
|
-37.57%
|
-30%
|
30%
|
42.43%
|
34.25%
|
11.56%
|
-17.98%
|
-46.76%
|
-20%
|
20%
|
24.67%
|
17.47%
|
-2.47%
|
-28.38%
|
-53.72%
|
-10%
|
10%
|
10.83%
|
4.44%
|
-13.28%
|
-36.52%
|
-58.79%
|
0%
|
0%
|
-0.25%
|
-6.04%
|
-22.08%
|
-42.90%
|
-63.23%
|
10%
|
-10%
|
-9.32%
|
-14.64%
|
-29.23%
|
-48.27%
|
-66.67%
|
20%
|
-20%
|
-16.89%
|
-21.75%
|
-35.24%
|
-52.72%
|
-69.67%
|
30%
|
-30%
|
-23.29%
|
-27.84%
|
-40.25%
|
-56.41%
|
-71.94%
|
40%
|
-40%
|
-28.78%
|
-33.01%
|
-44.63%
|
-59.81%
|
-74.32%
|
50%
|
-50%
|
-33.55%
|
-37.52%
|
-48.57%
|
-62.60%
|
-76.19%
|
60%
|
-60%
|
-37.72%
|
-41.51%
|
-51.96%
|
-65.19%
|
-78.12%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 1.91%. The Index’s highest volatility rate for any one calendar year during the five-year period was 2.46% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 3.68%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track
Direxion Shares
ETF Trust Prospectus
|
34
|
the performance of the same, or a substantially
similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an
ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any
financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject
to the agreement with the counterparty. If the
counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline.
Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse investment objective.
The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the
European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments
35
|
Direxion Shares ETF
Trust Prospectus
|
by the assets underlying the Fund’s short
positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse investment
objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of
the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the
Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important
to note that the correlation to these ETFs may vary
from the correlation to the Index due to embedded costs and other factors.
The Fund may have difficulty
achieving its daily inverse investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for
the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the
Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index. Activities
surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse investment objective. The Fund may take or refrain from taking positions to improve the tax efficiency or to
comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Municipal Securities Risk
—
Municipal issuers are subject to unique factors affecting their ability to pay debt obligations, including the risk
that litigation, legislation or other political events, local business and economic conditions, or bankruptcy could have a significant impact on an issuer’s ability to make payments of principal and/or interest or otherwise affect the value of
such securities. Moreover, an adverse interpretation of the tax status of municipal securities may make such securities decline in value. Municipal securities can be significantly affected by political changes as well as uncertainties in the
municipal market related to government regulation, taxation, legislative changes or the rights of municipal security holders, including in connection with an issuer insolvency. Because many municipal securities are issued to finance certain
projects, such as those related to education, health care, housing, transportation, utilities, and water and sewer, conditions in these sectors can affect the overall municipal market.
Debt Instrument Risk
—
The value of debt instruments may increase or decrease as a result of the following: market fluctuations; changes
in interest rates; actual or perceived inability of issuers, guarantors, or liquidity providers to make scheduled principal or interest payments; or illiquidity in debt securities markets. Debt instruments are also impacted by political, regulatory,
market and economic developments that impact the market in general and specific economic sectors, industries or segments of the fixed income market. In general, rising interest rates lead to a decline in the value of debt securities and debt
securities with longer durations tend to be more sensitive to interest rate changes usually making their prices more volatile than those of securities with shorter durations. To the extent that interest rates rise, certain underlying obligations may
be paid off substantially slower than originally anticipated and the value of those securities may fall. Declining interest rates may lead to prepayment of obligations and cause reduced rates of return
Direxion Shares
ETF Trust Prospectus
|
36
|
due to reinvestment of interest and principal payments
at lower interest rates.
Credit Risk
—
The Fund could lose money if the issuer or guarantor of a debt security goes bankrupt or is unable or unwilling to
make interest payments and/or repay principal. Changes in an issuer’s financial strength or in an issuer’s or debt security’s credit rating also may affect a security’s value and thus have an impact on Fund net asset value
and performance. Generally, the longer the maturity and the lower the credit quality of a security, the more sensitive it is to credit risk.
Interest Rate Risk
—
When interest rates
increase, fixed income securities or
instruments held
by the Fund will generally decline in value. The historically low interest rate environment,
together with recent
modest rate increases, heightens the risks associated with rising interest rates. A rising interest rate environment may adversely impact the liquidity of fixed-income securities and lead to increased volatility of fixed-income markets. Long-term
fixed income securities or instruments will normally have more price volatility because of this risk than short-term fixed income securities or instruments. The risks associated with changing interest rates may have unpredictable effects on the
markets and the Fund’s investments. Fluctuations in interest rates may also affect the liquidity of fixed income securities and instruments held by the Fund.
Prepayment Risk
—
Many types of debt securities are subject to prepayment risk, which is the
risk that the issuer of the security will repay principal prior to the maturity date. As a result, the Fund may have to reinvest its assets in other debt securities that have lower yields. Securities subject to prepayment can offer less potential
for gains during a declining interest rate environment and potential for loss in a rising interest rate environment. In addition, the potential impact of prepayment features on the price of a debt security can be difficult to predict and result in
greater volatility.
Extension Risk
—
During periods of rising interest rates, certain debt obligations may be paid off substantially more slowly than
originally anticipated and the value of those securities may fall sharply, which may adversely impact the value of the Fund’s investments.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index,
and/or may incur
substantial losses and may limit or stop purchases of the Fund.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
37
|
Direxion Shares ETF
Trust Prospectus
|
Authorized Participants Concentration
Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are unable to
process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments that have
lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “S&P National
AMT-Free Municipal Bond Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard & Poor’s
®
and S&P
®
are registered trademarks of
Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones Trademark Holdings LLC
(“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their
respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P National AMT-Free Municipal
Bond Index.
Direxion Shares
ETF Trust Prospectus
|
38
|
Direxion
Daily Total Bond Market Bear 1X Shares
Important Information Regarding the
Fund
The Direxion Daily Total
Bond Market Bear 1X Shares (“Fund”) seeks
daily inverse
investment results and is very different from most other exchange-traded funds. The pursuit of daily inverse investment
goals means that the return of the Fund for a period longer than a full trading day may have no resemblance to -100% of the return of the Bloomberg Barclays US Aggregate Bond Index (the “Index”). This means that the return of the Fund
for a period longer than a trading day will be the result of each single day’s compounded return over the period, which will very likely differ from -100% of the return of the Index for that period. As a consequence, longer holding periods and
higher volatility of the Index increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be -100% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse (-1X) investment results, understand the risks associated with the use of shorting and
are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will
lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 100% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.35%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
1.67%
|
Acquired
Fund Fees and Expenses
(1)
|
0.04%
|
Total
Annual Fund Operating Expenses
|
2.06%
|
Expense
Cap/Reimbursement
(2)
|
-1.57%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.49%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.45% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$50
|
$493
|
$963
|
$2,264
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives were
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short exposure to the Index equal to at least 80% of the Fund’s net
assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index measures
the performance of the investment grade, U.S. Dollar denominated, fixed-rate taxable bond market, and is composed of U.S. Treasury bonds, government-related bonds, investment-grade corporate bonds, mortgage pass-through securities, commercial
mortgage-backed securities and asset-backed securities. All bonds included in the Index must be denominated in U.S. Dollars, have a fixed rate, be non-convertible, be publicly offered in the U.S. and have at least one year remaining until maturity.
The Index is capitalization weighted and rebalanced monthly. As of December 31, 2018, the Index had 10,252 components.
The Fund may gain inverse exposure by
investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate characteristics similar to those of the
Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index. Derivatives are financial instruments that
derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting securities in order to gain inverse
exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the
Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse investment objective. The impact of the Index’s movements during
the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely,
if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms “daily,”
“day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -100% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily investment objective and the Fund’s performance for periods greater than a trading day will be the result of each
day's returns compounded over the period, which is very likely to differ from -100% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are leveraged and
that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -100% of the performance of the Index. The effect of compounding becomes more pronounced
as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during shareholder’s
holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s
investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance
will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending
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ETF Trust Prospectus
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40
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rates (to obtain inverse exposure) of 0%. If Fund
expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 6.04% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a significant loss of
value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 63.23% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -100% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -100% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-100%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
60%
|
148.55%
|
134.42%
|
95.28%
|
43.98%
|
-5.83%
|
-50%
|
50%
|
99.13%
|
87.77%
|
56.26%
|
15.23%
|
-24.77%
|
-40%
|
40%
|
66.08%
|
56.57%
|
30.21%
|
-4.08%
|
-37.57%
|
-30%
|
30%
|
42.43%
|
34.25%
|
11.56%
|
-17.98%
|
-46.76%
|
-20%
|
20%
|
24.67%
|
17.47%
|
-2.47%
|
-28.38%
|
-53.72%
|
-10%
|
10%
|
10.83%
|
4.44%
|
-13.28%
|
-36.52%
|
-58.79%
|
0%
|
0%
|
-0.25%
|
-6.04%
|
-22.08%
|
-42.90%
|
-63.23%
|
10%
|
-10%
|
-9.32%
|
-14.64%
|
-29.23%
|
-48.27%
|
-66.67%
|
20%
|
-20%
|
-16.89%
|
-21.75%
|
-35.24%
|
-52.72%
|
-69.67%
|
30%
|
-30%
|
-23.29%
|
-27.84%
|
-40.25%
|
-56.41%
|
-71.94%
|
40%
|
-40%
|
-28.78%
|
-33.01%
|
-44.63%
|
-59.81%
|
-74.32%
|
50%
|
-50%
|
-33.55%
|
-37.52%
|
-48.57%
|
-62.60%
|
-76.19%
|
60%
|
-60%
|
-37.72%
|
-41.51%
|
-51.96%
|
-65.19%
|
-78.12%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 3.08%. The Index’s highest volatility rate for any one calendar year during the five-year period was 3.79% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 2.52%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments
of the market, which may affect the Fund’s
value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide, which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees
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and other costs borne by the ETF and other factors.
Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse correlation with the Index as it would if the Fund used
swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive
the full amount it is entitled to receive and the
value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such collateral, the Fund may not
be able to achieve its inverse investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies are stayed or eliminated under
special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
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ETF Trust Prospectus
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42
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Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse investment
objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of
the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the
Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from
the correlation to the Index due to embedded costs and
other factors.
The Fund may
have difficulty achieving its daily inverse investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in
the markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index.
In addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Asset-Backed Securities Risk
- Payment of interest and repayment of principal may be impacted by the cash flows generated by the assets backing these securities. The value of the Fund’s asset-backed securities also may be
affected by changes in interest rates, the availability of information concerning the interest in, and structure of, the pools of purchase contracts, financing leases or sales agreements that are represented by these securities, the creditworthiness
of the servicing agent for the pool, the originator of the loans or receivables, or the entities that provide any supporting letters of credit, surety bonds, or other credit enhancements.
Mortgage-Backed Securities Risk
—
The Fund may invest in and/or have exposure to
mortgage-backed securities (“MBS”), some of which may not be backed by the full faith and credit of the U.S. government. MBS are subject to prepayment or call risk and extension risk. Because of these risks, MBS react differently than
other bonds to changes in interest rates. Small movements in interest rates (both increases and decreases) may quickly and significantly reduce the value of certain MBS. Default or bankruptcy of a counterparty to a TBA transaction would expose the
Fund to possible loss.
Debt Instrument Risk
—
The value of debt instruments may increase or decrease as a result of the following: market fluctuations; changes
in interest rates; actual or perceived inability of issuers, guarantors, or liquidity providers to make scheduled principal or interest payments; or illiquidity in debt securities markets. Debt instruments are also impacted by political, regulatory,
market and economic developments that impact the market in general and specific economic sectors, industries or segments of the fixed income market. In general, rising interest rates lead to a decline in the value of debt securities and debt
securities with longer durations tend to be more sensitive to interest rate changes usually making their prices more volatile than those of securities with shorter durations. To the extent that interest rates rise,
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certain underlying obligations may be paid off
substantially slower than originally anticipated and the value of those securities may fall. Declining interest rates may lead to prepayment of obligations and cause reduced rates of return due to reinvestment of interest and principal payments at
lower interest rates.
U.S. Government Securities Risk
—
A security backed by the U.S. Treasury or the full faith and credit of the United States is guaranteed only as to the
timely payment of interest and principal when held to maturity. The market prices for such securities are not guaranteed and will fluctuate. In addition, because many types of U.S. government securities trade actively outside the United States,
their prices may rise and fall as changes in global economic conditions affect the demand for these securities. In addition, U.S. Treasury obligations may differ from other securities in their interest rates, maturities, times of issuance and other
characteristics. Changes in the financial condition or credit rating of the U.S government may cause the value of U.S. Treasury obligations to decline.
Credit Risk
—
The Fund could lose money if the issuer or guarantor of a debt security goes bankrupt or is unable or unwilling to
make interest payments and/or repay principal. Changes in an issuer’s financial strength or in an issuer’s or debt security’s credit rating also may affect a security’s value and thus have an impact on Fund net asset value
and performance. Generally, the longer the maturity and the lower the credit quality of a security, the more sensitive it is to credit risk.
Interest Rate Risk
—
When interest rates
increase, fixed income securities or
instruments held
by the Fund will generally decline in value. The historically low interest rate environment,
together with recent
modest rate increases, heightens the risks associated with rising interest rates. A rising interest rate environment may adversely impact the liquidity of fixed-income securities and lead to increased volatility of fixed-income markets. Long-term
fixed income securities or instruments will normally have more price volatility because of this risk than short-term fixed income securities or instruments. The risks associated with changing interest rates may have unpredictable effects on the
markets and the Fund’s investments. Fluctuations in interest rates may also affect the liquidity of fixed income securities and instruments held by the Fund.
Prepayment Risk
—
Many types of debt securities are subject to prepayment risk, which is the
risk that the issuer of the security will repay principal prior to the maturity date. As a result, the Fund may have to reinvest its assets in other debt securities that have lower yields. Securities subject to prepayment can offer less potential
for gains during a declining interest rate environment and potential for loss in a rising interest rate environment. In addition, the potential impact of prepayment features on the price of a debt security can be difficult to predict and result in
greater volatility.
Extension Risk
—
During periods of rising interest rates, certain debt obligations may be paid off substantially more slowly than
originally anticipated and the value of those securities may fall sharply, which may adversely impact the value of the Fund’s investments.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Direxion Shares
ETF Trust Prospectus
|
44
|
Authorized Participants Concentration
Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are unable to
process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments that have
lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available
on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 3.16% for the quarter ended December 31, 2016 and its lowest calendar quarter return was -3.13% for the quarter ended March 31, 2016. The year-to-date return as of
December 31, 2018 was 2.80%.
Average
Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(3/23/2011)
|
Return
Before Taxes
|
2.80%
|
-2.18%
|
-2.81%
|
Return
After Taxes on Distributions
|
2.27%
|
-2.28%
|
-2.88%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
1.66%
|
-1.68%
|
-2.12%
|
Bloomberg
Barclays US Aggregate Bond Index
(reflects no deduction for fees, expenses or taxes)
|
0.01%
|
2.52%
|
2.78%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
11.19%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the five-year and since inception periods because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
45
|
Direxion Shares ETF
Trust Prospectus
|
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in March 2011
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Direxion Shares
ETF Trust Prospectus
|
46
|
Direxion
Daily CSI 300 China A Share Bear 1X Shares
Important Information Regarding the
Fund
The Direxion Daily CSI
300 China A Share Bear 1X Shares (“Fund”) seeks
daily inverse
investment results and is very different from most other exchange-traded funds. The pursuit of daily inverse
investment goals means that the return of the Fund for a period longer than a full trading day may have no resemblance to -100% of the return of the CSI 300 Index (the “Index”). This means that the return of the Fund for a period longer
than a trading day will be the result of each single day’s compounded return over the period, which will very likely differ from -100% of the return of the Index for that period. As a consequence, longer holding periods and higher volatility
of the Index increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the
return for investors that invest for periods less than a trading day will not be -100% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse (-1X) investment results, understand the risks associated with the use of shorting and
are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will
lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 100% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.60%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.16%
|
Acquired
Fund Fees and Expenses
(1)
|
0.05%
|
Total
Annual Fund Operating Expenses
|
0.81%
|
Expense
Cap/Reimbursement
(2,3)
|
0.04%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.85%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.80% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
(3)
|
For the fiscal year ended
October 31, 2018, as a result of a portion of the Adviser's management fee and/or a previous reimbursement of Other Expenses, the Adviser recouped fees in the amount of 0.04%.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$87
|
$263
|
$454
|
$1,005
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate
47
|
Direxion Shares ETF
Trust Prospectus
|
is calculated without regard to cash instruments or
derivative transactions. If the Fund's extensive use of derivatives were reflected, the Fund's portfolio turnover rate would be significantly higher.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short exposure to the Index equal to at least 80% of the Fund’s net assets (plus
borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less
than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is a
modified free-float market capitalization weighted index comprised of the largest and most liquid stocks in the Chinese A-share market. Index constituent stocks must have been listed for more than three months (unless the stock’s average daily
A-share market capitalization since its initial listing ranks among the top 30 of all A-shares) and must not be experiencing obvious abnormal fluctuations or market manipulations. As of December 31, 2018, the Index included 300 securities with an
average market capitalization of $3.4 billion, total market capitalizations ranging from $347.6 million to $61.2 billion and were concentrated in the financials sector.
A-shares are issued by companies
incorporated in the People’s Republic of China (“China” or the “PRC”). A-shares are traded in renminbi (“RMB”) on the Shenzhen Stock Exchange or Shanghai Stock Exchange (“SSE”). The A-share
market in China is made available to domestic PRC investors and certain foreign investors, including those foreign investors that have been approved as Renminbi Qualified Foreign Institutional Investors (“RQFII”) or as Qualified Foreign
Institutional Investors (“QFII”). A RQFII or QFII license may be obtained by submitting an application to the China Securities Regulatory Commission (“CSRC”). After obtaining a RQFII or QFII license, the RQFII or QFII also
applies to China’s State Administration of Foreign Exchange (“SAFE”) for a specific aggregate dollar amount investment quota in which the RQFII or QFII can invest in A-shares. Additionally, an investment in eligible A-shares listed
and traded on the SSE is also permitted through the Shanghai-Hong Kong Stock Connect program (“Stock Connect”), a securities trading and clearing program established by Hong Kong Securities Clearing Company Limited, the SSE and China
Securities Depository and Clearing Corporation Limited.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
Because the Fund does not satisfy the
criteria to qualify as a RQFII or QFII itself and does not intend to trade through
Stock Connect, the Fund expects to invest a majority
of its assets in swaps that provide short exposure to funds that seek to replicate the performance of the Index. The Fund may also utilize futures contracts and other types of derivative instruments or financial instruments that seek to replicate
the performance of the Index to obtain the inverse exposure necessary to achieve its investment objective. At times, however, the Fund will utilize other derivatives and investment strategies which may include gaining inverse exposure to only a
representative sample of the securities in the Index that have aggregate characteristics similar to those of the Index. The Fund may do this by utilizing swaps that provide short exposure on ETFs that track a similar index or futures contracts on a
similar index.
Derivatives are
financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting securities in
order to gain inverse exposure to the Index or its components.
The Fund seeks to
remain fully invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movements or the increase or decrease of the value of the securities in
the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the
day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if
the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,”
“day” and “trading day” refer to the period from the close of the U.S. markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -100% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Direxion Shares
ETF Trust Prospectus
|
48
|
Effects of
Compounding and Market Volatility Risk
-
The Fund has a daily investment objective and the Fund’s performance for periods greater than a trading day
will be the result of each day's returns compounded over the period, which is very likely to differ from -100% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on
funds that are leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -100% of the performance of the Index. The effect of
compounding becomes more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the
Index during shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss
because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due
to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 6.04% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a significant loss of
value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 63.23% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -100% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -100% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below
as a result of any of the factors discussed above or in
“Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-100%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
60%
|
148.55%
|
134.42%
|
95.28%
|
43.98%
|
-5.83%
|
-50%
|
50%
|
99.13%
|
87.77%
|
56.26%
|
15.23%
|
-24.77%
|
-40%
|
40%
|
66.08%
|
56.57%
|
30.21%
|
-4.08%
|
-37.57%
|
-30%
|
30%
|
42.43%
|
34.25%
|
11.56%
|
-17.98%
|
-46.76%
|
-20%
|
20%
|
24.67%
|
17.47%
|
-2.47%
|
-28.38%
|
-53.72%
|
-10%
|
10%
|
10.83%
|
4.44%
|
-13.28%
|
-36.52%
|
-58.79%
|
0%
|
0%
|
-0.25%
|
-6.04%
|
-22.08%
|
-42.90%
|
-63.23%
|
10%
|
-10%
|
-9.32%
|
-14.64%
|
-29.23%
|
-48.27%
|
-66.67%
|
20%
|
-20%
|
-16.89%
|
-21.75%
|
-35.24%
|
-52.72%
|
-69.67%
|
30%
|
-30%
|
-23.29%
|
-27.84%
|
-40.25%
|
-56.41%
|
-71.94%
|
40%
|
-40%
|
-28.78%
|
-33.01%
|
-44.63%
|
-59.81%
|
-74.32%
|
50%
|
-50%
|
-33.55%
|
-37.52%
|
-48.57%
|
-62.60%
|
-76.19%
|
60%
|
-60%
|
-37.72%
|
-41.51%
|
-51.96%
|
-65.19%
|
-78.12%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 25.11%. The Index’s highest volatility rate for any one calendar year during the five-year period was 40.24% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 4.67%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable
49
|
Direxion Shares ETF
Trust Prospectus
|
time or at a price that is lower than
Rafferty’s judgment of the security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
There can be no assurance that a security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or
|
the return on or change in value of a particular
dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse investment objective.
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Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse investment
objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of
the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the
Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily inverse investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for
the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the
Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index. Activities
surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse investment objective. The Fund may take or refrain from taking positions to improve the tax efficiency or to
comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
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Direxion Shares ETF
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China Investing Risk
- Because of the inverse nature of the Fund’s intended returns, the occurrence of some of these events discussed below may be favorable to the Fund’s returns, however, non-occurrence of
these events below could have no effect on the Fund’s returns, or could cause the value of the Fund’s assets to decrease. Although the Fund will not invest directly in A-shares, it is subject, indirectly, to certain risks applicable to
investing in A-shares. Investing in securities of Chinese companies, including investments that provide exposure to A-shares, involves certain risks and considerations not typically associated with investing in securities of U.S. issuers, including,
among others (i) the small size of the market for Chinese securities and low trading volume, resulting in a lack of liquidity and in price volatility; (ii) currency devaluations and other currency exchange rate fluctuations or blockages; (iii) the
nature and extent of intervention by the PRC government in the Chinese securities markets, whether such intervention will continue and the impact of such intervention or its discontinuation; (iv) the risk of nationalization or expropriation of
assets; (v) the risk that the PRC government may decide not to continue to support economic reform programs; (vi) limitation on the use of brokers; (vii) higher rates of inflation; (viii) greater political, economic and social uncertainty; (ix)
market volatility caused by potential regional or territorial conflicts or natural disasters and; (x) the risk of increased trade tariffs, embargoes and other trade limitations. These factors can directly affect A-shares, and may indirectly affect
investments that derive their value from A-shares.
The economy of China differs, often
unfavorably, from the U.S. economy in such respects as structure, general development, government involvement, wealth distribution, rate of inflation, growth rate, interest rates, allocation of resources and capital reinvestment and others. The PRC
central government has historically exercised substantial control over virtually every sector of the Chinese economy through administrative regulation and/or state ownership and actions of the PRC central and local government authorities continue to
have a substantial effect on economic conditions in China. In addition, the PRC government has from time to time taken actions that influence the prices at which certain goods may be sold; encouraged companies to invest or concentrate in particular
industries; induced mergers between companies in certain industries and induced private companies to publicly offer their securities to increase or continue the rate of economic growth; controlled the rate of inflation or otherwise regulated
economic expansion. It may do so in the future as well, potentially having a significant adverse effect on economic conditions in China.
The Chinese securities markets are
emerging markets with limited operating history characterized by relatively low trading volume, resulting in substantially less liquidity and greater price volatility. Liquidity risks may be more pronounced for the A-share market than for Chinese
securities markets in general because the A-share market is subject to greater government restrictions and control, including trading suspensions. Price fluctuations of A-shares are currently limited to either 5% or 10% per trading day. In addition,
there is less regulation and monitoring of Chinese securities markets and the activities of investors, brokers and other
participants than in the United States. Accounting,
auditing and financial reporting standards in China are different from U.S. standards and, therefore, disclosure of certain material information may not be made. In addition, less information may be available than would be the case if investments
were restricted to securities of U.S. issuers. There is also generally less governmental regulation of the securities industry in China, and less enforcement of regulatory provisions relating thereto, than in the United States. Additionally, it may
be more difficult to obtain a judgment in a court outside of the United States.
The PRC government strictly regulates
the payment of foreign currency denominated obligations and sets monetary policy. In addition, the Chinese economy is export-driven and highly reliant on trade. Adverse changes to the economic conditions of its primary trading partners, such as the
United States, Japan and South Korea, would adversely impact the Chinese economy. An economic downturn in China would materially impact the Fund’s performance.
Emerging markets such as China can
experience high rates of inflation, deflation and currency devaluation. The value of the RMB may be subject to a high degree of fluctuation due to, among other things, changes in interest rates, the effects of monetary policies issued by the PRC,
the United States, foreign governments, central banks or supranational entities, the imposition of currency controls of other national or global political or economic developments. The Fund’s exposure to the RMB and changes in value of the RMB
versus the U.S. Dollar may result in reduced returns of the Fund and result in volatility. The RMB is currently not a freely convertible currency. The PRC government places strict regulations on RMB and sets the value of RMB to levels dependent on
the value of the U.S. Dollar, but the PRC government has been under pressure to manage the currency in a less restrictive fashion so that it is less correlated to the U.S. Dollar. The PRC government’s imposition of restrictions on the
repatriation of RMB out of mainland China may limit the depth of the offshore RMB market and may reduce the liquidity of Chinese investments. There may not be sufficient amounts of RMB for funds that invest directly in A-shares because there is
limited availability of the RMB currency. As a result, funds may not be able to be fully invested in A-shares.
Special Risk
Considerations Relating to RQFII and QFII Investments Risk
- The Fund’s ability to achieve its investment objective is dependent on the ability of other ETFs and counterparties to obtain
their QFII or RQFII quota. The Fund also cannot predict what would occur if general QFII or RQFII quotas were reduced or eliminated. Either circumstance would likely have a material adverse impact on the Fund through its indirect investments and
would likely adversely affect the willingness and ability of potential swap counterparties to engage in swaps with the Fund that are linked to the performance of A-shares. Additionally, other ETFs may limit or suspend creation unit activity and
shares could trade at a significant premium or discount to its net asset value and therefore impact the Fund’s ability to obtain exposure to the Index and the Fund’s ability to achieve its investment objective or obtain a high
correlation to the Index.
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ETF Trust Prospectus
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Presently, there
are a limited number of firms and potential counterparties that have RQFII or QFII status or are willing and able to enter into swap transactions linked to the performance of A-shares. If the Fund is unable to obtain sufficient inverse exposure to
the Index due to the limited availability of necessary investments or financial instruments, the Fund could, among other things, as a defensive measure, limit or suspend creation units until the Adviser determines that the requisite exposure to the
Index is obtainable. During the period that creation units are suspended, the Fund could trade at a significant premium or discount to its net asset value and could experience substantial redemptions. Alternatively, the Fund could change its
investment objective, by example, seeking inverse exposure to track an alternative index focused on Chinese-related stocks other than A-shares or other appropriate investments, or decide to liquidate the Fund.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues
that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging
markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital
controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets
in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement procedures in
emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency. Emerging markets
may develop unevenly and may never fully develop.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets.
Profitability of these companies is largely
dependent on the availability and cost of capital and can fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to
substantial government regulation and intervention, which may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change
frequently and may have significant adverse consequences for financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on
any individual financial company or of the financials sector as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
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Direxion Shares ETF
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Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience
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ETF Trust Prospectus
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54
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the same
investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers,
Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the
Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
Total Return
for the Calendar Years Ended December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 16.13% for the quarter ended June 30, 2018 and its lowest calendar quarter return was -8.39% for the quarter ended June 30, 2017. The year-to-date return as of
December 31, 2018 was 28.77%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(6/17/2015)
|
Return
Before Taxes
|
28.77%
|
0.09%
|
Return
After Taxes on Distributions
|
28.35%
|
0.00%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
17.00%
|
0.02%
|
CSI
300 Index
(reflects no deduction for fees, expenses or taxes)
|
-27.64%
|
-14.41%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
7.37%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax
returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in June 2015
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
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Payments to Broker-Dealers and Other
Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may
create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
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Direxion
Daily MSCI China A Bear 1X Shares
Important Information Regarding the
Fund
The Direxion Daily MSCI
China A Bear 1X Shares (“Fund”) seeks
daily inverse
investment results and is very different from most other exchange-traded funds. The pursuit of daily inverse investment goals
means that the return of the Fund for a period longer than a full trading day may have no resemblance to -100% of the return of the MSCI China A International Index (the “Index”). This means that the return of the Fund for a period
longer than a trading day will be the result of each single day’s compounded return over the period, which will very likely differ from -100% of the return of the Index for that period. As a consequence, longer holding periods and higher
volatility of the Index increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index.
Further, the return for investors that invest for periods less than a trading day will not be -100% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse (-1X) investment results, understand the risks associated with the use of shorting and
are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will
lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 100% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.60%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
0.96%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.95%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.80% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short exposure to the Index equal to at least 80% of the Fund’s net assets (plus
borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less
than 397
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days and exhibit high quality credit profiles,
including U.S. government securities and repurchase agreements.
The Index is a free-float adjusted
market capitalization weighted index and represents securities of large-capitalization and mid-capitalization Chinese issuers. Free-float market capitalization is calculated by multiplying a security’s price by the number of shares available
in the market, rather than the total number of shares outstanding.
As of December 31,
2018, the Index included 407 constituents which had an average market capitalization of $2 billion, total market capitalizations ranging from $426.2 million to $32.4 billion and were concentrated in the financials sector.
A-shares are issued by companies
incorporated in the People’s Republic of China (“China” or the “PRC”). A-shares are traded in renminbi (“RMB”) on the Shenzhen Stock Exchange or Shanghai Stock Exchange (“SSE”). The A-share
market in China is made available only to domestic PRC investors and certain foreign investors, including those foreign investors that have been approved as Renminbi Qualified Foreign Institutional Investors (“RQFII”) or as Qualified
Foreign Institutional Investors (“QFII”). Additionally, an investment in eligible A-shares is also permitted through the Shenzhen-Hong Kong and Shanghai-Hong Kong Stock Connect programs (“Stock Connect”), securities trading
and clearing programs. A RQFII or QFII license may be obtained by submitting an application to the China Securities Regulatory Commission (“CSRC”). After obtaining a RQFII or QFII license, the RQFII or QFII also applies to China’s
State Administration of Foreign Exchange (“SAFE”) for a specific aggregate dollar amount investment quota in which the RQFII or QFII can invest in A-shares.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
Because the Fund does not satisfy the
criteria to qualify as a RQFII or QFII itself and does not intend to trade through Stock Connect, the Fund expects to invest a majority of its assets in swaps that provide short exposure to funds that seek to replicate the performance of the Index.
The Fund may also utilize futures contracts and other types of derivative instruments or financial instruments that seek to replicate the performance of the Index to obtain the inverse exposure necessary to achieve its investment objective. At
times, however, the Fund will utilize other derivatives and investment strategies which may include gaining inverse exposure to only a representative sample of the securities in the Index that have aggregate characteristics similar to those of the
Index. The Fund may do this by utilizing swaps that provide short exposure on ETFs that track a similar index or futures contracts on a similar index.
Derivatives are financial
instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse exposure to the
Index or its components.
The Fund seeks to
remain fully invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movements or the increase or decrease of the value of the securities in
the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the
day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if
the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,”
“day” and “trading day” refer to the period from the close of the U.S. markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -100% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily investment objective and the Fund’s performance for periods greater than a trading day will be the result of each
day's returns compounded over the period, which is very likely to differ from -100% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are leveraged and
that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -100% of the performance of the Index. The effect of compounding becomes more pronounced
as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during shareholder’s
holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead
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58
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to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 6.04% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a significant loss of
value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 63.23% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -100% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -100% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-100%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
60%
|
148.55%
|
134.42%
|
95.28%
|
43.98%
|
-5.83%
|
-50%
|
50%
|
99.13%
|
87.77%
|
56.26%
|
15.23%
|
-24.77%
|
-40%
|
40%
|
66.08%
|
56.57%
|
30.21%
|
-4.08%
|
-37.57%
|
-30%
|
30%
|
42.43%
|
34.25%
|
11.56%
|
-17.98%
|
-46.76%
|
-20%
|
20%
|
24.67%
|
17.47%
|
-2.47%
|
-28.38%
|
-53.72%
|
-10%
|
10%
|
10.83%
|
4.44%
|
-13.28%
|
-36.52%
|
-58.79%
|
0%
|
0%
|
-0.25%
|
-6.04%
|
-22.08%
|
-42.90%
|
-63.23%
|
10%
|
-10%
|
-9.32%
|
-14.64%
|
-29.23%
|
-48.27%
|
-66.67%
|
20%
|
-20%
|
-16.89%
|
-21.75%
|
-35.24%
|
-52.72%
|
-69.67%
|
30%
|
-30%
|
-23.29%
|
-27.84%
|
-40.25%
|
-56.41%
|
-71.94%
|
40%
|
-40%
|
-28.78%
|
-33.01%
|
-44.63%
|
-59.81%
|
-74.32%
|
50%
|
-50%
|
-33.55%
|
-37.52%
|
-48.57%
|
-62.60%
|
-76.19%
|
60%
|
-60%
|
-37.72%
|
-41.51%
|
-51.96%
|
-65.19%
|
-78.12%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 24.50%. The Index’s highest volatility rate for any one calendar year during the five-year period was 39.32% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 1.31%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those
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associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the
|
|
securities held by the
Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction. Exchanges may also limit the number of positions that can be held or
controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse investment strategy. Futures markets are highly volatile and the use of futures may increase the Fund’s volatility. The value of an
investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security
that
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it has sold short and returning that security to the
entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse investment
objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of
the Fund being materially over- or under-exposed to the
Index increases on days when the Index is volatile
near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily inverse investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for
the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the
Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index. Activities
surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse investment objective. The Fund may take or refrain from taking positions to improve the tax efficiency or to
comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
China Investing Risk
- Because of the inverse nature of the Fund’s intended returns, the occurrence of some of these events discussed below may be favorable to the Fund’s returns, however, non-occurrence of
these events below could have no effect on the Fund’s returns, or could cause the value of the Fund’s assets to decrease. Although the Fund will not invest directly in A-shares, it is subject, indirectly, to certain risks applicable to
investing in A-shares. Investing in securities of Chinese companies, including investments that provide exposure to A-shares, involves certain risks and considerations not typically associated with investing in securities of U.S. issuers, including,
among others (i) the small size of the market for Chinese securities and low trading volume, resulting in a lack of liquidity and in price volatility; (ii) currency devaluations and other currency exchange rate fluctuations or blockages; (iii) the
nature and extent of intervention by the PRC government in the Chinese securities
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markets, whether such intervention will continue and
the impact of such intervention or its discontinuation; (iv) the risk of nationalization or expropriation of assets; (v) the risk that the PRC government may decide not to continue to support economic reform programs; (vi) limitation on the use of
brokers; (vii) higher rates of inflation; (viii) greater political, economic and social uncertainty; (ix) market volatility caused by potential regional or territorial conflicts or natural disasters and; (x) the risk of increased trade tariffs,
embargoes and other trade limitations. These factors can directly affect A-shares, and may indirectly affect investments that derive their value from A-shares.
The economy of China differs, often
unfavorably, from the U.S. economy in such respects as structure, general development, government involvement, wealth distribution, rate of inflation, growth rate, interest rates, allocation of resources and capital reinvestment and others. The PRC
central government has historically exercised substantial control over virtually every sector of the Chinese economy through administrative regulation and/or state ownership and actions of the PRC central and local government authorities continue to
have a substantial effect on economic conditions in China. In addition, the PRC government has from time to time taken actions that influence the prices at which certain goods may be sold; encouraged companies to invest or concentrate in particular
industries; induced mergers between companies in certain industries and induced private companies to publicly offer their securities to increase or continue the rate of economic growth; controlled the rate of inflation or otherwise regulated
economic expansion. It may do so in the future as well, potentially having a significant adverse effect on economic conditions in China.
The Chinese securities markets are
emerging markets with limited operating history characterized by relatively low trading volume, resulting in substantially less liquidity and greater price volatility. Liquidity risks may be more pronounced for the A-share market than for Chinese
securities markets in general because the A-share market is subject to greater government restrictions and control, including trading suspensions. Price fluctuations of A-shares are currently limited to either 5% or 10% per trading day. In addition,
there is less regulation and monitoring of Chinese securities markets and the activities of investors, brokers and other participants than in the United States. Accounting, auditing and financial reporting standards in China are different from U.S.
standards and, therefore, disclosure of certain material information may not be made. In addition, less information may be available than would be the case if investments were restricted to securities of U.S. issuers. There is also generally less
governmental regulation of the securities industry in China, and less enforcement of regulatory provisions relating thereto, than in the United States. Additionally, it may be more difficult to obtain a judgment in a court outside of the United
States.
The PRC government
strictly regulates the payment of foreign currency denominated obligations and sets monetary policy. In addition, the Chinese economy is export-driven and highly reliant on trade. Adverse changes to the economic conditions of its primary trading
partners, such as the United States, Japan and South Korea, would adversely impact the Chinese
economy. An economic downturn in China would materially
impact the Fund’s performance.
Emerging markets such as China can
experience high rates of inflation, deflation and currency devaluation. The value of the RMB may be subject to a high degree of fluctuation due to, among other things, changes in interest rates, the effects of monetary policies issued by the PRC,
the United States, foreign governments, central banks or supranational entities, the imposition of currency controls of other national or global political or economic developments. The Fund’s exposure to the RMB and changes in value of the RMB
versus the U.S. Dollar may result in reduced returns of the Fund and result in volatility. The RMB is currently not a freely convertible currency. The PRC government places strict regulations on RMB and sets the value of RMB to levels dependent on
the value of the U.S. Dollar, but the PRC government has been under pressure to manage the currency in a less restrictive fashion so that it is less correlated to the U.S. Dollar. The PRC government’s imposition of restrictions on the
repatriation of RMB out of mainland China may limit the depth of the offshore RMB market and may reduce the liquidity of Chinese investments. There may not be sufficient amounts of RMB for funds that invest directly in A-shares because there is
limited availability of the RMB currency. As a result, funds may not be able to be fully invested in A-shares.
Special Risk
Considerations Relating to RQFII and QFII Investments Risk
- The Fund’s ability to achieve its investment objective is dependent on the ability of other ETFs and counterparties to obtain
their QFII or RQFII quota. The Fund also cannot predict what would occur if general QFII or RQFII quotas were reduced or eliminated. Either circumstance would likely have a material adverse impact on the Fund through its indirect investments and
would likely adversely affect the willingness and ability of potential swap counterparties to engage in swaps with the Fund that are linked to the performance of A-shares. Additionally, other ETFs may limit or suspend creation unit activity and
shares could trade at a significant premium or discount to its net asset value and therefore impact the Fund’s ability to obtain exposure to the Index and the Fund’s ability to achieve its investment objective or obtain a high
correlation to the Index.
Presently, there are a limited number
of firms and potential counterparties that have RQFII or QFII status or are willing and able to enter into swap transactions linked to the performance of A-shares. If the Fund is unable to obtain sufficient inverse exposure to the Index due to the
limited availability of necessary investments or financial instruments, the Fund could, among other things, as a defensive measure, limit or suspend creation units until the Adviser determines that the requisite exposure to the Index is obtainable.
During the period that creation units are suspended, the Fund could trade at a significant premium or discount to its net asset value and could experience substantial redemptions. Alternatively, the Fund could change its investment objective, by
example, seeking inverse exposure to track an alternative index focused on Chinese-related stocks other than A-shares or other appropriate investments, or decide to liquidate the Fund.
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Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues
that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging
markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital
controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets
in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement procedures in
emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency. Emerging markets
may develop unevenly and may never fully develop.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments
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that may be traded in markets that are closed when
the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in
premiums or discounts to net asset value that may be greater than those experienced by other ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock
Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience
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ETF Trust Prospectus
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the same
investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers,
Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the
Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase and Sale of Fund Shares
The Fund’s shares are not
individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a
national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset
value (discount).
Tax
Information
The Fund intends
to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred
arrangement, such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most
other ETFs.
Payments to
Broker-Dealers and Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily CSI China Internet Index Bear 1X Shares
Important Information Regarding the
Fund
The Direxion Daily CSI
China Internet Index Bear 1X Shares (“Fund”) seeks
daily inverse
investment results and is very different from most other exchange-traded funds. The pursuit of daily inverse
investment goals means that the return of the Fund for a period longer than a full trading day may have no resemblance to -100% of the return of the CSI Overseas China Internet Index (the “Index”). This means that the return of the Fund
for a period longer than a trading day will be the result of each single day’s compounded return over the period, which will very likely differ from -100% of the return of the Index for that period. As a consequence, longer holding periods and
higher volatility of the Index increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be -100% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse (-1X) investment results, understand the risks associated with the use of shorting and
are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will
lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 100% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.60%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
0.96%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.95%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.80% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short exposure to the Index equal to at least 80% of the Fund’s net assets (plus
borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less
than 397
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66
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days and exhibit high quality credit profiles,
including U.S. government securities and repurchase agreements.
The Index is provided by China
Securities Index Co., LTD (the “Index Provider”). The Index is designed to measure the performance of the investable universe of publicly traded China-based companies whose primary business or businesses are in the Internet and
Internet-related sectors, as defined by the index sponsor, China Securities Index Co., Ltd. (‘‘CSI’’). A China-based company is a company that meets at least one of the following criteria: 1) the company is incorporated in
mainland China; 2) its headquarters are in mainland China; or 3) at least 50% of the revenue from goods produced or sold, or services performed in mainland China. The Index Provider then removes securities that during the past year had a daily
average trading value of less than $500,000 or a daily average market capitalization of less than $500 million. China internet companies include, but are not limited to, companies that develop and market internet software and/or provide internet
services; manufacture home entertainment software and education software for home use; provide retail or commercial services primarily through the internet; and develop and market mobile internet software and/or provide mobile internet services.
Constituents of the Index are ranked by market capitalization in US Dollars and then weighted so that no constituent weighting exceeds 10%. The Index is rebalanced semi-annually.
As of December 31,
2018, the Index consisted of 51 constituents with an average market capitalization of approximately $20.9 billion and market capitalizations ranging from $228.5 million to $381.7 billion and were concentrated in the internet companies industry,
which is included in the information technology and consumer discretionary sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate characteristics
similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index. Derivatives are
financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting securities in
order to gain inverse exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the
Index. At the close of the markets each trading day, Rafferty positions the Fund’s
portfolio so that its exposure to the Index is
consistent with the Fund’s inverse investment objective. The impact of the Index’s movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day,
net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced.
This re-positioning strategy may result in high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on
the next trading day.
Because of
daily rebalancing and the compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from
-100% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that
the Fund will lose money over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily investment objective and the Fund’s performance for periods greater than a trading day will be the result of each
day's returns compounded over the period, which is very likely to differ from -100% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are leveraged and
that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -100% of the performance of the Index. The effect of compounding becomes more pronounced
as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during shareholder’s
holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s
investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance
will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance
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for periods greater than one single day can be
estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of time; d) financing rates associated with inverse exposure; e) other Fund expenses; and f) dividends or interest paid with
respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance
shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse exposure) of 0%. If Fund expenses and/or actual
borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 6.04% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a significant loss of
value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 63.23% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -100% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -100% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-100%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
60%
|
148.55%
|
134.42%
|
95.28%
|
43.98%
|
-5.83%
|
-50%
|
50%
|
99.13%
|
87.77%
|
56.26%
|
15.23%
|
-24.77%
|
-40%
|
40%
|
66.08%
|
56.57%
|
30.21%
|
-4.08%
|
-37.57%
|
-30%
|
30%
|
42.43%
|
34.25%
|
11.56%
|
-17.98%
|
-46.76%
|
-20%
|
20%
|
24.67%
|
17.47%
|
-2.47%
|
-28.38%
|
-53.72%
|
-10%
|
10%
|
10.83%
|
4.44%
|
-13.28%
|
-36.52%
|
-58.79%
|
0%
|
0%
|
-0.25%
|
-6.04%
|
-22.08%
|
-42.90%
|
-63.23%
|
10%
|
-10%
|
-9.32%
|
-14.64%
|
-29.23%
|
-48.27%
|
-66.67%
|
20%
|
-20%
|
-16.89%
|
-21.75%
|
-35.24%
|
-52.72%
|
-69.67%
|
30%
|
-30%
|
-23.29%
|
-27.84%
|
-40.25%
|
-56.41%
|
-71.94%
|
40%
|
-40%
|
-28.78%
|
-33.01%
|
-44.63%
|
-59.81%
|
-74.32%
|
50%
|
-50%
|
-33.55%
|
-37.52%
|
-48.57%
|
-62.60%
|
-76.19%
|
60%
|
-60%
|
-37.72%
|
-41.51%
|
-51.96%
|
-65.19%
|
-78.12%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 26.20%. The Index’s highest volatility rate for any one calendar year during the five-year period was 29.55% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 4.03%. Historical Index volatility and performance are not indications of what the Index
volatility and performance will be in the future.
The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio
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securities transactions. The use of derivatives may
result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative, which may prevent the Fund from achieving
its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse investment strategy. Futures markets are highly volatile and the use of
futures
|
|
may increase the
Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also seek inverse or
“short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of the underlying
short position. If the Fund were to experience this volatility or decreased liquidity, the
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Fund’s
return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or
more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of
available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its investment objective due to these factors. Any income, dividends or payments by the assets underlying the
Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse investment
objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of
the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the
Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock
Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily inverse investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for
the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the
Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index. Activities
surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse investment objective. The Fund may take or refrain from taking positions to improve the tax efficiency or to
comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Chinese Securities Risks
—
The Fund invests in, and/or has exposure to, Chinese securities and the Chinese economy. Investment in securities of
Chinese issuers involves risks that may be greater than if the Fund’s investments were more geographically diverse. The Chinese economy is generally considered an emerging market and can be significantly affected by economic and political
conditions and policy in China and surrounding Asian countries. In addition, the Chinese economy is export-driven and highly reliant on trade. A downturn in the economies of China’s primary trading partners could slow or eliminate the growth
of the Chinese economy. Additionally, the economy of China differs greatly from the U.S. economy in such respects as, structure, general development, government involvement, wealth distribution, rate of inflation, interest rates, allocation of
resources and capital reinvestment. Specifically, issuers in China are subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than issuers in more developed markets, and therefore, all material
information may not be available or reliable.
Chinese Government Risk
The Chinese government has historically exercised
substantial control over virtually every sector of the Chinese economy through administrative regulation and/or state ownership. In the past, the Chinese government has from time to time
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taken actions that influence the prices at which
certain goods may be sold, encouraged companies to invest or concentrate in particular industries, induced mergers between companies in certain industries and induced inflation or otherwise regulated economic expansion. If such past actions were to
continue, they may have significant adverse effects on the economic conditions in China. The Chinese government also strictly regulates the payment of foreign currency denominated obligations and sets monetary policy, and may introduce new laws and
regulation that may impact the Fund. Although China has begun the process of privatizing certain sectors of its economy, privatized entities may lose money and/or be re-nationalized. Accordingly, an investment in Chinese securities could result in a
total loss if these companies are re-nationalized or other regulatory actions are taken by the Chinese government.
Chinese Markets Risk
The Chinese securities markets have a limited
operating history and are not as developed as those in the U.S. A small number of issuers may represent a large portion of the China market as a whole, and prices for securities of these issuers may be very sensitive to adverse political, economic
and regulatory developments in China and other Asian countries and may experience significant losses in such conditions. The Chinese securities markets are characterized by relatively frequent trading halts and low trading volume, resulting in
substantially less liquidity and greater price volatility than more developed securities markets.
Investments in China may also be
subject to any positive or adverse effects of the varying nature of its economic landscape with respect to expropriation and/or nationalization of assets, strengthened or lessened restrictions on and government intervention in international trade,
confiscatory taxation, political instability, including authoritarian and/or military involvement in governmental decision making, armed conflict, the impact on the economy as a result of civil war and social instability as a result of religious,
ethnic and/or socioeconomic unrest.
Chinese Currency Risk
The value of the renminbi (“RMB”) may be
subject to a high degree of fluctuation due to, among other things, changes in interest rates, the effects of monetary policies issued by the Chinese government, the United States, foreign governments, central banks or supranational entities, the
imposition of current controls of other national or global political or economic developments. The RMB is currently not a freely convertible currency. The Chinese government places strict regulations on RMB and sets the value of RMB to levels
dependent on the value of the U.S. Dollar, but the PRC government has been under pressure to manage the currency in a less restrictive fashion so that it is less correlated to the U.S. Dollar. The Chinese government’s imposition of
restrictions on the repatriation of RMB out of mainland China may limit the depth of the offshore RMB market and may reduce the liquidity of Chinese investments. The Fund’s exposure to Chinese securities and therefore, the RMB, may result in
volatility.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater
risks than investing in issuers located or operating
in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market shutdown and more
government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues that are held by
only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging markets often have
less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital controls through such
measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets in emerging market
countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement procedures in emerging market
countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency. Emerging markets
may develop unevenly and may never fully develop.
Consumer Discretionary Sector Risk
—
Because companies in the consumer discretionary sector manufacture products and provide discretionary services directly
to the consumer, the success of these companies is tied closely to the performance of the overall domestic and international economy, interest rates, competition and consumer confidence. Success depends heavily on disposable household income and
consumer spending. Also, companies in the consumer discretionary sector may be subject to severe competition, which may have an adverse impact on a company’s profitability. Changes in demographics and consumer tastes also can affect the demand
for, and success of, consumer discretionary products in the marketplace.
Information
Technology Sector Risk
—
The value of stocks of information technology companies and companies that rely heavily on
technology is particularly vulnerable
to rapid changes in technology product cycles, rapid product obsolescence, government regulation and competition,
both domestically and internationally, including competition from competitors with lower production costs. Information technology companies and companies that rely heavily on technology, especially
those of smaller,
less-seasoned companies,
tend to be more volatile than the overall market. Information technology
companies
are heavily dependent
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on patent and
intellectual property rights, the loss or impairment of which may adversely affect profitability. Additionally, companies in the information technology sector may face dramatic and often unpredictable changes in growth rates and competition for the
services of qualified personnel.
Internet Company Industry Risk
—
The Fund may invest in, and/or have exposure to, internet
companies. The market prices of internet securities tend to exhibit a greater degree of market risk and sharp price fluctuations than other types of securities. These securities may fall in and out of favor with investors rapidly, which may cause
sudden selling and dramatically lower market prices. These companies are subject to rapid changes in technology, worldwide competition, rapid obsolescence of products and services, loss of patent protections, evolving industry standards and frequent
new product productions. Internet securities also may be affected adversely by changes in consumer and business purchasing patterns and government regulations. These companies may have high market valuations and may appear less attractive to
investors, which may cause sharp decreases in their market prices.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Micro-Capitalization Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition, micro-cap companies
often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or mid-capitalization. As
a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments,
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may incur
significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments
made with cash collateral, or a “gap”
between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
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www.direxioninvestments.com/etfs?producttab=performance or
by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily MSCI Real Estate Bear 1X Shares
Important Information Regarding the
Fund
The Direxion Daily MSCI
Real Estate Bear 1X Shares (“Fund”) seeks
daily inverse
investment results and is very different from most other exchange-traded funds. The pursuit of daily inverse investment
goals means that the return of the Fund for a period longer than a full trading day may have no resemblance to -100% of the return of the MSCI US REIT Index (the “Index”). This means that the return of the Fund for a period longer than a
trading day will be the result of each single day’s compounded return over the period, which will very likely differ from -100% of the return of the Index for that period. As a consequence, longer holding periods and higher volatility of the
Index increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return
for investors that invest for periods less than a trading day will not be -100% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse (-1X) investment results, understand the risks associated with the use of shorting and
are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will
lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 100% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.35%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
0.71%
|
Expense
Cap/Reimbursement
(2)
|
-0.11%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.60%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.45% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short exposure to the Index equal to at least 80% of the Fund’s net assets (plus
borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less
than 397
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days and exhibit high quality credit profiles,
including U.S. government securities and repurchase agreements.
The Index is a
free float-adjusted market capitalization weighted index that is comprised of equity real estate investment trusts (“REITs”) that are included in the MSCI USA Investable Market Index, with the exception of specialty equity REITs that do
not generate a majority of their revenue and income from real estate rental and leasing operations. The Index represents approximately 99% of the U.S. REIT universe.
As of December 31, 2018, the Index
was comprised of 153 constituents which had an average market capitalization of $5.1 billion, total market capitalizations ranging from $261.2 million to $51.9 billion and were concentrated in the real estate sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate characteristics
similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index. Derivatives are
financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting securities in
order to gain inverse exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the
Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse investment objective. The impact of the Index’s movements during
the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely,
if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms “daily,”
“day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely
differ from -100% of the return of the Index over the
same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money over time while
the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily investment objective and the Fund’s performance for periods greater than a trading day will be the result of each
day's returns compounded over the period, which is very likely to differ from -100% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are leveraged and
that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -100% of the performance of the Index. The effect of compounding becomes more pronounced
as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during shareholder’s
holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s
investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance
will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
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ETF Trust Prospectus
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As shown in the
chart below, the Fund would be expected to lose 6.04% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a significant loss of
value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 63.23% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -100% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -100% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-100%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
60%
|
148.55%
|
134.42%
|
95.28%
|
43.98%
|
-5.83%
|
-50%
|
50%
|
99.13%
|
87.77%
|
56.26%
|
15.23%
|
-24.77%
|
-40%
|
40%
|
66.08%
|
56.57%
|
30.21%
|
-4.08%
|
-37.57%
|
-30%
|
30%
|
42.43%
|
34.25%
|
11.56%
|
-17.98%
|
-46.76%
|
-20%
|
20%
|
24.67%
|
17.47%
|
-2.47%
|
-28.38%
|
-53.72%
|
-10%
|
10%
|
10.83%
|
4.44%
|
-13.28%
|
-36.52%
|
-58.79%
|
0%
|
0%
|
-0.25%
|
-6.04%
|
-22.08%
|
-42.90%
|
-63.23%
|
10%
|
-10%
|
-9.32%
|
-14.64%
|
-29.23%
|
-48.27%
|
-66.67%
|
20%
|
-20%
|
-16.89%
|
-21.75%
|
-35.24%
|
-52.72%
|
-69.67%
|
30%
|
-30%
|
-23.29%
|
-27.84%
|
-40.25%
|
-56.41%
|
-71.94%
|
40%
|
-40%
|
-28.78%
|
-33.01%
|
-44.63%
|
-59.81%
|
-74.32%
|
50%
|
-50%
|
-33.55%
|
-37.52%
|
-48.57%
|
-62.60%
|
-76.19%
|
60%
|
-60%
|
-37.72%
|
-41.51%
|
-51.96%
|
-65.19%
|
-78.12%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 14.46%. The Index’s highest volatility rate for any one calendar year during the five-year period was 16.98% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 7.79%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit
and fixed income markets may negatively affect many
issuers worldwide, which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an
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ETF as a reference asset, the Fund may be subject to
greater correlation risk and may not achieve as high a degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using
derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally,
if any collateral posted by the counterparty for the
benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse investment objective. The Fund may also not be able to exercise remedies, such as the
termination of transactions, netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for
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cash, rather than principally for in-kind
securities, because of the nature of the financial instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling
securities to achieve its investment objective.
Intra-Day Investment
Risk
- The Fund seeks investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse investment
objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of
the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the
Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for
the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the
Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index. Activities
surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse investment objective. The Fund may take or refrain from taking positions to improve the tax efficiency or to
comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Real Estate Sector Risk
- The Fund will focus its investments in, and/or have exposure to, securities issued by commercial and residential real estate companies. Real estate securities are subject to risks similar to those
associated with direct ownership of real estate, including changes in local and general economic conditions, vacancy rates, interest rates, zoning laws, rental income, property taxes, operating expenses and losses from casualty or condemnation. An
investment in a real estate investment trust is subject to additional risks, including poor performance by the manager of the real estate investment trust, adverse tax consequences, and limited diversification resulting from being invested in a
limited number or type of properties or a narrow geographic area.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Micro-Capitalization Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition, micro-cap companies
often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or mid-capitalization. As
a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently
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limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market.
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ETF Trust Prospectus
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There can be no assurance that Shares will continue
to meet the listing requirements of the exchange on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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The Direxion Shares ETF Trust
(the “Trust”) is a registered investment company offering a number of separate exchange-traded funds (“ETFs”). This Prospectus describes the ETFs noted in the table below (each a “Fund” and collectively the
“Funds”). Rafferty Asset Management, LLC serves as the investment advisor to each Fund ("Rafferty" or the "Adviser").
The Direxion Daily 7-10 Year Treasury
Bear 1X Shares, Direxion Daily 20+ Year Treasury Bear 1X Shares, Direxion Daily Municipal Bond Taxable Bear 1X Shares, and the Direxion Daily Total Bond Market Bear 1X Shares are collectively referred to as the "Fixed Income Funds."
The Direxion Daily CSI 300 China A Share
Bear 1X Shares, the Direxion Daily MSCI China A Bear 1X Shares, and the Direxion Daily CSI China Internet Index Bear 1X Shares are collectively referred to as the "China Funds."
The Funds seek
daily inverse investment results, before fees and expenses, which correspond to 100% of the
inverse
of the performance of an underlying index. If, on a given day, the underlying index gains 1%, the Funds are
designed to lose approximately 1% (which is equal to -100% of 1%). Conversely, if the underlying index loses 1% on a given day, the Funds are designed to gain approximately 1%. The Funds seek inverse investment results on a daily basis
—
from the close of regular trading on one trading day to the close on the next trading
day
—
which should not be equated with seeking an inverse investment objective for any other period.
The Funds are designed as short-term
trading vehicles. The Funds are intended to be used by investors who intend to actively monitor and manage their portfolios.
As used in this Prospectus, the terms
“daily,” “day,” and “trading day,” refer to the period from the regular close of the markets on one trading day to the regular close of the markets on the next trading day.
Each Fund seeks investment results that
correspond to the inverse (-100%) of the performance of an underlying index, before fees and expenses, as follows:
Fund
|
Underlying
Index
|
Direxion
Daily S&P 500
®
Bear 1X Shares
|
S&P
500
®
Index
|
Direxion
Daily Small Cap Bear 1X Shares
|
Russell
2000
®
Index
|
Direxion
Daily 7-10 Year Treasury Bear 1X Shares
|
ICE
U.S. Treasury 7-10 Year Bond Index
|
Direxion
Daily 20+ Year Treasury Bear 1X Shares
|
ICE
U.S. Treasury 20+ Year Bond Index
|
Direxion
Daily Municipal Bond Taxable Bear 1X Shares
|
S&P
National AMT-Free Municipal Bond Index
|
Direxion
Daily Total Bond Market Bear 1X Shares
|
Bloomberg
Barclays US Aggregate Bond Index
|
Direxion
Daily CSI 300 China A Shares Bear 1X shares
|
CSI
300 Index
|
Direxion
Daily MSCI China A Bear 1X Shares
|
MSCI
China A International Index
|
Direxion
Daily CSI China Internet Index Bear 1X Shares
|
CSI
Overseas China Internet Index
|
Direxion
Daily MSCI Real Estate Bear 1X Shares
|
MSCI
US REIT Index
|
Shares of the Funds
(“Shares”) are, or upon commencement of operations will be, listed and traded on the NYSE Arca, Inc. (the “Exchange”), where the market prices for the Shares may be different from the intra-day value of the Shares
disseminated by the Exchange and from their net asset value (“NAV”). Unlike conventional mutual funds, Shares are not individually redeemable directly with a Fund. Rather, each Fund issues and redeems Shares on a continuous basis at NAV
only in large blocks of Shares called “Creation Units.” A Creation Unit consists of 50,000 Shares. Creation Units of the Funds are issued and redeemed for cash. As a result, retail investors generally will not be able to purchase or
redeem Shares directly from, or with, each Fund. Most retail investors will purchase or sell Shares in the secondary market through a broker.
In order to
provide additional information regarding the value of Shares of a Fund, the Exchange, a market data vendor or other information provider, disseminates an Intraday Optimized Portfolio Value (“IOPV”) for each Fund. Each Fund’s IOPV
is expected to be disseminated every 15 seconds during the regular trading hours of the Exchange. The IOPV is based on the current market value of the securities and cash required to be deposited in exchange for a Creation Unit. The IOPV does not
necessarily reflect the precise composition of the current portfolio holdings of a Fund as of a particular point in time, or an accurate valuation of the current portfolio. The quotations of certain Fund holdings may not be updated during U.S.
trading hours if such holdings do not trade in the U.S. The Funds are not involved in, nor responsible for, the calculation or dissemination of the IOPV and make no representations or warranty as to its accuracy.
There is no assurance that the Funds
will achieve their investment objective and an investment in a Fund could lose money. No single Fund is a complete investment program.
Changes in Investment Objective.
Each Fund’s investment objective is not a fundamental policy and may be changed by the Funds' Board of Trustees without shareholder approval.
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Additional Information Regarding Investment
Techniques and Policies
Rafferty uses a number of
investment techniques in an effort to achieve the stated daily inverse investment objective for each Fund. Each Fund seeks -100% of the return of its underlying index on a given day. As such, the Funds are managed to provide returns inverse (or
opposite) to the return of a Fund’s underlying index for a one-day period.
Rafferty creates net
“short” positions for the Funds. (Rafferty may create long positions in the Funds even though the net exposure in the Funds will be short.) Long positions move in the same direction as the underlying index, advancing when the underlying
index advances and declining when the underlying index declines. Short positions move in the opposite direction of the underlying index, advancing when the underlying index declines and declining when the underlying index advances.
In seeking to
achieve each Fund’s investment objective, Rafferty uses statistical and quantitative analysis to determine the investments each Fund makes and the techniques it employs. Rafferty relies upon a pre-determined model to generate orders that
result in repositioning each Fund’s investments in accordance with its daily inverse investment objective. Using this approach, Rafferty determines the type, quantity and mix of investment positions that it believes in combination should
produce daily returns consistent with a Fund’s investment objective. In general, if a Fund is performing as designed, the return of the underlying index will dictate the return for the Fund. Rafferty does not invest the assets of a Fund in
securities, derivatives or other investments based on Rafferty’s view of the investment merit of a particular security, instrument or company, nor does it conduct conventional investment research or analysis or forecast market movements or
trends. Each Fund generally pursues its investment objective regardless of market conditions and does not take defensive positions.
Each Fund offered in this Prospectus
may invest significantly in the following types of derivatives to obtain short exposure to an underlying index: swap agreements, futures contracts, options on securities, future contracts and stock indices, and other financial instruments. Rafferty
uses these types of investments to produce inverse returns compared to each Fund’s applicable underlying index.
At the close of the markets each
trading day, each Fund will position its portfolio to ensure that the Fund’s exposure to its underlying index is consistent with the Fund’s stated daily inverse investment objective. The impact of market movements during the day
determines whether a portfolio needs to be repositioned. If the underlying index has risen on a given day, a Fund’s assets (
i.e.
, net assets plus borrowing for investment purposes, if any) should fall,
meaning its exposure will typically need to be decreased. Conversely, if the underlying index has fallen on a given day, a Fund’s net assets should rise, meaning its exposure will typically need to be increased. Any of the Funds’
portfolios may also need to be changed to reflect changes in the composition of their underlying index. Rafferty increases a Fund’s exposure when its assets rise and reduces a Fund’s exposure when its assets fall.
A Fund may have difficulty in
achieving its daily inverse investment objective due to fees, expenses, transaction costs, income items, accounting standards, significant purchase and redemption activity by Fund shareholders and/or disruptions or a temporary lack of liquidity in
the markets for the securities held by the Fund. Additionally, if a Fund’s underlying index includes foreign securities or tracks a foreign market index where the foreign market closes before or after the New York Stock Exchange
(“NYSE”) closes (generally at 4 p.m. Eastern Time), the performance of the underlying index may differ from the expected daily inverse performance. As such, correlation to an underlying index for Funds that track an underlying index that
includes foreign securities will generally be measured by comparing the daily change in a Fund’s NAV per share to the performance of one or more U.S. ETFs that tracks the same underlying index.
The Funds seek daily returns while
repositioning exposure daily. Therefore, for a period longer than one day, the pursuit of a daily investment objective will result in daily compounding. This means that the return of an underlying index over a period of time greater than one day
multiplied by a Fund’s daily target (
i.e.
, -100%) generally will not equal a Fund’s performance over that same period. As a consequence, investors should not plan to hold the Funds unmonitored for
periods longer than a single trading day. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of a Fund’s stated daily
inverse investment objective and the performance of the underlying index for the full trading day. The Funds are not suitable for all investors.
Consider the following examples:
Mary is considering
investments in two funds, Funds A and B. Fund A is a traditional index ETF which seeks (before fees and expenses) to match the performance of the XYZ index. Similar to the Funds, Fund B is an ETF that seeks daily investment results (before fees and
expenses) that correspond to -100% of the daily performance of the XYZ index.
On Day 1, the XYZ index increases in
value from $100 to $105, a gain of 5%. On Day 2, the XYZ index decreases in value from $105 back to $100, a loss of 4.76%. In the aggregate, the XYZ index has not moved.
An investment in Fund A would be
expected to gain 5% on Day 1 and lose 4.76% on Day 2 to return to its original value. The following example assumes a $100 investment in Fund A when the index is also valued at $100:
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Trust Prospectus
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Day
|
Index
Value
|
Index
Performance
|
Value
of Investment
|
|
$100.00
|
|
$100.00
|
1
|
$105.00
|
5.00%
|
$105.00
|
2
|
$100.00
|
-4.76%
|
$100.00
|
The same $100
investment in Fund B would be expected to decrease in value on Day 1, but gain value on Day 2. The $100 investment in Fund B would be expected to lose 5% on Day 1 (-100% of 5%) but gain 4.76% on Day 2.
Day
|
Index
Performance
|
-100%
of Index Performance
|
Value
of Investment
|
|
|
|
$100.00
|
1
|
5.00%
|
-5.00%
|
$95.00
|
2
|
-4.76%
|
4.76%
|
$99.52
|
In the
case of Fund B, although the percentage decrease on Day 2 is sufficient to bring the value of the index back to its starting point, because the inverse of that percentage is applied to a lower principal amount on Day 2, Fund B has a loss. (These
calculations do not include the charges for expense ratio and financing charges.) As you can see, an investment in Fund B has additional risks than Fund A due to the effects of compounding on Fund B.
The Funds are very
different from most mutual funds and ETFs. Each Fund seeks to provide returns equal to the inverse (-100%) of the underlying index, a result opposite of most mutual funds and ETFs. An investor who purchases shares of a Fund intra-day will generally
receive more, or less, than -100% exposure to the underlying index from that point until the end of the trading day. The actual exposure will be largely a function of the performance of the underlying index from the end of the prior trading day. If
a Fund’s shares are held for a period longer than a single trading day, the Fund’s performance is likely to deviate from -100% of the return of the underlying index performance for the longer period. This deviation will increase with
higher index volatility and longer holding periods.
For periods longer than a trading
day, volatility in the performance of the underlying index from day to day is the primary cause of any disparity between a Fund’s actual returns and the returns of the underlying index for such period. Volatility causes such disparity because
it exacerbates the effects of compounding on a Fund’s returns. For example, consider the following three examples that demonstrate the effect of volatility on a hypothetical fund seeking an -100% correlation with an underlying index:
Example 1
–
Underlying Index Experiences Low Volatility
Mary invests $10.00 in the
hypothetical Fund at the close of trading on Day 1. During Day 2, the Fund’s underlying index decreases from 100 to 98, a 2% loss. Mary’s investment rises 2% to $10.20. Mary holds her investment through the close of trading on Day 3,
during which the Fund’s underlying index decreases from 98 to 96, a loss of 2.04%. Mary’s investment rises to $10.41, a gain during Day 3 of 2.04%. For the two day period since Mary invested in the Fund, the underlying index lost 4%
although Mary’s investment increased by 4.1%. Because the underlying index continued to trend upwards with low volatility, Mary’s return closely correlates to the -100% return of the return of the underlying index for the period.
Example 2
–
Underlying Index Experiences High Volatility
Mary invests $10.00 in the
hypothetical Fund after the close of trading on Day 1. During Day 2, the Fund’s underlying index decreases from 100 to 98, a 2% loss, and Mary’s investment rises 2% to $10.20. Mary continues to hold her investment through the end of Day
3, during which the Fund’s underlying index increases from 98 to 102, a gain of 4.08%. Mary’s investment declines by 4.08%, from $10.20 to $9.78. For the two day period since Mary invested in the Fund, the Fund’s underlying index
gained 2% while Mary’s investment decreased from $10 to $9.78, a 2.20% loss. The volatility of the underlying index affected the correlation between the underlying index’s return for the two day period and Mary’s return. In this
situation, Mary lost more than -100% the return of the underlying index.
Example 3
–
Intra-day Investment with Volatility
The examples above assumed that Mary
purchased the hypothetical Fund at the close of trading on Day 1 and sold her investment at the close of trading on a subsequent day. However, if she made an investment intra-day, she would have received a beta determined by the performance of the
underlying index from the end of the prior trading day until her time of purchase on the next trading day. Consider the following example.
Mary invests $10.00 in the
hypothetical Fund at 11 a.m. on Day 2. From the close of trading on Day 1 until 11 a.m. on Day 2, the underlying index moved from 100 to 98, a 2% loss. In light of that loss, the Fund’s beta at the point at which Mary invests is -96%. During
the remainder of Day 2, the Fund’s underlying index decreases from 98 to 90, a loss of 8.16%, and Mary’s investment rises 7.83% (which is the underlying index gain of 8.16% multiplied by the 96% beta that she received) to $10.78. Mary
continues to hold her investment through the close of trading on Day 2, during which the Fund’s underlying index increases from 90 to 110, a gain of 22.22%. Mary’s investment declines by 18.2%, from $10.78 to $8.82. For the period of
Mary’s investment, the Fund’s underlying index increased from 98 to 110, a gain of 12.25%,
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ETF Trust Prospectus
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while Mary’s investment decreased from $10.00
to $8.82, an 11.8% loss. The volatility of the underlying index affected the correlation between the index’s return for period and Mary’s return. In this situation, Mary lost less than -100% of the return of the underlying index.
Mary’s investment was also affected because she missed the first 2% move of the underlying index and had a beta of -96% for the remainder of Day 2.
The Funds are designed to be utilized
only by sophisticated investors, such as traders and active investors employing dynamic strategies. Such investors are expected to monitor and manage their portfolios frequently. Investors in the Funds should: (a) understand the consequences of
seeking daily investment results, (b) understand the risk of shorting, and (c) intend to actively monitor and manage their investments. Investors who do not understand the Funds or do not intend to actively manage their funds and monitor their
investments should not buy the Funds. There is no assurance that any of the Funds offered in this Prospectus will achieve their investment objectives and an investment in any Fund could lose money. No single Fund is a complete investment
program.
Market Volatility
. Each Fund seeks to provide a return which is -100% of the daily performance of its underlying index. No Fund attempts to, and no Fund should be expected to, provide returns which are -100% of the return of the
underlying index for periods other than a single day. Each Fund rebalances its portfolio on a daily basis, increasing exposure in response to that day’s gains or reducing exposure in response to that day’s losses.
Daily rebalancing will impair a
Fund’s performance if the underlying index experiences volatility. For instance, a Fund would be expected to lose 4% (as shown in Table 1 below) if its underlying index provided no return over a one year period and experienced annualized
volatility of 20%. If the underlying index’s annualized volatility were to rise to 40%, the hypothetical loss for a one year period for a Fund widens to approximately 15%.
At higher volatility
levels, there is a chance of a significant loss of Fund assets even if the underlying index is flat.
For instance, if annualized volatility of the underlying index were 100%, the Fund based on that underlying index
would be expected to lose more than 60% of its value, even if the underlying index returned 0% for the year. An index’s volatility rate is a statistical measure of the magnitude of fluctuations in its return the index.
Table 1
Volatility
Range
|
Fund
Loss
|
10%
|
-1%
|
20%
|
-4%
|
30%
|
-9%
|
40%
|
-15%
|
50%
|
-22%
|
60%
|
-30%
|
70%
|
-39%
|
80%
|
-47%
|
90%
|
-55%
|
100%
|
-63%
|
Table 2 shows the
average volatility rate for the Funds’ underlying indices over the five year period ended December 31, 2018. If an index has been in existence for less than 5 years, its inception date is noted next to its name in Table 2. The underlying
indices have annualized historical volatility rates over that period ranging from 1.91% to 26.20%. Since market volatility has negative implications for Funds which rebalance daily, investors should be sure to monitor and manage their investments in
the Funds particularly in volatile markets. The negative implications of volatility in Table 1 can be combined with the recent volatility ranges of various indices in Table 2 to give investors some sense of the risks of holding the Funds for longer
periods over the past five years. Given the historically low levels of volatility during the past five years, historical index volatility and performance are not likely indicative of future volatility and performance.
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Table 2
–
Historic Volatility of each Fund’s Benchmark Index
Index
|
5-Year
Historical
Volatility
Rate
|
Bloomberg
Barclays US Aggregate Bond Index
|
3.08%
|
CSI
300 Index
|
25.11%
|
CSI
Overseas China Internet Index
|
26.20%
|
ICE
U.S. Treasury 20+ Year Bond Index
|
11.77%
|
ICE
U.S. Treasury 7-10 Year Bond Index
|
5.07%
|
MSCI
China A International Index
(Inception Date: October 14, 2014)
|
24.50%
|
MSCI
US REIT Index
|
14.46%
|
Russell
2000
®
Index
|
16.43%
|
S&P
500
®
Index
|
13.23%
|
S&P
National AMT-Free Municipal Bond Index
|
1.91%
|
The intra-day value of each
Fund’s shares, otherwise known as the “intraday indicative value” or “IOPV,” which is disseminated by the Exchange every 15 seconds throughout the business day, is based on the current market value of the securities and
cash required to be deposited in exchange for a Creation Unit on the prior business day. The IOPV does not necessarily reflect the precise composition of the current portfolio of securities held by a Fund at a particular point in time, nor the best
possible valuation of the current portfolio. Therefore, the IOPV should not be viewed as a “real-time” update of the Fund’s NAV, which is computed only once a day.
The Projected Return of a Fund for a
Single Trading Day
. Each Fund seeks to provide a daily return which is the inverse (or opposite) of the daily return of an underlying index. To create the necessary exposure, a Fund engages in short selling
— borrowing and selling securities it does not own. The money that a Fund receives from short sales
—
the short sale proceeds
—
is an asset of the
Fund that can generate income to help offset the Fund’s operating expenses. However, the costs of creating short exposure, which may require the Fund’s counterparties to borrow and sell certain securities, may offset or outweigh such
income. As the holder of a short position, a Fund also is responsible for paying the dividends and interest accruing on the short position, which is an expense to the Fund that could cause the Fund to lose money on the short sale and may adversely
affect its performance. Each Fund will reposition its portfolio at the end of every trading day. Therefore, if an investor purchases Fund shares at close of the markets on a given trading day, the investor’s exposure to the underlying index of
a Fund would reflect 100% of the inverse performance of the underlying index during the following trading day, subject to the charges and expenses noted above.
The Projected Returns of Funds for
Intra-Day Purchases.
Because the Funds rebalance their portfolios once daily, an investor who purchases shares during a day will likely have more, or less, than -100% investment exposure to the underlying index for
a Fund. The exposure to the underlying index received by an investor who purchases a Fund intra-day will differ from the Fund’s stated daily investment objective (
i.e.
,-100%) by an amount determined by the movement of the underlying index from its value at the end of the prior day. If the underlying index moves in a direction favorable to the Fund between the close of the market on
one trading day through the time on the next trading day when the investor purchases Fund shares, the investor will receive less exposure to the underlying index than the stated fund daily investment objective (
i.e.
, -100%). Conversely, if the underlying index moves in a direction adverse to the Fund, the investor will receive more exposure to the underlying index than
the stated fund daily inverse investment objective (
i.e.
, -100%).
Table 3 below indicates the exposure
to the underlying index that an intra-day purchase of a Fund would be expected to provide based upon the movement in the value of a Fund’s underlying index from the close of the market on the prior trading day. Such exposure holds until a
subsequent sale on that same trading day or until the close of the market on that trading day. For instance, if the underlying index of a Fund has moved 2% in a direction favorable to a Fund, the investor would receive exposure to the performance of
the underlying index from that point until the investor sells later that day or the end of the day equal to approximately 96% of the investor’s investment.
Conversely, if the underlying index
has moved 2% in a direction unfavorable to a Fund, an investor at that point would receive exposure to the performance of the underlying index from that point until the investor sells later that day or the end of the day equal to approximately -104%
of the investor’s investment.
The table includes a range of underlying
index moves from 5% to
–
5% for a Fund; index moves beyond the range noted below will result in exposure further from a Fund’s daily investment objective.
Direxion Shares
ETF Trust Prospectus
|
86
|
Table 3
Index
Move
|
Resulting
Exposure for a Fund
|
-5%
|
-90%
|
-4%
|
-92%
|
-3%
|
-94%
|
-2%
|
-96%
|
-1%
|
-98%
|
0%
|
-100%
|
1%
|
-102%
|
2%
|
-104%
|
3%
|
-106%
|
4%
|
-108%
|
5%
|
-110%
|
The
Projected Returns of the Funds for Periods Other Than a Single Trading Day.
The Funds seek investment results on a daily
basis
—
from the close of regular trading on one trading day to the close on the next
trading day
—
which should not be equated with seeking an investment objective for any
other period. For instance, if the S&P 500
®
Index gains 10% for a week, the Direxion Daily S&P 500
®
Bear 1X Shares should not be expected to provide a return of -10% for the week even if it meets its daily investment objective throughout the week.
This is true because of the financing charges noted above but also because the pursuit of daily investment objectives may result in daily compounding, which means that the return of an underlying index over a period of time greater than one day
multiplied by a Fund’s daily inverse investment objective (-100%) will not generally equal a Fund’s performance over that same period. In addition, the effects of compounding become greater the longer Shares are held beyond a single
trading day.
The
following charts set out a range of hypothetical daily performances during a given 10 trading days of an underlying index and demonstrate how changes in the underlying index impact a Fund’s performance for one trading day and cumulatively up
to, and including, the entire 10 trading day period. The charts are based on a hypothetical $100 investment in a Fund over a 10 trading day period and do not reflect expenses of any kind.
Table 4
–
The Index Lacks a Clear Trend
Index
|
Fund
|
|
Value
|
Daily
Performance
|
Cumulative
Performance
|
NAV
|
Daily
Performance
|
Cumulative
Performance
|
|
100
|
|
|
$100.00
|
|
|
Day
1
|
105
|
5.00%
|
5.00%
|
$
95.00
|
-5.00%
|
-5.00%
|
Day
2
|
110
|
4.76%
|
10.00%
|
$
90.47
|
-4.76%
|
-9.53%
|
Day
3
|
100
|
-9.09%
|
0.00%
|
$
98.69
|
9.09%
|
-1.31%
|
Day
4
|
90
|
-10.00%
|
-10.00%
|
$108.55
|
10.00%
|
8.55%
|
Day
5
|
85
|
-5.56%
|
-15.00%
|
$114.58
|
5.56%
|
14.58%
|
Day
6
|
100
|
17.65%
|
0.00%
|
$
94.35
|
-17.65%
|
-5.65%
|
Day
7
|
95
|
-5.00%
|
-5.00%
|
$
99.06
|
5.00%
|
-0.94%
|
Day
8
|
100
|
5.26%
|
0.00%
|
$
93.84
|
-5.26%
|
-6.16%
|
Day
9
|
105
|
5.00%
|
5.00%
|
$
89.14
|
-5.00%
|
-10.86%
|
Day
10
|
100
|
-4.76%
|
0.00%
|
$
93.38
|
4.76%
|
-6.62%
|
The
cumulative performance of the hypothetical underlying index in Table 4 is 0% for 10 trading days. The return of a hypothetical Fund for the 10 trading day period is -6.62%. The volatility of the hypothetical underlying index performance and lack of
a clear trend results in performance for a hypothetical Fund for the period which bears little relationship to the performance of the hypothetical underlying index for the 10 trading day period.
87
|
Direxion Shares ETF
Trust Prospectus
|
Table 5
–
The Index Rises in a Clear Trend
Index
|
Fund
|
|
Value
|
Daily
Performance
|
Cumulative
Performance
|
NAV
|
Daily
Performance
|
Cumulative
Performance
|
|
100
|
|
|
$100.00
|
|
|
Day
1
|
102
|
2.00%
|
2.00%
|
$
98.00
|
-2.00%
|
-2.00%
|
Day
2
|
104
|
1.96%
|
4.00%
|
$
96.07
|
-1.96%
|
-3.93%
|
Day
3
|
106
|
1.92%
|
6.00%
|
$
94.22
|
-1.92%
|
-5.78%
|
Day
4
|
108
|
1.89%
|
8.00%
|
$
92.43
|
-1.89%
|
-7.57%
|
Day
5
|
110
|
1.85%
|
10.00%
|
$
90.72
|
-1.85%
|
-9.28%
|
Day
6
|
112
|
1.82%
|
12.00%
|
$
89.06
|
-1.82%
|
-10.94%
|
Day
7
|
114
|
1.79%
|
14.00%
|
$
87.46
|
-1.79%
|
-12.54%
|
Day
8
|
116
|
1.75%
|
16.00%
|
$
85.92
|
-1.75%
|
-14.08%
|
Day
9
|
118
|
1.72%
|
18.00%
|
$
84.44
|
-1.72%
|
-15.56%
|
Day
10
|
120
|
1.69%
|
20.00%
|
$
83.01
|
-1.69%
|
-16.91%
|
The
cumulative performance of the hypothetical underlying index in Table 5 is 20% for 10 trading days. The return of a hypothetical Fund for the 10 trading day period is -16.91%. In this case, because of the positive hypothetical underlying index trend,
a hypothetical Fund’s decline is less than -100% of the hypothetical underlying index gain for the 10 trading day period.
Table 6
–
The Index Declines in a Clear Trend
Index
|
Fund
|
|
Value
|
Daily
Performance
|
Cumulative
Performance
|
NAV
|
Daily
Performance
|
Cumulative
Performance
|
|
100
|
|
|
$100.00
|
|
|
Day
1
|
98
|
-2.00%
|
-2.00%
|
$102.00
|
2.00%
|
2.00%
|
Day
2
|
96
|
-2.04%
|
-4.00%
|
$104.08
|
2.04%
|
4.08%
|
Day
3
|
94
|
-2.08%
|
-6.00%
|
$106.24
|
2.08%
|
6.24%
|
Day
4
|
92
|
-2.13%
|
-8.00%
|
$108.50
|
2.13%
|
8.50%
|
Day
5
|
90
|
-2.17%
|
-10.00%
|
$110.85
|
2.17%
|
10.85%
|
Day
6
|
88
|
-2.22%
|
-12.00%
|
$113.31
|
2.22%
|
13.31%
|
Day
7
|
86
|
-2.27%
|
-14.00%
|
$115.88
|
2.27%
|
15.88%
|
Day
8
|
84
|
-2.33%
|
-16.00%
|
$118.58
|
2.33%
|
18.58%
|
Day
9
|
82
|
-2.38%
|
-18.00%
|
$121.40
|
2.38%
|
21.40%
|
Day
10
|
80
|
-2.44%
|
-20.00%
|
$124.36
|
2.44%
|
24.36%
|
The
cumulative performance of the hypothetical underlying index in Table 6 is -20% for 10 trading days. The return of a hypothetical Fund for the 10 trading day period is 24.36%. In this case, because of the negative hypothetical underlying index trend,
a hypothetical Fund’s gain is greater than 100% of the hypothetical underlying index decline for the 10 trading day period.
Direxion Shares
ETF Trust Prospectus
|
88
|
Additional Information Regarding Principal
Risks
An investment in a
Fund entails risks. A Fund may not achieve its investment objective and may decline in value. The Funds present risks not traditionally associated with other mutual funds and ETFs. For example, due to the Funds' daily inverse investment objectives,
a small adverse move in a Fund's underlying index will result in larger and potentially substantial declines in that Fund. It is important that investors closely review and understand all of a Fund’s risks before making an investment. A Fund
is not a complete investment program. The table below provides the risks of investing in the Funds. Following the table, each risk is explained.
|
|
|
|
|
|
|
|
|
|
|
|
Direxion
Daily S&P 500
®
Bear 1X Shares
|
Direxion
Daily Small Cap Bear 1X Shares
|
Direxion
Daily 7-10 Year Treasury Bear 1X Shares
|
Direxion
Daily 20+ Year Treasury Bear 1X Shares
|
Direxion
Daily Municipal Bond Taxable Bear 1X Shares
|
Direxion
Daily Total Bond Market Bear 1X Shares
|
Direxion
Daily CSI 300 China A Share Bear 1X Shares
|
Direxion
Daily MSCI China A Bear 1X Shares
|
Direxion
Daily CSI China Internet Index Bear 1X Shares
|
Direxion
Daily MSCI Real Estate Bear 1X Shares
|
Effects
of Compounding
and Market Volatility Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Market
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Aggressive
Investment Techniques Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Liquidity
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Derivatives
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Counterparty
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Shorting
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Cash
Transaction Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Intra-Day
Investment Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Daily
Inverse Index
Correlation/Tracking Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Asset-Backed
Securities Risk
|
|
|
|
|
|
X
|
|
|
|
|
China
Investing Risk
|
|
|
|
|
|
|
X
|
X
|
|
|
Chinese
Securities Risk
|
|
|
|
|
|
|
|
|
X
|
|
Consumer
Discretionary Sector Risk
|
|
|
|
|
|
|
|
|
X
|
|
Credit
Risk
|
|
|
X
|
X
|
X
|
X
|
|
|
|
|
Debt
Instrument Risk
|
|
|
X
|
X
|
X
|
X
|
|
|
|
|
Emerging
Markets Risk
|
|
|
|
|
|
|
X
|
X
|
X
|
|
Extension
Risk
|
|
|
|
|
X
|
X
|
|
|
|
|
Financials
Sector Risk
|
|
X
|
|
|
|
|
X
|
X
|
|
|
Healthcare
Sector Risk
|
X
|
X
|
|
|
|
|
|
|
|
|
Information
Technology Sector Risk
|
X
|
|
|
|
|
|
|
|
X
|
|
Interest
Rate Risk
|
|
|
X
|
X
|
X
|
X
|
|
|
|
|
Internet
Company Industry Risk
|
|
|
|
|
|
|
|
|
X
|
|
Mortgage-Backed
Securities Risk
|
|
|
|
|
|
X
|
|
|
|
|
Municipal
Securities Risk
|
|
|
|
|
X
|
|
|
|
|
|
Prepayment
Risk
|
|
|
|
|
X
|
X
|
|
|
|
|
Real
Estate Sector Risk
|
|
|
|
|
|
|
|
|
|
X
|
U.S.
Government Securities Risk
|
|
|
X
|
X
|
|
X
|
|
|
|
|
Large-Capitalization
Company Risk
|
X
|
|
|
|
|
|
X
|
X
|
X
|
X
|
Micro-Capitalization
Company Risk
|
|
|
|
|
|
|
|
|
X
|
X
|
Mid-Capitalization
Company Risk
|
X
|
|
|
|
|
|
|
|
|
|
Small-
and /or
Mid-Capitalization Company Risk
|
|
X
|
|
|
|
|
X
|
X
|
X
|
X
|
Currency
Exchange Rate Risk
|
|
|
|
|
|
|
X
|
X
|
X
|
|
Foreign
Securities Risk
|
|
|
|
|
|
|
X
|
X
|
X
|
|
Geographic
Concentration Risk
|
|
|
|
|
|
|
X
|
X
|
X
|
|
International
Closed-Market Trading Risk
|
|
|
|
|
|
|
X
|
X
|
X
|
|
Cybersecurity
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Early
Close/Trading Halt Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Equity
Securities Risk
|
X
|
X
|
|
|
|
|
X
|
X
|
X
|
X
|
High
Portfolio Turnover Risk
|
|
X
|
|
|
X
|
|
|
X
|
X
|
X
|
Investment
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Money
Market Instrument Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Non-Diversification
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Securities
Lending Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
89
|
Direxion Shares ETF
Trust Prospectus
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion
Daily S&P 500
®
Bear 1X Shares
|
Direxion
Daily Small Cap Bear 1X Shares
|
Direxion
Daily 7-10 Year Treasury Bear 1X Shares
|
Direxion
Daily 20+ Year Treasury Bear 1X Shares
|
Direxion
Daily Municipal Bond Taxable Bear 1X Shares
|
Direxion
Daily Total Bond Market Bear 1X Shares
|
Direxion
Daily CSI 300 China A Share Bear 1X Shares
|
Direxion
Daily MSCI China A Bear 1X Shares
|
Direxion
Daily CSI China Internet Index Bear 1X Shares
|
Direxion
Daily MSCI Real Estate Bear 1X Shares
|
Special
Risks of Exchange-Traded Funds
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Special
Risk Considerations Relating to
RQFII and QFII Investments Risk
|
|
|
|
|
|
|
X
|
X
|
|
|
Effects of Compounding and Market Volatility Risk
Each Fund
has a daily investment objective and a Fund’s performance for periods greater than a trading day will be the result of each day's returns compounded over the period, which is very likely to differ from underlying index’s performance
times the stated multiple in a Fund’s investment objective, before fees and expenses. Compounding affects all investments, but has a more significant impact on leveraged funds, particularly during periods of higher index volatility. A Fund
does not attempt to, and should not be expected to, provide returns, before fees and expenses, which are 100% of the performance of its underlying index for periods other than one trading day. The impact of compounding will affect each shareholder
differently depending on the period of time an investment in a Fund is held and the volatility of its underlying index during the period an investment in a Fund is held. The effect of compounding becomes more pronounced as volatility and a
shareholder’s holding period increase.
Over time, the cumulative percentage
increase or decrease in the value of a Fund’s portfolio may diverge significantly from the cumulative percentage increase or decrease in 100% of the return of a Fund's underlying index due to the compounding effect of losses and gains on the
returns of a Fund. It also is expected that a Fund will underperform the return of 100% of its underlying index in a trendless or flat market.
The chart below provides examples of
how index volatility could affect a Fund’s performance. An index’s volatility rate is a statistical measure of the magnitude of fluctuations in the returns of the index. Fund performance for periods greater than one single day can be
estimated given any set of assumptions for the following factors: a) index volatility; b) index performance; c) period of time; d) financing rates associated with inverse exposure; e) other Fund expenses; and f) dividends or interest paid with
respect to securities in its underlying index. The chart below illustrates the impact of two principal factors
–
index volatility and index performance
–
on Fund performance. The chart shows estimated Fund returns for a number of combinations of index volatility and index performance over a one-year period. Performance
shown in the chart assumes that: (i) no dividends
were paid with respect to the securities included in
its underlying index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be worse than those
shown.
As shown below, a Fund
would be expected to lose 6.04% if its underlying index provided no return over a one year period during which the index experienced annualized volatility of 25%. If the underlying index’s annualized volatility were to rise to 75%, the
hypothetical loss for a one year period widens to approximately 42.9%.
At higher ranges of volatility, there
is a chance of a significant loss of value in a Fund. For instance, if the underlying index’s annualized volatility is 100%, a Fund would be expected to lose approximately 63.23% of its value, even if the cumulative index return for the year
was 0%. The volatility of ETFs or instruments that reflect the value of the underlying index such as swaps, may differ from the volatility of a Fund’s underlying index.
One
Year
Index
|
-100%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
60%
|
148.55%
|
134.42%
|
95.28%
|
43.98%
|
-5.83%
|
-50%
|
50%
|
99.13%
|
87.77%
|
56.26%
|
15.23%
|
-24.77%
|
-40%
|
40%
|
66.08%
|
56.57%
|
30.21%
|
-4.08%
|
-37.57%
|
-30%
|
30%
|
42.43%
|
34.25%
|
11.56%
|
-17.98%
|
-46.76%
|
-20%
|
20%
|
24.67%
|
17.47%
|
-2.47%
|
-28.38%
|
-53.72%
|
-10%
|
10%
|
10.83%
|
4.44%
|
-13.28%
|
-36.52%
|
-58.79%
|
0%
|
0%
|
-0.25%
|
-6.04%
|
-22.08%
|
-42.90%
|
-63.23%
|
10%
|
-10%
|
-9.32%
|
-14.64%
|
-29.23%
|
-48.27%
|
-66.67%
|
20%
|
-20%
|
-16.89%
|
-21.75%
|
-35.24%
|
-52.72%
|
-69.67%
|
30%
|
-30%
|
-23.29%
|
-27.84%
|
-40.25%
|
-56.41%
|
-71.94%
|
40%
|
-40%
|
-28.78%
|
-33.01%
|
-44.63%
|
-59.81%
|
-74.32%
|
50%
|
-50%
|
-33.55%
|
-37.52%
|
-48.57%
|
-62.60%
|
-76.19%
|
60%
|
-60%
|
-37.72%
|
-41.51%
|
-51.96%
|
-65.19%
|
-78.12%
|
Holding an
unmanaged position opens the investor to the risk of market volatility adversely affecting the performance of the investment. A Fund is not appropriate for investors who do not intend to actively monitor and manage their portfolios. These tables are
intended to underscore the fact
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that a Fund is designed as a short-term trading
vehicle for investors who intend to actively monitor and manage their portfolios.
For additional information and examples
demonstrating the effects of volatility and index performance on the long-term performance of the Funds, see the “Additional Information Regarding Investment Techniques and Policies” section, and “Special Note Regarding the
Correlation Risks of the Funds” in the Funds’ Statement of Additional Information.
Market Risk
Market risks include political, regulatory, market
and economic developments, including developments that impact specific economic sectors, industries or segments of the market. A Fund typically would lose value on a day when its underlying index increases.
Turbulence in the financial markets
and reduced liquidity may negatively affect issuers, which could have an adverse effect on each Fund. A Fund’s NAV could decline over short periods due to short-term market movements and over longer periods during market downturns.
Aggressive Investment Techniques
Risk
Using investment techniques that may be
considered aggressive, such as futures contracts, forward contracts, options and swap agreements, includes the risk of potentially dramatic changes (losses) in the value of the instruments, imperfect correlations between the price of the instrument
and the underlying security or index, and volatility of a Fund.
Liquidity Risk
Some securities held by a Fund, including
derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including, but not limited to, an economic crisis, natural
disasters, new legislation or regulatory changes inside or outside the United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If a Fund is forced to sell an illiquid security at an unfavorable time
or price, a Fund may incur a loss. Certain market conditions may prevent a Fund from limiting losses, realizing gains or achieving a high correlation with its underlying index. There is no assurance that a security that is deemed liquid when
purchased will continue to be liquid.
Market illiquidity may cause losses
for certain Funds. For these Funds, to the extent that a Fund's underlying index increases, a Fund may be one of many market participants that are attempting to transact in the securities of an underlying index or correlated instruments. Under such
circumstances, the market for investments of the underlying index may lack sufficient liquidity for all market participants' trades. Therefore, a Fund may have more difficulty transacting in securities of the underlying index or correlated
investments such as financial instruments and a Fund's transactions could exacerbate the price change of the securities of the underlying index. Additionally, because a Fund has short exposure, a minor increase in the value of underlying index
should be expected to have a substantial adverse impact on a Fund.
Derivatives Risk
A Fund uses investment techniques, including
investments in derivatives, such as swaps, futures and forward contracts, and options that may be considered aggressive. The use of derivatives may result in larger losses or smaller gains than than shorting the underlying securities. Investments in
these derivatives may generally be subject to market risks that cause their prices to fluctuate more than an investment directly in a security and may increase the volatility of a Fund. The use of derivatives may expose a Fund to additional risks
such as counterparty risk, liquidity risk and increased daily correlation risk. When a Fund uses derivatives, there may be imperfect correlation between the value of the underlying reference assets and the derivative, which may prevent a Fund from
achieving its investment objective.
A Fund may use
swaps on the underlying index. If the underlying index has a dramatic intraday move in value that causes a material decline in a Fund’s NAV, the terms of the swap agreement between a Fund and its counterparty may allow the counterparty to
immediately close out of the transaction with a Fund. In such circumstances, a Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with a Fund’s daily inverse
investment objective. This may prevent a Fund from achieving its daily inverse investment objective particularly if the underlying index reverses all or a portion of its intraday move by the end of the day. The value of an investment in the Fund may
change quickly and without warning. Any financing, borrowing or other costs associated with using derivatives may also have the effect of lowering a Fund’s return.
In addition, a Fund’s investments
in derivatives are subject to the following risks:
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Swap Agreements
. Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to
exchange the return (or differentials in rates of return) earned or realized on particular predetermined reference or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a reference asset.
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Futures Contracts
. A futures contact is a contract to purchase or sell a particular security, or the cash value of an index, at a specified future date at a price agreed upon when the contract is made. Under such contracts, no delivery of
the actual securities is required. Rather, upon the expiration of the contract, settlement is made by exchanging cash in an amount equal to the difference between the contract price and the closing price of a security or index at expiration, net of
the variation margin that was previously paid.
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•
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Forward
Contracts
. Forward contracts are two-party contracts pursuant to which one party agrees to pay the counterparty a fixed price for an agreed upon amount of commodities, securities, or the cash value of the
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commodities,
securities or the securities index, at an agreed upon date. A forward currency contract is an obligation to buy or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract.
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•
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Options
. An option is a contract that gives the purchaser (holder) of the option, in return for a premium, the right to buy from (call) or sell to (put) the seller (writer) of the option the security or currency underlying the
option at a specified exercise price at any time during the term of the option (normally not exceeding nine months). The writer of an option has the obligation upon exercise of the option to deliver the underlying security or currency upon payment
of the exercise price or to pay the exercise price upon delivery of the underlying security or currency.
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•
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Options
on Futures Contracts
. An option on a futures contract provides the holder with the right to enter into a “long” position in the underlying futures contract, in the case of a call option, or a
“short” position in the underlying futures contract in the case of a put option, at a fixed exercise price to a stated expiration date. Upon exercise of the option by the holder, the contract market clearing house establishes a
corresponding short position for the writer of the option, in the case of a call option, or a corresponding long position, in the case of a put option.
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Counterparty Risk
Counterparty risk
is the risk that a counterparty is unwilling or unable to make timely payments to meet its contractual obligations with respect to the amount a Fund expects to receive from a counterparty to a financial instrument entered into by a Fund. Each Fund
generally enters into derivatives transactions, such as the swap agreements, with counterparties such that either party can terminate the contract without penalty prior to the termination date. A Fund may be negatively impacted if a counterparty
becomes bankrupt or otherwise fails to perform its obligations under such a contract, or if any collateral posted by the counterparty for the benefit of a Fund is insufficient or there are delays in a Fund’s ability to access such collateral.
If the counterparty becomes bankrupt or defaults on its payment obligations to a Fund, it may experience significant delays in obtaining any recovery, may obtain only a limited recovery or obtain no recovery and the value of an investment held by a
Fund may decline. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral, if such remedies are stayed or eliminated under special resolutions adopted in the
United States, the European Union and various other jurisdictions. European Union rules and regulations intervene when a financial institution is experiencing financial difficulties and could reduce, eliminate, or convert to equity a
counterparty’s obligations to a Fund (sometimes referred to as a “bail in”).
A Fund typically enters into
transactions with counterparties that present minimal risks based on the Adviser’s assessment of the counterparty’s creditworthiness, or its capacity to meet its financial obligations during the term of the derivative
agreement or contract. The Adviser considers factors
such as counterparty credit rating among other factors when determining whether a counterparty is creditworthy. The Adviser regularly monitors the creditworthiness of each counterparty with which a Fund transacts. Each Fund generally enters into
swap agreements or other financial instruments with major, global financial institutions and seeks to mitigate risks by generally requiring that the counterparties for each Fund to post collateral, marked to market daily, in an amount approximately
equal to what the counterparty owes a Fund, subject to certain minimum thresholds. To the extent any such collateral is insufficient or there are delays in accessing the collateral, the Funds will be exposed to the risks described above. If a
counterparty’s credit ratings decline, a Fund may be subject to a bail-in, as described above.
In addition, a Fund may enter into
swap agreements with a limited number of counterparties, which may increase a Fund’s exposure to counterparty credit risk. A Fund does not specifically limit its counterparty risk with respect to any single counterparty. There is a risk that
no suitable counterparties are willing to enter into, or continue to enter into, transactions with a Fund and, as a result, a Fund may not be able to achieve its investment objective. Additionally, although a counterparty to a centrally cleared swap
agreement and/or an exchange-traded futures contract is often backed by a futures commission merchant (“FCM”) or a clearing organization that is further backed by a group of financial institutions, there may be instances in which a FCM
or a clearing organization would fail to perform its obligations, causing significant losses to a Fund.
Shorting Risk
Shareholders should lose money when the Index rises,
which is a result that is the opposite from traditional index tracking funds. A Fund may engage in short sales designed to earn the Fund a profit from the decline in the price of particular securities, baskets of securities or indices. Short sales
are transactions in which a Fund borrows securities from a broker and sells the borrowed securities. A Fund is obligated to replace the security borrowed by purchasing the security at the market price at the time of replacement. If the market price
of the underlying security goes down between the time a Fund sells the security and buys it back, a Fund will realize a gain on the transaction. Conversely, if the underlying security goes up in price during the period, a Fund will realize a loss on
the transaction. Any such loss is increased by the amount of premium or interest a Fund must pay to the lender of the security. Likewise, any gain will be decreased by the amount of premium or interest a Fund must pay to the lender of the security.
A Fund’s investment performance may also suffer if the Fund is required to close out a short position earlier than it had intended. This would occur if the securities lender required a Fund to deliver the securities the Fund borrowed at the
commencement of the short sale and the Fund was unable to borrow the securities from another securities lender or otherwise obtain the security by other means. In addition, a Fund may be subject to expenses related to short sales that are not
typically associated with investing in securities directly, such as costs of borrowing and margin account maintenance costs associated with the Fund’s open
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short positions. As the holder of a short position,
a Fund also is responsible for paying the dividends and interest accruing on the short position, which is an expense to the Fund that could cause the Fund to lose money on the short sale and may adversely affect its performance.
A Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose a Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If a Fund were to experience this volatility or decreased liquidity, a Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or a Fund may
be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, a Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. A Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying a Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
Unlike most ETFs, each Fund currently intends to
effect creation and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial instruments held by each Fund. As such, investment in each Fund may be less tax efficient than investment in
a conventional ETF. ETFs generally are able to make in-kind redemptions and avoid being taxed on gains on the distributed portfolio securities at the fund level. Because each Fund currently intends to effect redemptions principally for cash, each
Fund may be required to sell portfolio securities in order to obtain the cash needed to distribute redemption proceeds. Each Fund may recognize a capital gain on these sales that might not have been incurred if such Fund had made a redemption
in-kind and this may decrease the tax efficiency of the Fund compared to ETFs that utilize an in-kind redemption process.
Intra-Day Investment Risk
Each Fund seeks
daily investment results, which should not be equated with seeking an investment objective for shorter than a day. Thus, an investor who purchases Fund shares after the close of the markets on one trading day and before the close of the markets on
the next trading day will likely have more, or less, than 100% investment exposure to the underlying index, depending upon the movement of the underlying index from the end of one trading day until the time of purchase. If the underlying index moves
in a direction favorable to a Fund, the investor will receive less than 100% exposure to the underlying index. Conversely, if the underlying index moves in a direction adverse to a Fund, the investor will receive exposure to the underlying index
greater than 100%. Thus, an investor that purchases shares intra-day may experience performance that is greater than, or less than, a Fund’s stated multiple of its underlying index.
If there is a significant intra-day
market event and/or the securities of the underlying index experience a significant change in value, a Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, a Fund may close to purchases and sales of
Shares prior to the close of regular trading on the Exchange and incur significant losses.
Daily Inverse Index Correlation/Tracking
Risk
Investors will
lose money when the underlying index of a rises, which is a result that is the opposite from traditional index funds. There is no guarantee that a Fund will achieve a high degree of inverse correlation to its underlying index and therefore achieve
its daily inverse investment objective. To achieve a high degree of inverse correlation with the underlying index, a Fund seeks to rebalance its portfolio daily to be consistent with its daily inverse investment objective. A Fund may have difficulty
achieving its daily inverse investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for
the securities or derivatives held by a Fund. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect a Fund’s ability to adjust exposure to the required levels.
Because an underlying index may
include instruments that trade on a different market than a Fund, a Fund's return may vary from a multiple of the performance of an underlying index because different markets may close before the Exchange opens or may not be open for business on the
same calendar days as a Fund. Additionally, due to differences in trading hours between different markets, and because the level of the underlying index may be determined using prices obtained at times other than a Fund's NAV calculation time,
correlation to the underlying index may be measured by comparing a Fund's daily return to a multiple of the daily performance of the underlying index or by comparing the daily change in a Fund's NAV per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the underlying index as of a Fund's NAV calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to a Fund’s
underlying index due to embedded costs and other factors.
A Fund may not have investment
exposure to all securities in its underlying index, or its weighting of investment exposure to such stocks or industries may be different from that of the underlying index. In addition, a Fund may invest in securities or financial instruments not
included in the underlying index. A Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to its underlying index. In addition, the target amount of portfolio
exposure to the underlying index is impacted dynamically by the underlying index’s movement. Because of this, it is unlikely that a Fund will be perfectly exposed to its underlying index at the end of each day. The possibility of a Fund being
materially over- or under-exposed to its underlying index increases on days when the underlying index is volatile near the close of the trading day. Activities surrounding periodic
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underlying index reconstitutions and other
underlying index rebalancing or reconstitution events may hinder a Fund’s ability to meet its daily inverse investment objective.
Asset-Backed Securities Risk
Payment of interest and repayment of principal may
be impacted by the cash flows generated by the assets backing these securities. The value of a Fund’s asset-backed securities also may be affected by changes in interest rates, the availability of information concerning the interests in, and
structure of, the pools of purchase contracts, financing leases or sales agreements that are represented by these securities, the creditworthiness of the servicing agent for the pool, the originator of the loans or receivables, or the entities that
provide any supporting letters of credit, surety bonds, or other credit enhancements.
China Investing Risk
Exposure to investments in China and A-shares involve
certain risks and other special considerations, including the following:
•
|
Political and Economic
Risk
. The economy of China, which has been in a state of transition from a planned economy to a more market oriented economy, differs from economies of most developed countries in many respects, including the level
of government involvement, its state of development, its growth rate, control of foreign exchange, and allocation of resources. Although the majority of productive assets in China are still owned by the People’s Republic of China
(“China” or the “PRC”) government at various levels, in recent years, the PRC government has implemented economic reform measures emphasizing utilization of market forces in the development of the economy of China and a high
level of management autonomy. The economy of China has experienced significant growth in the past 30 years, but growth has been uneven both geographically and among various sectors of the economy. Economic growth has also been accompanied by periods
of high inflation. The PRC government has implemented various measures from time to time to control inflation and restrain the rate of economic growth.
|
|
The PRC government has
carried out economic reforms to achieve decentralization and utilization of market forces to develop the economy of the PRC over the last 30 years. There can be no assurance that the PRC government will continue to pursue such economic policies or,
if it does, that those policies will continue to be successful. Any adjustment or modification of those economic policies may have an adverse impact on the China securities market. Further, the PRC government may from time to time adopt corrective
measures to control the growth of the PRC economy which may also have an adverse impact on the capital growth and performance of the Chinese securities.
|
|
Political changes,
social instability and adverse diplomatic developments in the PRC could result in the imposition of additional government restrictions including expropriation of assets, confiscatory taxes or nationalization of some of all of the property held by
the issuers of A-shares securities.
|
|
The
laws, regulations, including the investment regulations allowing Stock Connect investing and Renminbi Qualified
|
Foreign Institutional Investors
(“RQFII”) (and Qualified Foreign Institutional Investors (“QFII”)) to invest in A-shares, government policies and political and economic climate in China may change with little or no advance notice. Any such change could
adversely affect market conditions and the performance of the Chinese economy and, thus, the value of the exposure to A-shares in a Fund’s portfolio.
Since 1949, the PRC has been a
socialist state controlled by the Communist party. China has only recently opened up to foreign investment and has only begun to permit private economic activity. There is no guarantee that the Chinese government will not revert from its current
open-market economy to the economic policy of central planning that it implemented prior to 1978.
The PRC government continues to be
an active participant in many economic sectors through ownership positions and regulation. The allocation of resources in China is subject to a high level of government control. The PRC government strictly regulates the payment of foreign currency
denominated obligations and sets monetary policy. Through its policies, the PRC government may provide preferential treatment to particular industries or companies. The policies set by the government could have a substantial effect on the Chinese
economy.
The Chinese economy
is export-driven and highly reliant on trade, and much of China’s growth in recent years has been the result of focused investments in economic sectors intended to produce goods and services for export purposes. The performance of the Chinese
economy may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, currency depreciation, capital reinvestment, resource self-sufficiency and balance of payments position.
Adverse changes to the economic conditions of its primary trading partners, such as the United States, Japan and South Korea, would adversely impact the Chinese economy and the Fund’s investments. International trade tensions involving China
and its trading counterparties may arise from time to time which can result in trade tariffs, embargoes, trade limitations, trade wars and other negative consequences. Such actions and consequences may ultimately result in a significant reduction in
international trade, an oversupply of certain manufactured goods, devaluations of existing inventories and potentially the failure of individual companies and/or large segments of China’s export industry with a potentially severe impact to the
Fund.
China has been
transitioning to a market economy since the late seventies, reaffirming its economic policy reforms through five-year programs, the latest of which (for 2011 through 2015) was approved in March 2011. Under the economic reforms implemented by the PRC
government, the Chinese economy has experienced tremendous growth, developing into one of the largest economies in the world. There is no assurance, however, that such growth will be sustained in the future.
Moreover, the current slowdown or
any future recessions in other significant economies of the world, such as the United States, the European Union and certain Asian
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countries, may adversely affect economic growth in
China. An economic downturn in China would likely adversely impact the value of A-shares.
•
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Inflation
. Economic growth in China has also historically been accompanied by periods of high inflation. Beginning in 2004, the PRC government commenced the implementation of various measures to control inflation, which included
the tightening of the money supply, the raising of interest rates and more stringent control over certain industries. If these measures are not successful, and if inflation were to steadily increase, the performance of the Chinese economy and
A-share securities could be negatively impacted.
|
•
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Tax Changes
. The Chinese taxation system is not as well settled as that of the United States. Changes in the Chinese tax system could have retroactive effects that may impact the Chinese securities market.
|
•
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Nationalization and
Expropriation
. After the formation of the Chinese socialist state in 1949, the PRC government renounced various debt obligations and nationalized private assets without providing any form of compensation. There can
be no assurance that the PRC government will not take similar actions in the future. Accordingly, investments in A-share securities or other Chinese investments involve a risk of total loss.
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•
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Chinese Securities
Markets
. The securities markets in China have a limited operating history and are not as developed as those in the United States. These markets tend to be smaller in size, have less liquidity and historically have
had greater volatility than markets in the United States and some other countries. In addition, there is less regulation and monitoring of Chinese securities markets and the activities of investors, brokers and other participants than in the United
States. Accordingly, issuers of securities in China are not subject to the same degree of regulation as are the United States issuers with respects to such matters as insider trading rules, tender offer regulation, stockholder proxy requirements and
the requirements mandating timely disclosure of information. Stock markets in China are in the process of change and further development. This may lead to trading volatility, unpredictable trading suspensions, difficulty in the settlement and
recording of transactions and difficulty in interpreting and applying the relevant regulations.
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•
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Available
Disclosure about Chinese Companies
. Disclosure and regulatory standards in emerging countries, such as China, are in many respects less stringent then U.S. standards. There is substantially less publicly available
information about Chinese issuers than there is about U.S. issuers. Therefore, disclosure of certain material information may not be made, and less information may be available to investors than would be the case if the investments were made in the
U.S. issuers. Chinese issuers are subject to accounting, auditing and financial standards and requirements that differ, in some cases significantly, from those applicable to U.S. issuers. In particular, the assets and profits appearing on the
financial statements of a Chinese issuer may not reflect its financial position or results of operations in the way they would be reflected
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had such financial
statements been prepared in accordance with U.S. Generally Accepted Accounting Principles.
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•
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Chinese Corporate and
Securities Law
. The regulations on investments and repatriation of capital by QFIIs and RQFIIs are relatively new. As a result, the application and interpretation of such investment regulations are therefore
relatively untested. In addition, PRC authorities have broad discretion in this regard. China operates under a civil law system, in which court precedent is not binding. Because there is no binding precedent to interpret existing statues, there is
uncertainty regarding the implementation of existing law.
|
|
Legal principles
relating to corporate affairs and the validity of corporate procedures, directors’ fiduciary duties and liabilities and stockholders’ rights often differ from those that may apply in the United States and other countries. Chinese laws
providing protection to investors, such as laws regarding the fiduciary duties of officers and directors, are undeveloped and will not provide investors with protection would be provided by comparable law in the United States. China lacks a national
set of laws that address all issues that may arise with regard to a foreign investor. It may therefore be more difficult for an investor to enforce their rights under Chinese corporate and securities laws, and it may be difficult or impossible to
obtain a judgment in court. Moreover, as Chinese corporate and securities laws continue to develop, these developments may adversely affect foreign investors.
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•
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Investment
and Repatriation Restrictions
. Investments in A-shares and other Chinese financial instruments are regulated by the CSRC, including warrants and open- and closed-end investment companies, are subject to governmental
pre-approval limitations on the quantity that a foreign investor may purchase and limits the classes of securities in which a foreign investor may invest. The PRC government limits foreign investment in securities of certain Chinese issuers entirely
if foreign investment is banned in respect of the industry in which the relevant Chinese issuers are conducting their business. Currently licensed RQFII entities are allowed to repatriate RMB daily and are not subject to RMB repatriation
restrictions or prior approval. However, there is no assurance that PRC rules and regulations will not change or that repatriation restrictions will not be imposed in the future.
|
Chinese Securities Risks
Investment in, and/or exposure to, the securities of
Chinese issuers involves risks that may be greater than if a Fund’s investments were more geographically diverse. The Chinese economy is generally considered an emerging market and can be significantly affected by economic and political
conditions and policy in China and surrounding Asian countries. In addition, the Chinese economy is export-driven and highly reliant on trade. A downturn in the economies of China’s primary trading partners could slow or eliminate the growth
of the Chinese economy. Additionally, the economy of China differs greatly from the U.S. economy in such respects as, structure, general development, government involvement, wealth distribution, rate of
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inflation, interest rates, allocation of resources
and capital reinvestment. Specifically, issuers in China are subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than issuers in more developed markets, and therefore, all material
information may not be available or reliable.
Chinese Government Risk
The Chinese government has historically exercised
substantial control over virtually every sector of the Chinese economy through administrative regulation and/or state ownership. In the past, the Chinese government has from time to time taken actions that influence the prices at which certain goods
may be sold, encouraged companies to invest or concentrate in particular industries, induced mergers between companies in certain industries and induced inflation or otherwise regulated economic expansion. If such past actions were to continue, they
may have significant adverse effects on the economic conditions in China. The Chinese government also strictly regulates the payment of foreign currency-denominated obligations and sets monetary policy, and may introduce new laws and regulations
that may impact a Fund. Although China has begun the process of privatizing certain sectors of its economy, privatized entities may lose money and/or be re-nationalized. Accordingly, an investment in Chinese securities could result in a total loss
if these companies are re-nationalized or other regulatory actions are taken by the Chinese government. The Chinese securities markets have a limited operating history and are not as developed as those in the U.S. A small number of issuers may
represent a large portion of the China market as a whole, and prices for securities of these issuers may be very sensitive to adverse political, economic and regulatory developments in China and other Asian countries and may experience significant
losses in such conditions. The Chinese securities markets are characterized by relatively frequent trading halts and low trading volume, resulting in substantially less liquidity and greater price volatility than more developed securities
markets.
Chinese Markets
Risk
The Chinese securities markets have a
limited operating history and are not as developed as those in the United States. A small number of issuers may represent a large portion of the China market as a whole, and prices for securities of these issuers may be very sensitive to adverse
political, economic and regulatory developments in China and other Asian countries and may experience significant losses in such conditions. The Chinese securities markets are characterized by relatively frequent trading halts and low trading
volume, resulting in substantially less liquidity and greater price volatility than more developed securities markets.
Investments in China may also be
subject to any positive or adverse effects of the varying nature of its economic landscape with respect to expropriation and/or nationalization of assets, strengthened or lessened restrictions on and government intervention in international trade,
confiscatory taxation, political instability, including authoritarian and/or military involvement in governmental decision making, armed conflict, the impact on the economy as a result of civil war and social instability as a result of religious,
ethnic and/or socioeconomic unrest.
Chinese Currency Risk
The value of the renminbi (“RMB”) may be
subject to a high degree of fluctuation due to, among other things, changes in interest rates, the effects of monetary policies issued by the Chinese government, the United States, foreign governments, central banks or supranational entities, the
imposition of current controls of other national or global political or economic developments. The RMB is currently not a freely convertible currency. The Chinese government places strict regulations on RMB and sets the value of RMB to levels
dependent on the value of the U.S. Dollar, but the Chinese government has been under pressure to manage the currency in a less restrictive fashion so that it is less correlated to the U.S. Dollar. The Chinese government’s imposition of
restrictions on the repatriation of RMB out of mainland China may limit the depth of the offshore RMB market and may reduce the liquidity of Chinese investments. A Fund’s exposure to Chinese securities and therefore, the RMB, may result in
volatility.
Special Risk
Considerations Relating to RQFII and QFII Investments Risk
The China Funds’ ability to achieve their
investment objective is dependent on the ability of other ETFs and counterparties to obtain their QFII or RQFII quota. The China Funds also cannot predict what would occur if general QFII or RQFII quotas were reduced or eliminated. Either
circumstance would likely have a material adverse impact on the China Funds through its indirect investments and would likely adversely affect the willingness and ability of potential swap counterparties to engage in swaps with the China Funds that
are linked to the performance of A-shares. Additionally, other ETFs may limit or suspend creation unit activity and shares could trade at a significant premium or discount to its NAV and therefore impact the China Funds’ ability to obtain
exposure to their underlying indices and the China Funds' ability to achieve their investment objectives or obtain a high correlation to their underlying indices.
Presently, there are a limited number
of firms and potential counterparties that have RQFII or QFII status or are willing and able to enter into swap transactions linked to the performance of A-shares. If the China Funds are unable to obtain sufficient inverse exposure to their
underlying indices due to the limited availability of necessary investments or financial instruments, the China Funds could, among other things, as a defensive measure, limit or suspend creation units until the Adviser determines that the requisite
exposure to their underlying indices is obtainable. During the period that creation units are suspended, the China Funds could trade at a significant premium or discount to their NAV and could experience substantial redemptions. Alternatively, the
China Funds could change their investment objectives, for example, seeking inverse exposure to track an alternative index focused on Chinese-related stocks other than A-shares or other appropriate investments, or decide to liquidate the China
Funds.
Consumer
Discretionary Sector Risk
Because companies in
the consumer discretionary sector manufacture products and provide discretionary services directly to the consumer, the success of these companies
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is tied closely to the performance of the overall
domestic and international economy, interest rates, competition and consumer confidence. Success depends heavily on disposable household income and consumer spending. Also, companies in the consumer discretionary sector may be subject to severe
competition, which may have an adverse impact on a company’s profitability. Changes in demographics and consumer tastes also can affect the demand for, and success of, consumer discretionary products in the marketplace.
Credit Risk
A Fund could lose
money if the issuer or guarantor of a debt security goes bankrupt or is unable or unwilling to make interest payments and/or repay principal. Changes in an issuer’s financial strength or in an issuer’s or debt security’s credit
rating also may affect a security’s value and thus have an impact on Fund performance. The degree of credit risk for a particular security may be reflected in its credit rating. Lower rated debt securities involve greater credit risk,
including the possibility of default or bankruptcy. Generally, the longer the maturity and the lower the credit quality of a security, the more sensitive it is to credit risk.
Debt Instrument Risk
The value of debt
instruments may increase or decrease as a result of the following: market fluctuations; changes in interest rates; actual or perceived inability of issuers, guarantors, or liquidity providers to make scheduled principal or interest payments; or
illiquidity in debt securities markets. Debt instruments are also impacted by political, regulatory, market and economic developments that impact the market in general and specific economic sectors, industries or segments of the fixed income market.
In general, rising interest rates lead to a decline in the value of debt securities and debt securities with longer durations tend to be more sensitive to interest rate changes usually making their prices more volatile than those of securities with
shorter durations. To the extent that interest rates rise, certain underlying obligations may be paid off substantially slower than originally anticipated and the value of those securities may fall. Declining interest rates may lead to prepayment of
obligations and cause reduced rates of return due to reinvestment of interest and principal payments at lower interest rates.
Emerging Markets Risk
Investments in, and or exposure to, emerging markets
instruments involves greater risks than investing in issuers located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation,
political and economic instability, greater risk of market shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies
that concentrate in only a few industries, security issues that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign
nationals who have inside information. Additionally, emerging markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated
with custody of securities than developed markets.
Emerging markets often have greater risk of capital controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of
foreign trade and investment. Local securities markets in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings
difficult or impossible at times. Settlement procedures in emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the
transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency. Emerging markets
may develop unevenly and may never fully develop.
Extension Risk
During periods of rising interest rates, certain
debt obligations may be paid off substantially more slowly than originally anticipated and the value of those securities may fall sharply, which may adversely impact the value of a Fund’s investments.
Financials Sector Risk
Performance of companies in the financials sector
may be materially impacted by many factors, including but not limited to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is
largely dependent on the availability and cost of capital and can fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also
subject to substantial government regulation and intervention, which may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may
change frequently and may have significant adverse consequences for financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various
countries on any individual financial company or of the financials sector as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Healthcare Sector Risk
The profitability of companies in the healthcare
sector may be affected by extensive, costly and uncertain government regulation, restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient
services, limited number of products, industry innovation, changes in technologies and other market developments. Many healthcare companies are heavily dependent on patent protection. The expiration of patents may adversely affect
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the profitability of these companies. Many
healthcare companies are subject to extensive litigation based on product liability and similar claims. Healthcare companies are subject to competitive forces that may make it difficult to raise prices and, in fact, may result in price discounting.
Many new products in the healthcare sector may be subject to regulatory approvals. The process of obtaining such approvals may be long and costly.
Information Technology Sector Risk
The value
of stocks of information technology companies and companies that rely heavily on technology is particularly vulnerable to rapid changes in technology product cycles, rapid product obsolescence, government regulation and competition, both
domestically and internationally, including competition from competitors with lower production costs. Information technology companies and companies that rely heavily on technology, especially those of smaller, less-seasoned companies, tend to be
more volatile than the overall market. Information technology companies are heavily dependent on patent and intellectual property rights, the loss or impairment of which may adversely affect profitability. Additionally, companies in the information
technology sector may face dramatic and often unpredictable changes in growth rates and competition for the services of qualified personnel.
Interest Rate Risk
Debt securities,
and securities that provide exposure to debt securities, have varying levels of sensitivity to changes in interest rates. In addition, a Fund is subject to the risk that interest rates may change and exhibit increased volatility, thus affecting the
performance of a Fund. Interest rates across the U.S. economy have recently increased and may continue to increase, which may expose a Fund to heightened interest rate risk and volatility. Securities with longer maturities can be more sensitive to
interest rate changes. To the extent a Fund’s Index includes a substantial portion of its assets in fixed-income securities with longer-term durations, rising interest rates may cause the value of the Index to decline significantly. An
increase in interest rates may lead to heightened volatility in the fixed-income markets and adversely affect the liquidity of certain fixed-income investments. A decrease in fixed-income market maker capacity may act to decrease liquidity in the
fixed-income markets and act to further increase volatility, affecting a Fund’s return.
In addition, short-term and long-term
interest rates do not necessarily move in the same amount or the same direction. Short-term securities tend to react to changes in short-term interest rates, and long-term securities tend to react to changes in long-term interest rates. The impact
of an interest rate change may be significant for other asset classes as well, whether because of the impact of interest rates on economic activity or because of changes in the relative attractiveness of asset classes due to changes in interest
rates. For instance, higher interest rates may make investments in debt securities more attractive, thus reducing investments in equities. The link between interest rates and debt security prices tends to be weaker with lower-rated debt securities
than with investment-grade debt securities.
The historically low interest rate
environment was created in part by the U.S. Board of Governors of the Federal Reserve System (the “Fed”) and certain foreign banks keeping the federal funds and equivalent foreign rates at or near zero percent. The Fed recently raised
its benchmark interest rate several times as the U.S. labor market strengthened and economic activity accelerated. The Fed indicated that it expects its accommodative monetary policy stance to support strong labor market conditions and a sustained
return to target inflation, which increases the likelihood of rising interest rates in the future. Fed policy going forward is less clear given recent changes in Fed leadership.
Internet Company Industry Risk
A Fund may invest in, and/or have exposure to,
internet companies. The market prices of internet securities tend to exhibit a greater degree of market risk and sharp price fluctuations than other types of securities. These securities may fall in and out of favor with investors rapidly, which may
cause sudden selling and dramatically lower market prices. These companies are subject to rapid changes in technology, worldwide competition, rapid obsolescence of products and services, loss of patent protections, evolving industry standards and
frequent new product productions. Internet securities also may be affected adversely by changes in consumer and business purchasing patterns and government regulations. These companies may have high market valuations and may appear less attractive
to investors, which may cause sharp decreases in their market prices.
Mortgage-Backed Securities Risk
A Fund may invest in and/or have exposure to
mortgage-backed securities (“MBS”), some of which may not be backed by the full faith and credit of the U.S. government. MBS are subject to prepayment or call risk and extension risk. Because of these risks, MBS react differently than
other bonds to changes in interest rates. Small movements in interest rates (both increases and decreases) may quickly and significantly reduce the value of certain MBS. Default or bankruptcy of a counterparty to a TBA transaction would expose a
Fund to possible loss.
Municipal
Securities Risk
Municipal securities are
fixed-income securities issued by states, counties, cities and other political subdivisions and authorities. Municipalities issue such securities to fund their current operations before collecting taxes or other municipal revenues or to fund capital
projects prior to issuing long-term bonds. Municipal securities also may be issued by industrial or economic development authorities, school and college authorities, housing authorities, healthcare facility authorities, municipal utilities,
transportation authorities, and other public agencies.
Municipal issuers are subject to
unique factors affecting their ability to pay debt obligations, including the risk that litigation, legislation or other political events, local business and economic conditions, or bankruptcy could have a significant impact on an issuer’s
ability to make payments of principal and/or interest or otherwise affect the value of such securities. Moreover, an adverse interpretation of
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the tax status of municipal securities may make such
securities decline in value. Municipal securities can be significantly affected by political changes as well as uncertainties in the municipal market related to government regulation, taxation, legislative changes or the rights of municipal security
holders, including in connection with an issuer insolvency. Because many municipal securities are issued to finance certain projects, such as those related to education, health care, housing, transportation, utilities, and water and sewer,
conditions in these sectors can affect the overall municipal market.
Municipal securities backed by
current or anticipated revenues from a specific project or specific assets can be negatively affected by the discontinuance of the tax benefits supporting the project or assets or the inability to collect revenues for the project or from the assets.
Municipal securities may be less liquid than taxable bonds and there may be less publicly available information on the financial condition of municipal security issuers than for issuers of other securities.
Prepayment Risk
Many types of debt securities, including mortgage
securities, are subject to prepayment risk, which is the risk that the issuer of the security will repay principal prior to the maturity date. Securities subject to prepayment can offer less potential for gains during a declining interest rate
environment and similar or greater potential for loss in a rising interest rate environment. In addition, the potential impact of prepayment features on the price of a debt security can be difficult to predict and result in greater volatility. As a
result, a Fund may have to reinvest its assets in mortgage securities or other debt securities that have lower yields.
Real Estate Sector Risk
Investment in securities issued by, and/or having
exposure to, commercial and residential real estate companies are subject to risks similar to those associated with direct ownership of real estate, including changes in local and general economic conditions, vacancy rates, interest rates, zoning
laws, rental income, property taxes, operating expenses and losses from casualty or condemnation. An investment in a real estate investment trust (“REIT”) is subject to additional risks, including poor performance by the manager of the
REIT, adverse tax consequences, and limited diversification resulting from being invested in a limited number or type of properties or a narrow geographic area.
U.S. Government Securities Risk
A security backed by the U.S. Treasury or the full
faith and credit of the United States is guaranteed only as to the timely payment of interest and principal when held to maturity. The market prices for such securities are not guaranteed and will fluctuate. In addition, because many types of U.S.
government securities trade actively outside the United States, their prices may rise and fall as changes in global economic conditions affect the demand for these securities. In addition, U.S. Treasury obligations may differ from other securities
in their interest rates, maturities, times of issuance and other characteristics. Changes in the financial condition or credit rating of the U.S government may cause the value of U.S. Treasury obligations to decline. On August 5, 2011, S&P
Global Ratings downgraded U.S. Treasury securities from a AAA rating to a AA+ rating. A further downgrade of the ratings
of U.S. government debt obligations could result in
higher interest rates for individual and corporate borrowers, cause disruptions in bond markets and have a substantial negative effect on the U.S. economy.
Large-Capitalization Company Risk
Large-capitalization companies may be less able to
adapt to changing market conditions or to respond quickly to competitive challenges or to changes in business, product, financial, or market conditions. Larger companies may not be able to maintain growth at rates that may be achieved by
well-managed smaller and mid-size companies, which may affect the companies’ returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Micro-Capitalization Company Risk
Stock prices of micro-capitalization companies are
significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition, micro-capitalization companies often have limited product lines, narrower markets for their goods and/or
services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or mid-capitalization. In addition, because these stocks are not well known to the investing
public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of
larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity of securities held by a Fund. As a result, their performance can be more volatile and they face greater risk of
business failure, which could increase the volatility of a Fund’s portfolio.
Mid-Capitalization Company Risk
Mid-capitalization companies often have narrower
markets for their goods and/or services and more limited managerial and financial resources than larger, more-established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are
dependent on a small management group. In addition, because these stocks are not well known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less
publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and
liquidity of securities held by a Fund. As a result, the performance of mid-capitalization companies can be more volatile and they face greater risk of business failure, which could increase the volatility of a Fund’s portfolio.
Small- and/or Mid-Capitalization Company
Risk
Small- and/or mid-capitalization companies often
have narrower markets for their goods and/or services and more limited managerial and financial resources. Furthermore, those companies often have limited product lines, services,
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markets, financial resources or are dependent on a
small management group. Because these stocks are not well-known to the investing public, there will normally be less publicly available information concerning these securities. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, can decrease the value and liquidity of securities held by a Fund, resulting in more volatile performance. They also face greater risk of business failure, which could increase the volatility of a Fund’s portfolio.
Currency Exchange Rate Risk
Changes in foreign currency exchange rates will
affect the value of what a Fund owns and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities
markets.
Foreign Securities
Risk
Foreign instruments may involve greater
risks than domestic instruments. As a result, a Fund’s returns and NAV may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in
other countries. The laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the United States, and there may be less public information available about foreign
companies.
Foreign securities
may involve additional risk, including, greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political
instability. Certain foreign markets may rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or countries, organizations,
entities and/or individuals, changes in international trade patterns, trade barriers, and other protectionists or retaliatory measures.
Geographic Concentration Risk
Investments in a particular country or geographic
region may be particularly susceptible to political, diplomatic or economic conditions and regulatory requirements. As a result, a Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
Because a Fund’s investments may be
traded in markets that are closed when the Exchange is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed
foreign market), resulting in premiums or discounts to NAV that may be greater than those experienced by other ETFs.
Adverse Market Conditions Risk
The
investment objective of each Fund is to provide performance that correlates to the inverse of the performance of an underlying index. A Fund’s performance will suffer
when market conditions are adverse to the
Fund’s investment objective. For example, if the underlying index has risen on a given day, then a Fund’s performance should fall. Conversely, if an underlying index has fallen on a given day, then a Fund’s performance should
rise.
Adviser’s
Investment Strategy Risk
The Adviser utilizes
a quantitative methodology to select investments for each Fund. Although this methodology is designed to correlate each Fund's daily performance with -100% of the daily performance of its underlying index, there is no assurance that such methodology
will be successful and will enable a Fund to achieve its investment objective.
Commodity Pool Registration Risk
Under
amended regulations promulgated by the U.S. Commodities Futures Trading Commission (“CFTC”), the Funds are considered commodity pools, and therefore each is subject to regulation under the Commodity Exchange Act and CFTC rules. The
Adviser is registered as a commodity pool operator and will manage the Funds in accordance with CFTC rules as well as the rules that apply to registered investment companies, which includes registering the Funds as commodity pools. Registration as a
commodity pool subjects the registrant to additional laws, regulations and enforcement policies, all of which may potentially increase compliance costs and may affect the operations and financial performance of the Funds.
Cybersecurity Risk
The increased use of technologies, such as the
internet, to conduct business increases the operational, information security and related “cyber” risks both directly to a Fund and through its service providers. Similar types of cyber security risks are also present for issuers of
securities in which a Fund may invest, which could result in material adverse consequences for such issuers. Unlike many other types of risks faced by a Fund, these risks typically are not covered by insurance. Cyber incidents can result from
deliberate attacks or unintentional events. Cyber incidents may include, but are not limited to, gaining unauthorized access to digital systems (
e.g.
, through “hacking” or malicious software
coding) for purposes of misappropriating assets or sensitive information, corrupting data, causing physical damage to computer or network systems, or causing operational disruption. Cyber attacks may also be carried out in a manner that does not
require gaining unauthorized access, such as causing denial-of-service attacks on websites (
i.e
., efforts to make network services unavailable to intended users).
Failures or breaches of the
electronic systems of a Fund, a Fund’s advisor, distributor, other service providers, counterparties, securities trading venues, or the issuers of securities in which a Fund invests have the ability to cause disruptions and negatively impact a
Fund’s business operations, potentially resulting in financial losses to a Fund and its shareholders. Cyber attacks may also interfere with the Fund’s calculation of its NAV, result in the submission of erroneous trades or erroneous
creation or redemption orders, and could lead to violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs and/or additional compliance costs. While a Fund has
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business continuity plans, there are inherent
limitations in such plans, including the possibility that certain risks have not been identified and that prevention and remediation efforts will not be successful. Furthermore, a Fund cannot control the cyber security plans and systems of a
Fund’s service providers or issuers of securities in which a Fund invests.
Early Close/Trading Halt Risk
An exchange or market may close or issue trading
halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in a Fund being unable to buy or sell certain securities or financial instruments. For example, there is a
risk that sharp price declines in securities owned by the Fund may trigger trading halts, which may result in the Fund’s shares trading at an increasingly large discount to NAV during part of, or all of, the trading day. In such circumstances,
a Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
Equity Securities Risk
Publicly-issued equity securities, including common
stocks, are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which a Fund invests will cause the NAV of the Fund to fluctuate.
High Portfolio Turnover Risk
Engaging in active and frequent trading leads to
increased portfolio turnover, higher transaction costs, and the possibility of increased short-term capital gains (which will be taxable to shareholders as ordinary income when distributed to them) and/or long-term capital gains.
Investment Risk
An investment in a Fund is not a deposit in a bank
and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
Money market instruments, including money market
funds, depositary accounts and repurchase agreements may be used for cash management purposes. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject
to credit risk with respect to the financial institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase
agreements may be subject to market and credit risk related to the collateral securing the repurchase agreement. Money market instruments may also be subject to credit risks associated with the instruments in which they invest. There is no guarantee
that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
A Fund invests a high percentage of its assets in a
limited number of securities. A Fund’s NAV and total return may fluctuate more, or fall greater, in times of weaker markets than a diversified mutual fund because the Fund may invest
its assets in a smaller number of issuers or may
invest a larger proportion of its assets in a single issuer. As a result, the gains or losses on a single investment may have a greater impact on a Fund’s NAV and may make a Fund more volatile than more diversified funds.
Regulatory Risk
Each Fund is subject to the risk that a change in
U.S. law and related regulations will impact the way a Fund operates, increase the particular costs of a Fund’s operations and/or change the competitive landscape. In particular, there is no guarantee that a Fund will be permitted to continue
to engage in short sales, which are designed to earn a Fund a profit from the decline of the price of a particular security, basket of securities or index.
Additional legislative or regulatory
changes could occur that may materially and adversely affect a Fund. For example, the regulatory environment for derivative instruments in which a Fund may invest is evolving, and changes in the regulation or taxation of derivative instruments may
materially and adversely affect the ability of a Fund to pursue its trading strategies. Such legislative or regulatory changes could pose additional risks and result in material adverse consequences to a Fund.
Securities Lending Risk
Securities lending
involves the risk that a Fund may lose money because the borrower of the loaned securities fails to return the securities in a timely manner or at all. A Fund could also lose money in the event of a decline in the value of collateral provided for
loaned securities, a decline in the value of any investments made with cash collateral, or a “gap” between the return on cash collateral reinvestments and any fees a Fund has agreed to pay a borrower. These events could also trigger
adverse tax consequences for a Fund. In the event of a large redemption while a Fund has loaned portfolio securities, a Fund may suffer losses (
e.g
. overdraft fees) if it is unable to recall the securities on
loan in time to fulfill the redemption.
Special Risks of Exchange-Traded
Funds
Authorized Participants Concentration Risk
. A Fund may have a limited number of financial institutions that may act as Authorized Participants. Only Authorized Participants who have entered into agreements with a Fund’s distributor may
engage in creation or redemption transactions directly with the Fund. To the extent that those Authorized Participants exit the business or are unable to process creation and/or redemption orders, Shares may trade at a discount to NAV and possibly
face trading halts and/or delisting. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or investments that have lower trading volumes.
Market Price Variance Risk
. Shares of a Fund that are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at NAV. The market prices of Shares will fluctuate in response
to changes in the value of a Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than NAV (a premium) or less than NAV (a discount).
The
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Adviser cannot
predict if Shares will trade at a premium or discount to the Fund’s NAV. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that large discounts or premiums to the NAV of Shares should not be
sustained. There may, however, be times when the market price and the NAV vary significantly and a shareholder may trade shares at a premium or a discount to a Fund’s NAV. A Fund’s investment results are measured based upon the daily NAV
of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent with those experienced by those creating and redeeming directly with a Fund. There is no guarantee
that an active secondary market will develop for Shares of a Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade a Fund’s Shares and/or create or
redeem Creation Units, trading spreads and the resulting premium or discount on a Fund’s Shares may widen and a Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues
. Trading in Shares on the Exchange may be halted due to market conditions or for reasons that, in the view of the Exchange, make trading in Shares inadvisable, such as extraordinary market volatility
or other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the Exchange or markets. There can be no assurance that Shares will continue to meet the listing requirements of the
Exchange, and the listing requirements may be amended from time to time.
A Precautionary Note to Retail
Investors
. The Depository Trust Company (“DTC”), a limited trust company and securities depositary that serves as a national clearinghouse for the settlement of trades for its participating banks and
broker-dealers, or its nominee, will be the registered owner of all outstanding Shares of each Fund of the Trust. Your ownership of Shares will be shown on the records of DTC and the DTC Participant broker through whom you hold the Shares. THE TRUST
WILL NOT HAVE ANY RECORD OF YOUR OWNERSHIP. Your account information will be maintained by your broker, who will provide you with account statements, confirmations of your purchases and sales of Shares, and tax information. Your broker also will be
responsible for ensuring that you receive shareholder reports and other communications from a Fund whose Shares you own. Typically, you will receive other services (
e.g.
, average basis information) only if your broker offers these services.
A Precautionary Note to Purchasers of
Creation Units
. Because new Shares may be issued on an ongoing basis, a “distribution” of Shares could be occurring at any time. As a dealer, certain activities on your part could, depending on the
circumstances, result in your being deemed a participant in the distribution, in a manner that could render
you a statutory underwriter and subject you to the
prospectus delivery and liability provisions of the Securities Act of 1933, as amended (“Securities Act”). For example, you could be deemed a statutory underwriter if you purchase Creation Units from an issuing Fund, break them down into
the constituent Shares and sell those Shares directly to customers, or if you choose to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for Shares. Whether a person is an
underwriter depends upon all of the facts and circumstances pertaining to that person’s activities, and the examples mentioned here should not be considered a complete description of all the activities that could cause you to be deemed an
underwriter. Dealers who are not “underwriters,” but are participating in a distribution (as opposed to engaging in ordinary secondary market transactions), and thus dealing with Shares as part of an “unsold allotment” within
the meaning of Section 4(3)(C) of the Securities Act, will be unable to take advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities Act.
A Precautionary Note
to Investment Companies
. For purposes of the Investment Company Act of 1940, as amended (“1940 Act”) each Fund is a registered investment company, and the acquisition of Shares by other investment
companies is subject to the restrictions of Section 12(d)(1) thereof. Section 12(d)(1) of the 1940 Act restricts investments by investment companies in the securities of other investment companies, including shares of each Fund. Provided, generally,
that a Fund’s investments comply with Section 12(d)(1)(A), registered investment companies are permitted to invest in a Fund beyond the limits set forth in Section 12(d)(1) subject to certain terms and conditions, including that such
investment companies enter into an agreement with a Fund.
The Trust and the Funds have obtained
an exemptive order from the U.S. Securities and Exchange Commission (the “SEC”) allowing a registered investment company to invest in a Fund beyond the limits of Section 12(d)(1) subject to certain conditions, including that a registered
investment company enters into a Participation Agreement with the Trust regarding the terms of the investment. Any investment company considering purchasing Shares of a Fund in amounts that would cause it to exceed the restrictions under Section
12(d)(1) should contact the Trust.
A Precautionary Note Regarding Unusual
Circumstances
. The Trust can postpone payment of redemption proceeds for any period during which (1) the Exchange is closed other than customary weekend and holiday closings, (2) trading on the Exchange is
restricted, as determined by the SEC, (3) any emergency circumstances exist, as determined by the SEC, or (4) the SEC by order permits for the protection of shareholders of a Fund.
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Share Price of the Funds
A fund’s share price is known
as its NAV. Each Fund’s share price (except for the Fixed Income Funds) is calculated as of the close of regular trading on the NYSE, usually 4:00 p.m. Eastern Time (“Valuation Time”), each day the NYSE is open for business
(“Business Day”). The NYSE is open for business Monday through Friday, except in observation of the following holidays: New Year’s Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. The NYSE may close early on the business day before each of these holidays and on the day after Thanksgiving Day. NYSE holiday schedules are subject to change without notice.
Each Fixed Income Fund also
calculates its NAV as of the close of regular trading on the NYSE, usually 4:00 p.m. Eastern Time each Business Day. However, on days that the bond markets close all day, which currently includes the following holidays: New Year's Day, Martin Luther
King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day (a “Bond Market Holiday”), the Fixed Income Funds do not calculate their NAVs, even if
the NYSE is open for business. On such days, orders for purchase or redemption will receive the NAV next calculated on the following Business Day that is not a Bond Market Holiday. Similarly, on days that the bond markets close early but the NYSE
does not (usually at 2 p.m. Eastern Time, and which currently include the Friday before Memorial Day and New Year’s Eve), the Fixed Income Funds treat the portion of the day that the bond markets are closed as a Bond Market Holiday and
calculates their NAVs as of the recommended closing time for the bond markets, which may be before 4:00 p.m. Eastern Time, subject to the discretion of the Adviser. In such instances, orders for purchase or redemption that are received prior to the
close of bond markets will receive the NAV calculated at the time of the bond markets closure, whereas orders for purchase or redemption that are received thereafter will receive the NAV next calculated on the following Business Day that is not a
Bond Market Holiday.
If the
exchange or market on which a Fund’s investments are primarily traded closes early, the NAV may be calculated prior to its normal calculation time. Creation/redemption transaction order time cutoffs would also be accelerated.
The value of a Fund’s assets that
trade in markets outside the United States or in currencies other than the U.S. Dollar may fluctuate when foreign markets are open but the Fund is not open for business.
Share price is calculated by dividing
a Fund’s net assets by its shares outstanding. In calculating its NAV, each Fund generally values its assets on the basis of market quotations, last sale or settlement prices, or estimates of value furnished by a pricing service or brokers who
make markets in such instruments. If such information is not available for a security held by a Fund, is determined to be unreliable, or (to the Adviser’s knowledge) does not reflect a significant event occurring after the close of the market
on which the security principally trades (but before the close of trading on the NYSE), the security will be valued at fair value estimates by the Adviser under guidelines established by the Board of Trustees. Foreign securities, currencies and
other assets denominated in foreign currencies are translated into U.S. Dollars at the exchange rate of such currencies against the U.S. Dollar, as provided by an independent pricing service or reporting agency. Each Fund also relies on a pricing
service in circumstances where the U.S. securities markets exceed a pre-determined threshold to value foreign securities held in a Fund’s portfolio. The pricing service, its methodology or the threshold may change from time to time. Debt
obligations with maturities of 60 days or less are valued at amortized cost.
Fair Value Pricing
. Securities are priced at a fair value as determined by the Adviser, under the oversight of the Board of Trustees, when reliable market quotations are not readily available, the Funds' pricing service does not provide a
valuation for such securities, the Funds' pricing service provides a valuation that in the judgment of the Adviser does not represent fair value, the Adviser believes that the market price is stale, or an event that affects the value of an
instrument (a “Significant Event”) has occurred since closing prices were established, but before the time as of which a Fund calculates its NAV. Examples of Significant Events may include: (1) events that relate to a single issuer or to
an entire market sector; (2) significant fluctuations in domestic or foreign markets; or (3) occurrences not tied directly to the securities markets, such as natural disasters, armed conflicts, or significant government actions. If such Significant
Events occur, the Funds may value the instruments at fair value, taking into account such events when it calculates each Fund’s NAV. Fair value determinations are made in good faith in accordance with procedures adopted by the Board of
Trustees. In addition, the Funds may also fair value an instrument if trading in a particular instrument is halted and does not resume prior to the closing of the exchange or other market.
Attempts to determine the fair value
of securities introduce an element of subjectivity to the pricing of securities. As a result, the price of a security determined through fair valuation techniques may differ from the price quoted or published by other sources and may not accurately
reflect the market value of the security when trading resumes. If a reliable market quotation becomes available for a security formerly valued through fair valuation techniques, Rafferty compares the market quotation to the fair value price to
evaluate the effectiveness of the Funds' fair valuation procedures and will use that market value in the next calculation of NAV.
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Rule 12b-1 Fees
The Board of Trustees of the Trust
has adopted a Distribution and Service Plan (the “Plan”) pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Plan, each Fund may pay an amount up to 0.25% of its average daily net assets each year for certain
distribution-related activities and shareholder services.
No 12b-1 fees are currently
authorized to be paid by a Fund, and there are no plans to impose these fees. However, in the event 12b-1 fees are charged in the future, because the fees are paid out of each Fund’s assets, over time these fees will increase the cost of your
investment and may cost you more than certain other types of sales charges.
Creations, Redemptions and Transaction
Fees
Creation Units.
Investors such as market makers, large investors and institutions who wish to deal in Creation Units directly with a Fund must have entered into an authorized participant agreement (“Authorized Participant
Agreement”) with the principal underwriter and the transfer agent, or purchase through a dealer that has entered into such an agreement. These investors are known as “Authorized Participants.” Set forth below is a brief description
of the procedures applicable to the purchase and redemption of Creation Units.
Purchase of a Fund.
Each Fund only accepts cash to purchase Creation Units. The purchaser must transfer cash in an amount equal to the value of the Creation Unit(s) purchased and the applicable Transaction Fee. All purchase orders for
Creation Units must be placed by or through an Authorized Participant. Purchase orders will be processed either through a manual clearing process run at the DTC (“Manual Clearing Process”) or through an enhanced clearing process
(“Enhanced Clearing Process”) that is available only to those DTC participants that also are participants in the Continuous Net Settlement System of the National Securities Clearing Corporation (“NSCC”). Authorized
Participants that do not use the Enhanced Clearing Process will be charged a higher Transaction Fee (discussed below). A purchase order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail,
through the transfer agent’s automated system, telephone, facsimile or other means permitted under the Participant Agreement in order to receive that day’s NAV per Share. The Trust will deliver Shares of a Fund upon payment of cash to
the Trust on or before the third Business Day following the Transmittal Date consistent with the terms of the Authorized Participant Agreement.
Redemption from a Fund.
Redemption proceeds will be paid in cash. As with purchases, redemptions may be processed either through the Manual Clearing Process or the Enhanced Clearing Process. Authorized Participants that do not use the Enhanced
Clearing Process will be charged a higher Transaction Fee (discussed below). A redemption order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent’s automated
system, telephone, facsimile or other means permitted under the Participant Agreement in order to receive that day’s NAV per Share. All other procedures set forth in the Participant Agreement must be followed in order for you to receive the
NAV determined on that day.
Transaction Fees on Creation and
Redemption Transactions.
Each Fund will impose Transaction Fees to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units. There is a fixed and a variable component
to the total Transaction Fee on transactions in Creation Units. A fixed Transaction Fee is applicable to each creation and redemption transaction, regardless of the number of Creation Units transacted. Purchasers and redeemers of Creation Units
effected through the Manual Clearing Process may be required to pay an additional charge to compensate for brokerage and other expenses related to the costs of transferring the Deposit Securities to the Trust. A variable Transaction Fee based upon
the value of each Creation Unit also may be applicable to each purchase or redemption transaction. However, in no instance will the fees charged exceed 2% of the value of the Creation Units subject to a redemption transaction. Purchasers and
redeemers of Creation Units are responsible for the costs of transferring securities to and from the Trust in connection with in-kind transactions. Investors who use the services of a broker or other such intermediary may pay additional fees for
such services. In addition, Rafferty may, from time to time, at its own expense, compensate purchasers of Creation Units who have purchased substantial amounts of Creation Units and other financial institutions for administrative or marketing
services.
The table below
summarizes the components of the Transaction Fees.
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Shares ETF Trust
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Fixed
Transaction Fee
|
Maximum
Additional
Charge for
Purchases
and
Redemptions*
|
|
In-Kind
|
Cash
|
NSCC
|
Outside
NSCC
|
Outside
NSCC
|
Direxion
Daily S&P 500
®
Bear 1X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Small Cap Bear 1X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily 7-10 Year Treasury Bear 1X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily 20+ Year Treasury Bear 1X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Municipal Bond Taxable Bear 1X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Total Bond Market Bear 1X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily CSI 300 China A Share Bear 1X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily MSCI China A Bear 1X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily CSI China Internet Index Bear 1X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily MSCI Real Estate Bear 1X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
*
|
As a percentage of the amount
invested.
|
Frequent Purchases and Redemptions
. Rafferty expects a significant portion of the Funds' assets to come from professional money managers and investors who use the Funds as part of “asset allocation” and “market timing” investment
strategies. These strategies often call for frequent trading to take advantage of anticipated changes in market conditions. The Trust’s Board of Trustees has determined not to adopt policies and procedures designed to prevent or monitor for
frequent purchases and redemptions of each Fund’s shares because the Fund sells and redeems its shares at NAV only in Creation Units pursuant to the terms of an Authorized Participant Agreement between the Authorized Participant and the
Distributor, and such direct trading between the Fund and Authorized Participants is critical to ensuring that the Fund’s shares trade at or close to NAV. Further, the vast majority of trading in Fund shares occurs on the secondary market,
which does not involve a Fund directly and therefore does not cause a Fund to experience many of the harmful effects of market timing, such as dilution and disruption of portfolio management. In addition, each Fund imposes a Transaction Fee on
Creation Unit transactions, which is designed to offset transfer and other transaction costs incurred by the Fund in connection with the issuance and redemption of Creation Units and may employ fair valuation pricing to minimize potential dilution
from market timing. Although each Fund reserves the right to reject any purchase orders, each Fund does not currently impose any trading restrictions on frequent trading or actively monitor for trading abuses.
How to Buy and Sell Shares
Each Fund issues and redeems Shares
only in large blocks of 50,000 Shares, called “Creation Units.”
Most investors will buy and sell
Shares of each Fund in secondary market transactions through brokers. Individual Shares of each Fund, once listed for trading on the Exchange, can be bought and sold throughout the trading day like other publicly traded securities. The Funds do not
require any minimum investment in such secondary market transactions.
When buying or selling Shares through
a broker, investors may incur customary brokerage commissions and charges, and may pay some or all of the spread between the bid and the offer prices in the secondary market. In addition, because secondary market transactions occur at market prices,
investors may pay more than NAV when buying Shares, and receive less than NAV when selling Shares.
The Adviser may pay brokers and other
financial intermediaries for educational training programs, the development of technology platforms and reporting systems or other administrative services related to a Fund. Ask your salesperson or visit your financial intermediary’s website
for more information.
The
Funds’ Exchange trading symbols are as follows:
Fund
|
Symbol
|
Direxion
Daily S&P 500
®
Bear 1X Shares
|
SPDN
|
Direxion
Daily Small Cap Bear 1X Shares
|
|
Direxion
Daily 7-10 Year Treasury Bear 1X Shares
|
TYNS
|
Direxion
Daily 20+ Year Treasury Bear 1X Shares
|
TYBS
|
Direxion
Daily Municipal Bond Taxable Bear 1X Shares
|
|
Direxion
Daily Total Bond Market Bear 1X Shares
|
SAGG
|
Direxion
Daily CSI 300 China A Share Bear 1X Shares
|
CHAD
|
Direxion
Daily MSCI China A Bear 1X Shares
|
|
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Fund
|
Symbol
|
Direxion
Daily CSI China Internet Index Bear 1X Shares
|
|
Direxion
Daily MSCI Real Estate Bear 1X Shares
|
|
Share prices are reported in dollars and
cents per Share. For information about acquiring or selling Shares through a secondary market purchase, please contact your broker.
Book Entry
. Shares are held in book-entry form, which means that no stock certificates are issued. DTC or its nominee is the record owner of all outstanding Shares of the Funds and is recognized as the owner of all Shares for all
purposes.
Investors
owning Shares are beneficial owners as shown on the records of DTC or its participants. DTC serves as the securities depository for all Shares. Participants in DTC include securities brokers and dealers, banks, trust companies, clearing corporations
and other institutions that directly or indirectly maintain a custodial relationship with DTC. As a beneficial owner of Shares, you are not entitled to receive physical delivery of stock certificates or to have Shares registered in your name, and
you are not considered a registered owner of Shares. Therefore, to exercise any right as an owner of Shares, you must rely upon the procedures of DTC and its participants. These procedures are the same as those that apply to any other stocks that
you hold in book entry or “street name” through your brokerage account.
Rafferty provides
investment management services to the Funds. Rafferty has been managing investment companies since 1997. Rafferty is located at 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019. As of October 31, 2018, the Adviser had
approximately $12.8 billion in assets under management.
Pursuant to an investment advisory
agreement between the Trust and Rafferty, each Fund pays Rafferty the following fee at an annualized rate based on a percentage of each Fund's average daily net assets:
Fund
|
Advisory
Fee Charged
|
Direxion
Daily S&P 500
®
Bear 1X Shares
|
0.35%
|
Direxion
Daily Small Cap Bear 1X Shares
|
0.35%
|
Direxion
Daily 7-10 Year Treasury Bear 1X Shares
|
0.35%
|
Direxion
Daily 20+ Year Treasury Bear 1X Shares
|
0.35%
|
Direxion
Daily Municipal Bond Taxable Bear 1X Shares
|
0.35%
|
Direxion
Daily Total Bond Market Bear 1X Shares
|
0.35%
|
Direxion
Daily CSI 300 China A Share Bear 1X Shares
|
0.60%
|
Direxion
Daily MSCI China A Bear 1X Shares
|
0.60%
|
Direxion
Daily CSI China Internet Index Bear 1X Shares
|
0.60%
|
Direxion
Daily MSCI Real Estate Bear 1X Shares
|
0.35%
|
For the
fiscal year ended October 31, 2018, the Adviser received net management fees as a percentage of average daily net assets from each Fund as follows:
Fund
|
Percentage
|
Direxion
Daily S&P 500
®
Bear 1X Shares
|
0.15%
|
Direxion
Daily 7-10 Year Treasury Bear 1X Shares
|
0.00%
|
Direxion
Daily 20+ Year Treasury Bear 1X Shares
|
0.00%
|
Direxion
Daily Total Bond Market Bear 1X Shares
|
0.00%
|
Direxion
Daily CSI 300 China A Share Bear 1X Shares
|
0.64%
|
A discussion
regarding the basis on which the Board of Trustees approved the investment advisory agreement for the Funds is included in the Funds' Annual Report for the period ended October 31, 2018.
Rafferty has entered into an
Operating Expense Limitation Agreement with each Fund. Under this Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse each Fund for Other Expenses through
September 1, 2020, to the extent that a Fund’s Total Annual Fund Operating Expenses exceed the percentage listed in the table below of the Fund’s average daily net assets (excluding, as applicable, among other expenses, taxes, swap
financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
Any expense waiver or reimbursement
is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. Solely at Rafferty’s
option and discretion, Rafferty may pay, reimburse or otherwise assume one or more of the excluded expenses, in which case such expense will be subject to reimbursement by Rafferty in accordance
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with the Operating Expense Limitation Agreement. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
Fund
|
Expense
Cap
|
Direxion
Daily S&P 500
®
Bear 1X Shares
|
0.45%
|
Direxion
Daily Small Cap Bear 1X Shares
|
0.45%
|
Direxion
Daily 7-10 Year Treasury Bear 1X Shares
|
0.45%
|
Direxion
Daily 20+ Year Treasury Bear 1X Shares
|
0.45%
|
Direxion
Daily Municipal Bond Taxable Bear 1X Shares
|
0.45%
|
Direxion
Daily Total Bond Market Bear 1X Shares
|
0.45%
|
Direxion
Daily CSI 300 China A Share Bear 1X Shares
|
0.80%
|
Direxion
Daily MSCI China A Bear 1X Shares
|
0.80%
|
Direxion
Daily CSI China Internet Index Bear 1X Shares
|
0.80%
|
Direxion
Daily MSCI Real Estate Bear 1X Shares
|
0.45%
|
Paul
Brigandi and Tony Ng are jointly and primarily responsible for the day-to-day management of the Funds (the “Portfolio Managers”). An investment trading team of Rafferty employees assists the Portfolio Managers in the day-to-day
management of the Funds subject to their primary responsibility and oversight. The Portfolio Managers work with the investment trading team to decide the target allocation of each Fund’s investments and on a day-to-day basis, an individual
portfolio trader executes transactions for the Funds consistent with the target allocation. The members of the investment trading team rotate periodically among the various series of the Trust, including the Funds, so that no single individual is
assigned to a specific Fund for extended periods of time.
Mr. Brigandi has been a Portfolio
Manager at Rafferty since June 2004. Mr. Brigandi was previously involved in the equity trading training program for Fleet Boston Financial Corporation from August 2002 to April 2004. Mr. Brigandi is a 2002 graduate of Fordham University.
Mr. Ng has been a Portfolio Manager
at Rafferty since April 2006. Mr. Ng was previously a Team Leader in the Trading Assistant Group with Goldman Sachs from 2004 to 2006. He was employed with Deutsche Asset Management from 1998 to 2004. Mr. Ng graduated from State University at
Buffalo in 1998.
The Funds'
Statement of Additional Information ("SAI") provides additional information about the investment team members’ compensation, other accounts they manage and their ownership of securities in the Funds.
A description of the Funds' policies
and procedures with respect to the disclosure of the Funds' portfolio securities is available in the Funds' SAI.
Foreside Fund Services, LLC
(“Distributor”) serves as the Funds' distributor. U.S. Bancorp Fund Services, LLC (“USBFS”) serves as the Funds' administrator. Bank of New York Mellon (“BNYM”) serves as the Funds' transfer agent, fund
accountant, custodian and index receipt agent. The Distributor is not affiliated with Rafferty, USBFS, or BNYM.
Fund Distributions
. Each Fund pays out dividends from its net investment income, and distributes any net capital gains, if any, to its shareholders at least annually. Each Fund is authorized to declare and pay capital gain distributions
in additional Shares or in cash. A Fund may have extremely high portfolio turnover, which may cause it to generate significant amounts of taxable income. Each Fund will generally need to distribute net short-term capital gain to satisfy certain tax
requirements. As a result of the Funds' high portfolio turnover, they could need to make larger and/or more frequent distributions than traditional ETFs.
Dividend Reinvestment Service
. Brokers may make the DTC book-entry dividend reinvestment service (“Reinvestment Service”) available to their customers who are shareholders of a Fund. If the Reinvestment Service is used with respect to a
Fund, its distributions of both net income and capital gains will automatically be reinvested in additional and fractional Shares thereof purchased in the secondary market. Without the Reinvestment Service, investors will receive Fund distributions
in cash, except as noted above under “Fund Distributions.” To determine whether the Reinvestment Service is available and
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whether there is a commission or other charge for using
the service, consult your broker. Fund shareholders should be aware that brokers may require them to adhere to specific procedures and timetables to use the Reinvestment Service.
As with any investment, you
should consider the tax consequences of buying, holding, and disposing of Shares. The tax information in this Prospectus is only a general summary of some important federal tax considerations generally affecting a Fund and its shareholders. No
attempt is made to present a complete explanation of the federal tax treatment of the Funds' activities, and this discussion is not intended as a substitute for careful tax planning. Accordingly, potential investors are urged to consult their own
tax advisers for more detailed information and for information regarding any state, local, or foreign taxes applicable to the Funds and to an investment in Shares.
Fund distributions to you and your
sale of your Shares will have tax consequences to you unless you hold your Shares through a tax-exempt entity or tax-deferred retirement arrangement, such as an individual retirement account (“IRA”) or 401(k) plan.
Each Fund intends to qualify, or to
continue to qualify, each taxable year for taxation as a “regulated investment company” under Subchapter M of the Internal Revenue Code. If a Fund so qualifies and satisfies certain distribution requirements, the Fund will not be subject
to federal income tax on income that is distributed in a timely manner to its shareholders in the form of income dividends or capital gain distributions.
Taxes on Distributions
. Dividends from a Fund’s investment company taxable income
–
generally, the sum of net investment income, the excess of net short-term capital gain over net long-term capital loss, and net gains and losses from certain foreign currency transactions, if any, all determined without
regard to any deduction for dividends paid
–
will be taxable to you as ordinary
income to the extent of its earnings and profits, whether they are paid in cash or reinvested in additional Shares. However, dividends a Fund pays to you that are attributable to its “qualified dividend income” (i.e., dividends it
receives on stock of most domestic and certain foreign corporations with respect to which it satisfies certain holding period and other restrictions) generally will be taxed to you, if you are an individual, trust, or estate and satisfy those
restrictions with respect to your Shares, for federal income tax purposes, at the rates of 15% or 20% for such shareholders with taxable income exceeding certain thresholds (which will be indexed for inflation annually). A portion of a Fund’s
dividends also may be eligible for the dividends-received deduction allowed to corporations
–
the eligible portion may not exceed the aggregate dividends the Fund receives from domestic corporations subject to federal income tax (excluding real estate investment trusts) and excludes dividends from foreign
corporations
–
subject to similar restrictions; however, dividends a corporate
shareholder deducts pursuant to that deduction are subject indirectly to the federal alternative minimum tax. No Fund expects to earn a significant amount of income that would qualify for those maximum rates or that deduction.
Distributions of a Fund’s net
capital gain (which is the excess of net long-term capital gain over net short-term capital loss) that it recognizes on sales or exchanges of capital assets (“capital gain distributions”), if any, will be taxable to you as long-term
capital gains, at the maximum rates mentioned above if you are an individual, trust, or estate, regardless of your holding period for the Shares on which the distributions are paid and regardless of whether they are paid in cash or reinvested in
additional Shares. A Fund’s capital gain distributions may vary considerably from one year to the next as a result of its investment activities and cash flows and the performance of the markets in which it invests. No Fund expects to earn a
significant amount of net capital gain.
Distributions in excess of a
Fund’s current and accumulated earnings and profits, if any, first will reduce your adjusted tax basis in your Shares in the Fund and, after that basis is reduced to zero, will constitute capital gain. That capital gain will be long-term
capital gain, and thus will be taxed at the maximum rates mentioned above if you are an individual, trust, or estate if the distributions are attributable to Shares you held for more than one year.
Investors should be aware that the
price of Shares at any time may reflect the amount of a forthcoming dividend or capital gain distribution, so if they purchase Shares shortly before the record date therefor, they will pay full price for the Shares and receive some part of the
purchase price back as a taxable distribution even though it represents a partial return of invested capital.
In general, distributions are subject to
federal income tax for the year when they are paid. However, certain distributions paid in January may be treated as paid on December 31 of the prior year.
Because of the possibility of high
portfolio turnover, the Funds may generate significant amounts of taxable income. Accordingly, the Funds may need to make larger and/or more frequent distributions than traditional unleveraged ETFs. A substantial portion of that income typically
will be short-term capital gain, which will generally be treated as ordinary income when distributed to shareholders.
Fund distributions to tax-deferred or
qualified plans, such as an IRA, retirement plan or pension plan, generally will not be taxable. However, distributions from such plans will be taxable to the individual participant notwithstanding the character of the income earned by the qualified
plan. Please consult a tax adviser for a more complete explanation of the federal, state, local and foreign tax consequences of investing in a Fund through such a plan.
Taxes When Shares are Sold.
Generally, you will recognize taxable gain or loss if you sell or otherwise dispose of your Shares. Any gain arising from such a disposition generally will be treated as long-term capital gain if you held the Shares for
more than one year, taxable at the maximum rates (15% or 20%) mentioned above if you are an individual, trust, or estate; otherwise, the gain will be treated as short-term capital gain. However, any capital loss arising from the disposition of
Shares held for six months or less will be treated as long-term capital loss to the extent of capital gain distributions, if any, received with respect to those Shares. In addition, all or a portion of any loss recognized on a sale or exchange of
Shares of a Fund will be disallowed to the extent other Shares of the same Fund are purchased (whether through reinvestment
Direxion Shares
ETF Trust Prospectus
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108
|
of distributions or otherwise) within a period of 61
days beginning 30 days before and ending 30 days after the date of the sale or exchange; in that event, the basis in the newly purchased Shares will be adjusted to reflect the disallowed loss.
Holders of Creation Units
. A person who purchases Shares of a Fund by exchanging securities for a Creation Unit generally will recognize capital gain or loss equal to the difference between the market value of the Creation Unit and the
person’s aggregate basis in the exchanged securities, adjusted for any Balancing Amount paid or received. A shareholder who redeems a Creation Unit generally will recognize gain or loss to the same extent and in the same manner as described in
the immediately preceding paragraph.
Miscellaneous.
Backup Withholding
. A Fund must withhold and remit to the U.S. Treasury 24% of dividends and capital gain distributions otherwise payable to any individual or
certain other non-corporate shareholder who fails to certify that the social security or other taxpayer identification number furnished to the Fund is correct or who furnishes an incorrect number (together with the withholding described in the next
sentence, “backup withholding”). Withholding at that rate also is required from a Fund’s dividends and capital gain distributions otherwise payable to such a shareholder who is subject to backup withholding for any other reason.
Backup withholding is not an additional tax, and any amounts so withheld may be credited against a shareholder’s federal income tax liability or refunded.
Additional Tax
. An individual must pay a 3.8% federal tax on the lesser of (1) the individual’s “net investment income,” which generally includes dividends, interest, and net gains from the disposition of investment
property (including dividends and capital gain distributions a Fund pays and net gains realized on the sale or redemption of Shares), or (2) the excess of the individual’s “modified adjusted gross income” over a threshold amount
($250,000 for married persons filing jointly and $200,000 for single taxpayers). This tax is in addition to any other taxes due on that income. A similar tax will apply for those years to estates and trusts. Shareholders should consult their own tax
advisers regarding the effect, if any, this provision may have on their investment in Fund shares.
Basis Determination
. A shareholder who wants to use the average basis method for determining basis in Shares he or she acquires after December 31, 2011 (“Covered Shares”), must elect to do so in writing (which may be electronic)
with the broker through which he or she purchased the Shares. A shareholder who wishes to use a different IRS-acceptable method for basis determination (
e.g.
, a specific identification method) may elect to do
so. Fund shareholders are urged to consult with their brokers regarding the application of the basis determination rules to them.
You may also be subject to state and
local taxes on Fund distributions and dispositions of Shares.
Non-U.S. Shareholders
. “A “non-U.S. shareholder” is an investor that, for federal tax purposes, is a nonresident alien individual, a foreign corporation or a foreign estate or trust. Except where discussed otherwise, the
following disclosure assumes that a non-U.S. shareholder’s ownership of Shares is not effectively connected with a trade or business conducted by such non-U.S. shareholder in the United States and does not address non-U.S. shareholders who are
present in the United States for 183 days or more during the taxable year. The tax consequences to a non-U.S. shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Non-U.S. shareholders
should consult their tax advisers with respect to the particular tax consequences to them of an investment in a Fund.
Withholding
. Dividends paid by a Fund to non-U.S. shareholders will be subject to withholding tax at a 30% rate or a reduced rate specified by an applicable income tax treaty to the extent derived from investment income (other than
“qualified interest income” or “qualified short-term capital gains,” as described below). In order to obtain a reduced rate of withholding, a non-U.S. shareholder will be required to provide an IRS Form W-8BEN (or substitute
form) certifying its entitlement to benefits under a treaty. The withholding tax does not apply to regular dividends paid to a non-U.S. shareholder who provides an IRS Form W-8ECI, certifying that the dividends are effectively connected with the
non-U.S. shareholder’s conduct of a trade or business within the United States. Instead, the effectively connected dividends will be subject to regular U.S. income tax as if the non-U.S. shareholder were a U.S. shareholder. A non-U.S.
corporation’s earnings and profits attributable to such dividends may also be subject to additional “branch profits tax” imposed at a rate of 30% (or lower treaty rate).
A non-U.S. shareholder who fails to
provide an IRS Form W-8BEN or other applicable form may be subject to backup withholding at the appropriate rate. See the discussion of backup withholding under “Miscellaneous” above.
Exemptions from Withholding
. In general, federal income tax will not apply to gain realized on the sale or other disposition of Shares or to any Fund distributions reported as capital gain dividends, short-term capital gain dividends, or
interest-related dividends.
“ Short-term capital gain
dividends” are dividends that are attributable to “qualified short-term gain” a Fund realizes (generally, the excess of a Fund’s net short-term capital gain over long-term capital loss for a taxable year, computed with
certain adjustments). “Interest-related dividends” are dividends that are attributable to “qualified net interest income” from U.S. sources. Depending on its circumstances, a Fund may report all, some or none of its
potentially eligible dividends as short-term capital gain dividends and interest-related dividends and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. To qualify for the exemption, a non-U.S.
shareholder will need to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN or substitute form). In the case of shares held through an intermediary, the
intermediary may withhold even if a Fund designates the payment as a short-term capital gain dividend or an interest-related dividend. Non-U.S. shareholders should contact their intermediaries with respect to the application of these rules to their
accounts.
Foreign Account
Tax Compliance Act (“FATCA”).
Under FATCA, “foreign financial institutions” (“FFIs”) or “non-financial foreign entities” (“NFFEs”) that are Fund
shareholders may be subject to a generally nonrefundable 30% withholding tax on income dividends. As discussed more fully in the Funds' SAI under “Taxes,” the FATCA withholding tax generally can be avoided (a) by an FFI, if it reports
certain information regarding direct and indirect ownership of financial accounts U.S. persons hold with the FFI and (b) by an NFFE, if it certifies as such and, in certain circumstances, that (i) it has no substantial U.S. persons as owners or (ii)
it does have such owners and reports information relating to them to the withholding agent. The U.S. Treasury has negotiated intergovernmental agreements (“IGAs”) with certain countries and is in various stages of
109
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Direxion Shares ETF
Trust Prospectus
|
negotiations with other foreign countries with
respect to one or more alternative approaches to implement FATCA; entities in those countries may be required to comply with the terms of the IGA instead of Treasury regulations. Non-U.S. shareholders should consult their own tax advisers regarding
the application of these requirements to their own situation and the impact thereof on their investment in a Fund.
More information about taxes is in the
Funds' SAI.
The Trust enters into contractual
arrangements with various parties, which may include, among others, the Funds' investment adviser, custodian, and transfer agent, who provide services to the Funds. Shareholders are not parties to any such contractual arrangements and are not
intended beneficiaries of those contractual arrangements, and those contractual arrangements are not intended to create in any shareholder any right to enforce them against the service providers or to seek any remedy under them against the service
providers, either directly or on behalf of the Trust.
This Prospectus provides information
concerning the Funds that you should consider in determining whether to purchase Fund shares. Neither this Prospectus nor the SAI is intended, or should be read, to be or give rise to an agreement or contract between the Trust or the Funds and any
investor, or to give rise to any rights in any shareholder or other person other than any rights under federal or state law that may not be waived.
Bloomberg Barclays Index
. The Direxion Daily Total Bond Market Bear 1X Shares, (collectively “the Fund”), is/are not sponsored, endorsed, sold or promoted by Barclays Capital. Barclays Capital makes no representation or warranty,
express or implied, to the owners of the Fund or any member of the public regarding the advisability of investing in securities generally or in the Fund particularly or the ability of the Barclays Capital Index to track general bond market
performance. Barclays Capital’s only relationship to Direxion and the Fund is/are the licensing of the Barclays Capital Index which is determined, composed and calculated by Barclays Capital without regard to Direxion or the Fund. Barclays
Capital has no obligation to take the needs of Direxion, the Fund or the owners of the Fund into consideration in determining, composing or calculating the Barclays Capital Index. Barclays Capital is not responsible for and has not participated in
the determination of the timing of, prices at, or quantities of the Fund to be issued. Barclays Capital has no obligation or liability in connection with the administration, marketing or trading of the Fund.
BARCLAYS CAPITAL SHALL HAVE NO
LIABILITY TO LICENSEE OR TO THIRD PARTIES FOR THE QUALITY, ACCURACY AND/OR COMPLETENESS OF THE INDEX OR ANY DATA INCLUDED THEREIN OR FOR INTERRUPTIONS IN THE DELIVERY OF THE INDEX. BARCLAYS CAPITAL MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE FUND(S) OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR FOR ANY OTHER USE. BARCLAYS CAPITAL MAKES NO EXPRESS
OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN. BARCLAYS CAPITAL SHALL NOT BE LIABLE FOR ANY DAMAGES,
INCLUDING, WITHOUT LIMITATION, ANY INDIRECT OR CONSEQUENTIAL DAMAGES, RESULTING FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN.
CSI Indices
. The CSI 300 Index and the CSI Overseas China Internet Index are calculated by China Securities Index Company (“CSI”). CSI does not make any warranties, express or implied, to any of their customers or
anyone else regarding the accuracy or completeness of any data related to the CSI Indices. All information is provided for informational purposes only. CSI accepts no liability for any errors or any loss arising from the use of
information.
Interactive
Data Pricing and Reference Data, LLC
. The ICE U.S. Treasury 7-10 Year Bond Index and the ICE U.S. Treasury 20+ Year Bond Index (the “ICE Indexes”) are a service mark of Interactive Data Pricing and
Reference Data, LLC or its affiliates ("Interactive Data'') and have been licensed for use by Rafferty in connection with the Direxion Daily 7-10 Year Treasury Bear 1X Shares and the Direxion Daily 20+ Year Treasury Bear 1X Shares (the
“Financial Products”). Neither Rafferty nor the Financial Products are sponsored, endorsed, sold or promoted by Interactive Data. Interactive Data makes no representations or warranties regarding Rafferty or the Financial Products or the
ability of the Direxion Daily 7-10 Year Treasury Bear 1X Shares and the Direxion Daily 20+ Year Treasury Bear 1X Shares to track the applicable Index.
VENDOR MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE ICE INDEX OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL VENDOR HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE,
INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
MSCI Indices.
The underlying indicies for the Direxion Daily MSCI China A Bear 1X Shares and the Direxion Daily MSCI Real Estate Bear 1X Shares are the MSCI China A International Index and the MSCI US REIT Index. The Funds are not
sponsored, endorsed, sold or promoted by Morgan Stanley Capital International Inc. (“MSCI”), any of its affiliates, any of its information
Direxion Shares
ETF Trust Prospectus
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110
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providers or any other third party involved in, or
related to, compiling, computing or creating any MSCI Index (collectively, the “MSCI Parties”). The MSCI Indices are the exclusive property of MSCI. MSCI and the MSCI Indices names are service marks of MSCI or its affiliates and have
been licensed for use for certain purposes by the Trust. None of the MSCI Parties makes any representation or warranty, express or implied, to the issuer or shareholders of the Funds or any other person or entity regarding the advisability of
investing in funds generally or in the Funds particularly or the ability of any MSCI Index to track corresponding stock market performance. MSCI or its affiliates are the licensors of certain trademarks, service marks and trade names and of the MSCI
Indices which are determined, composed and calculated by MSCI without regard to the Funds or the issuer or shareholders of the Funds or any other person or entity into consideration in determining, composing or calculating the MSCI Indices. None of
the MSCI Parties are responsible for, or has participated in, the determination of the timing of, prices at, or quantities of the Funds to be issued or in the determination or calculation of the equation by or the consideration into which the Funds
is/are redeemable. Further, none of the MSCI Parties has any obligation or liability to the issuer or owners of the Funds or any other person or entity in connection with the administration, marketing or offering of the Funds.
Although MSCI shall obtain
information for inclusion in or for use in the calculation of the MSCI Indices from sources that MSCI considers reliable, none of the MSCI Parties warrants or guarantees the originality, accuracy and/or the completeness of any MSCI Index or any data
included therein. None of the MSCI Parties makes any warranty, express or implied, as to results to be obtained by the issuer of the Funds, shareholders of the Funds, or any other person or entity, from the use of any MSCI Index or any data included
therein. None of the MSCI Parties shall have any liability for any errors, omissions or interruptions of, or in connection with, any MSCI Index or any data included therein. Further, none of the MSCI Parties makes any express or implied warranties
of any kind, and the MSCI Parties hereby expressly disclaim all warranties of merchantability and fitness for a particular purpose, with respect to the MSCI Indices and any data included therein. Without limiting any of the foregoing, in no event
shall any of the MSCI Parties have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No purchaser, seller or holder of this
security, product or fund, or any other person or entity, should use or refer to any MSCI trade name, trademark or service mark to sponsor, endorse, market or promote this security without first contacting MSCI to determine whether MSCI’s
permission is required. Under no circumstances may any person or entity claim any affiliation with MSCI without the prior written permission of MSCI.
Russell Indices.
The Direxion Daily Small Cap Bear 1X Shares are not sponsored, endorsed, sold or promoted by Frank Russell Company (“Russell”). Russell makes no representation or warranty, express or implied, to the owners
of the Direxion Daily Small Cap Bear 1X Shares or any member of the public regarding the advisability of investing in securities generally or in the Direxion Daily Small Cap Bear 1X Shares particularly or the ability of the Russell 2000
®
Index to track general stock market performance or a segment of the same. Russell’s publication of the Russell 2000
®
Index in no way suggests or implies an opinion by Russell as to the advisability of investment in any or all of the securities upon which the Russell
2000
®
Index is based. Russell’s only relationship to the Trust is the licensing of certain trademarks and trade names of Russell and of the
Russell 2000
®
Index which is determined, composed and calculated by Russell without regard to the Trust or Direxion Daily Small Cap Bear 1X Shares.
Russell is not responsible for and has not reviewed the Trust or Direxion Daily Small Cap Bear 1X Shares nor any associated literature or publications and Russell makes no representation or warranty express or implied as to their accuracy or
completeness, or otherwise. Russell reserves the right, at any time and without notice, to alter, amend, terminate or in any way change the Russell
2000
®
Index. Russell has no obligation or liability in connection with the administration, marketing or trading of the Direxion Daily Small Cap Bear
1X Shares.
RUSSELL DOES
NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE Russell 2000
®
Index OR ANY DATA INCLUDED THEREIN AND RUSSELL SHALL HAVE NO LIABILITY FOR
ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. RUSSELL MAKES NO WARRANTY, EXPRESS OF IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE TRUST, INVESTORS, OWNERS OF THE Direxion Daily Small Cap Bear 1X Shares, OR ANY OTHER PERSON OR ENTITY FROM THE USE
OF THE Russell 2000
®
Index OR ANY DATA INCLUDED THEREIN. RUSSELL MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE Russell 2000
®
Index OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING
ANY OF THE FOREGOING, IN NO EVENT SHALL RUSSELL HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Standard and Poor’s Indices.
The S&P 500
®
Index and the S&P National AMT-Free Municipal Bond Index (the “S&P Indices”)
is/are products of S&P Dow Jones Indices LLC (“SPDJI”), and has/have been licensed for use by the Trust. Standard &
Poor’s
®
, S&P
®
and S&P 500
®
are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and
sublicensed for certain purposes by the Trust. The Funds are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, any of their respective affiliates (collectively, “S&P Dow Jones Indices”). S&P Dow Jones
Indices makes no representation or warranty, express or implied, to the owners of the Funds or any member of the public regarding the advisability of investing in securities generally or in the Funds particularly or the ability of the S&P
Indices to track general market performance. S&P Dow Jones Indices’ only relationship to the Trust with respect to the S&P Indices is the licensing of such Index(es) and certain trademarks, service marks and/or trade names of S&P
Dow Jones Indices or its licensors. The S&P Indices is/are determined,
111
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Trust Prospectus
|
composed and calculated by S&P Dow Jones Indices
without regard to the Trust or the Funds. S&P Dow Jones Indices have no obligation to take the needs of the Trust or the owners of the Funds into consideration in determining, composing or calculating the S&P Indices. S&P Dow Jones
Indices is not responsible for and has not participated in the determination of the prices, and amount of the Funds or the timing of the issuance or sale of the Funds or in the determination or calculation of the equation by which the Funds are to
be converted into cash, surrendered or redeemed, as the case may be. S&P Dow Jones Indices has no obligation or liability in connection with the administration, marketing or trading of the Funds. There is no assurance that investment products
based on the S&P Indices will accurately track index performance or provide positive investment returns. S&P Dow Jones Indices LLC is not an investment advisor. Inclusion of a security within an index is not a recommendation by S&P Dow
Jones Indices to buy, sell, or hold such security, nor is it considered to be investment advice. Notwithstanding the foregoing, CME Group Inc. and its affiliates may independently issue and/or sponsor financial products based on the S&P 500
Index and other S&P proprietary indices unrelated to the Funds currently being issued by the Trust, but which may be similar to and competitive with the Funds. CME Group Inc. is an indirect shareholder of S&P Dow Jones Indices LLC.
S&P DOW JONES INDICES DOES NOT
GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE S&P INDICES OR ANY DATA RELATED THERETO OR ANY COMMUNICATION, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING ELECTRONIC COMMUNICATIONS) WITH
RESPECT THERETO. S&P DOW JONES INDICES SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. S&P DOW JONES INDICES MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY THE TRUST, OWNERS OF THE FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500
®
INDEX AND THE S&P NATIONAL AMT-FREE MUNICIPAL BOND INDEX OR WITH RESPECT TO ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO
EVENT WHATSOEVER SHALL S&P DOW JONES INDICES BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED
OF THE POSSIBLITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN S&P DOW JONES INDICES AND THE TRUST, OTHER THAN THE LICENSORS OF
S&P DOW JONES INDICES.
Direxion Shares
ETF Trust Prospectus
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The financial highlights table is
intended to help you understand the financial performance of the Funds listed below for the periods indicated. The information set forth below was audited by Ernst & Young LLP, Independent Registered Public Accounting Firm, whose report, along
with the Funds’ financial statements, is included in the Annual shareholder report, which are available upon request and incorporated by reference into the Funds’ SAI. Certain information reflects financial results for a single Share.
The total returns in the table represent the rate that an investor would have earned (or lost) on an investment in a Fund (assuming reinvestment of all dividends and distributions).
No financial information
is available for the Direxion Daily Small Cap Bear 1X Shares, Direxion Daily Municipal Bond Bear 1X Shares, Direxion Daily MSCI China A Bear 1X Shares, Direxion Daily CSI China Internet Index Bear 1X Shares, Direxion Daily Emerging Markets Bond Bear
1X Shares, and the Direxion Daily MSCI Real Estate Bear 1X Shares because those Funds had not commenced operations prior to October 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asset
Value,
Beginning of
Year/Period
|
Net
Investment
Income
(Loss)
1
|
Net
Investment
Income
(Loss)
1,2
|
Net
Realized
and
Unrealized
Gain (Loss)
on Investments
3
|
Net
Increase
(Decrease)
in Net
Asset Value
Resulting
from Operations
|
Dividends
from Net
Investment
Income
|
Distributions
from Realized
Capital Gains
|
Distributions
from
Return of
Capital
|
Total
Distributions
|
Net
Asset
Value,
End of
Year/Period
|
Direxion
Daily CSI 300 China A Share Bear 1X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$32.04
|
0.24
|
0.26
|
6.50
|
6.74
|
(0.20
)
|
–
|
–
|
(0.20
)
|
$38.58
|
For
the Year Ended October 31, 2017
|
$41.32
|
(0.05)
|
(0.05)
|
(9.23)
|
(9.28)
|
–
|
–
|
–
|
–
|
$32.04
|
For
the Year Ended October 31, 2016
|
$45.36
|
(0.29)
|
(0.29)
|
(3.75)
|
(4.04)
|
–
|
–
|
–
|
–
|
$41.32
|
For
the Period June 17, 2015
8
through October 31, 2015
|
$40.00
|
(0.14)
|
(0.14)
|
5.50
|
5.36
|
–
|
–
|
–
|
–
|
$45.36
|
Direxion
Daily S&P 500
®
Bear 1X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$31.91
|
0.30
|
0.30
|
(2.14)
|
(1.84)
|
(0.34
)
|
–
|
–
|
(0.34
)
|
$29.73
|
For
the Year Ended October 31, 2017
|
$39.30
|
0.07
|
0.08
|
(7.31)
|
(7.24)
|
(0.15
)
|
–
|
–
|
(0.15
)
|
$31.91
|
For
the Period June 8, 2016
8
through October 31, 2016
|
$40.00
|
0.02
|
0.02
|
(0.72)
|
(0.70)
|
–
|
–
|
–
|
–
|
$39.30
|
Direxion
Daily Total Bond Market Bear 1X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$31.19
|
0.34
|
0.34
|
1.08
|
1.42
|
(0.29
)
|
–
|
–
|
(0.29
)
|
$32.32
|
For
the Year Ended October 31, 2017
|
$31.25
|
0.06
|
0.06
|
(0.12)
|
(0.06)
|
–
|
–
|
–
|
–
|
$31.19
|
For
the Year Ended October 31, 2016
|
$32.76
|
(0.15)
|
(0.15)
|
(1.36)
|
(1.51)
|
–
|
–
|
–
|
–
|
$31.25
|
For
the Year Ended October 31, 2015
|
$33.73
|
(0.21)
|
(0.21)
|
(0.76)
|
(0.97)
|
–
|
–
|
–
|
–
|
$32.76
|
For
the Year Ended October 31, 2014
|
$35.52
|
(0.22)
|
(0.22)
|
(1.57)
|
(1.79)
|
–
|
–
|
–
|
–
|
$33.73
|
Direxion
Daily 7-10 Year Treasury Bear 1X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$28.21
|
0.30
|
0.30
|
1.02
|
1.32
|
(0.26
)
|
–
|
–
|
(0.26
)
|
$29.27
|
For
the Year Ended October 31, 2017
|
$27.82
|
0.06
|
0.06
|
0.33
|
0.39
|
–
|
–
|
–
|
–
|
$28.21
|
For
the Year Ended October 31, 2016
|
$29.60
|
(0.13)
|
(0.13)
|
(1.65)
|
(1.78)
|
–
|
–
|
–
|
–
|
$27.82
|
For
the Year Ended October 31, 2015
|
$31.42
|
(0.19)
|
(0.19)
|
(1.63)
|
(1.82)
|
–
|
–
|
–
|
–
|
$29.60
|
For
the Year Ended October 31, 2014
|
$33.38
|
(0.21)
|
(0.21)
|
(1.75)
|
(1.96)
|
–
|
–
|
–
|
–
|
$31.42
|
Direxion
Daily 20+ Year Treasury Bear 1X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$20.45
|
0.22
|
0.23
|
1.39
|
1.61
|
(0.20
)
|
–
|
–
|
(0.20
)
|
$21.86
|
For
the Year Ended October 31, 2017
|
$20.04
|
0.04
|
0.04
|
0.37
|
0.41
|
–
|
–
|
–
|
–
|
$20.45
|
For
the Year Ended October 31, 2016
|
$22.45
|
(0.10)
|
(0.10)
|
(2.31)
|
(2.41)
|
–
|
–
|
–
|
–
|
$20.04
|
For
the Year Ended October 31, 2015
|
$24.61
|
(0.14)
|
(0.14)
|
(2.02)
|
(2.16)
|
–
|
–
|
–
|
–
|
$22.45
|
For
the Year Ended October 31, 2014
|
$28.83
|
(0.18)
|
(0.18)
|
(4.04)
|
(4.22)
|
–
|
–
|
–
|
–
|
$24.61
|
113
|
Direxion Shares ETF
Trust Prospectus
|
Financial Highlights
(continued)
|
|
|
RATIOS
TO AVERAGE NET ASSETS
5
|
Portfolio
Turnover
Rate
7
|
|
|
Total
Return
4
|
Net
Assets,
End of
Year/Period
(000's omitted)
|
Net
Expenses
6
|
Total
Expenses
|
Net
Investment
Income (Loss)
after
Expense
Reimbursement
|
Net
Expenses
2,6
|
Total
Expenses
2
|
Net
Investment
Income (Loss)
after
Expense
Reimbursement
2
|
|
Direxion
Daily CSI 300 China A Share Bear 1X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
21.11%
|
$115,750
|
0.85%
|
0.81%
|
0.72%
|
0.80%
|
0.76%
|
0.77%
|
0%
|
|
For
the Year Ended October 31, 2017
|
(22.46)%
|
$100,918
|
0.80%
|
0.79%
|
(0.12)%
|
0.80%
|
0.79%
|
(0.12)%
|
0%
|
|
For
the Year Ended October 31, 2016
|
(8.91)%
|
$
86,765
|
0.81%
|
0.84%
|
(0.66)%
|
0.80%
|
0.83%
|
(0.65)%
|
0%
|
|
For
the Period June 17, 2015
8
through October 31, 2015
|
13.40%
|
$147,409
|
0.80%
|
0.84%
|
(0.76)%
|
0.80%
|
0.83%
|
(0.76)%
|
0%
|
|
Direxion
Daily S&P 500
®
Bear 1X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(5.74)%
|
$
13,380
|
0.45%
|
0.65%
|
0.99%
|
0.45%
|
0.65%
|
0.99%
|
0%
|
|
For
the Year Ended October 31, 2017
|
(18.62)%
|
$
33,504
|
0.45%
|
0.60%
|
0.21%
|
0.45%
|
0.60%
|
0.21%
|
0%
|
|
For
the Period June 8, 2016
8
through October 31, 2016
|
(1.75)%
|
$
47,153
|
0.09%
|
0.66%
|
0.17%
|
0.09%
|
0.66%
|
0.17%
|
0%
|
|
Direxion
Daily Total Bond Market Bear 1X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
4.57%
|
$
3,232
|
0.45%
|
2.02%
|
1.07%
|
0.45%
|
2.02%
|
1.07%
|
0%
|
|
For
the Year Ended October 31, 2017
|
(0.19)%
|
$
3,119
|
0.45%
|
2.33%
|
0.19%
|
0.45%
|
2.33%
|
0.19%
|
0%
|
|
For
the Year Ended October 31, 2016
|
(4.61)%
|
$
3,125
|
0.63%
|
2.38%
|
(0.47)%
|
0.63%
|
2.38%
|
(0.47)%
|
0%
|
|
For
the Year Ended October 31, 2015
|
(2.88)%
|
$
3,276
|
0.65%
|
2.34%
|
(0.62)%
|
0.65%
|
2.34%
|
(0.62)%
|
0%
|
|
For
the Year Ended October 31, 2014
|
(5.04)%
|
$
3,373
|
0.65%
|
1.25%
|
(0.65)%
|
0.65%
|
1.25%
|
(0.65)%
|
0%
|
|
Direxion
Daily 7-10 Year Treasury Bear 1X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
4.67%
|
$
1,463
|
0.45%
|
3.51%
|
1.04%
|
0.45%
|
3.51%
|
1.04%
|
0%
|
|
For
the Year Ended October 31, 2017
|
1.40%
|
$
1,411
|
0.45%
|
4.25%
|
0.20%
|
0.45%
|
4.25%
|
0.20%
|
0%
|
|
For
the Year Ended October 31, 2016
|
(6.01)%
|
$
1,391
|
0.63%
|
4.14%
|
(0.47)%
|
0.63%
|
4.14%
|
(0.47)%
|
0%
|
|
For
the Year Ended October 31, 2015
|
(5.79)%
|
$
1,480
|
0.65%
|
3.24%
|
(0.62)%
|
0.65%
|
3.24%
|
(0.62)%
|
0%
|
|
For
the Year Ended October 31, 2014
|
(5.87)%
|
$
1,571
|
0.65%
|
3.85%
|
(0.65)%
|
0.65%
|
3.85%
|
(0.65)%
|
0%
|
|
Direxion
Daily 20+ Year Treasury Bear 1X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
7.90%
|
$
5,465
|
0.46%
|
1.31%
|
1.08%
|
0.45%
|
1.30%
|
1.09%
|
0%
|
|
For
the Year Ended October 31, 2017
|
2.05%
|
$
5,113
|
0.45%
|
1.46%
|
0.18%
|
0.45%
|
1.46%
|
0.18%
|
0%
|
|
For
the Year Ended October 31, 2016
|
(10.73)%
|
$
12,026
|
0.63%
|
0.96%
|
(0.48)%
|
0.63%
|
0.96%
|
(0.48)%
|
0%
|
|
For
the Year Ended October 31, 2015
|
(8.78)%
|
$
14,594
|
0.65%
|
0.95%
|
(0.62)%
|
0.65%
|
0.95%
|
(0.62)%
|
0%
|
|
For
the Year Ended October 31, 2014
|
(14.64)%
|
$
8,613
|
0.65%
|
1.21%
|
(0.65)%
|
0.65%
|
1.21%
|
(0.65)%
|
0%
|
|
1
|
Net investment income (loss)
per share represents net investment income dividend by the daily average shares of beneficial interest outstanding throughout each period.
|
2
|
Excludes interest expense and
extraordinary expenses which comprise of tax and litigation expenses.
|
3
|
Due to the timing of sales
and redemptions of capital shares, the net realized and unrealized gain (loss) per share will not equal the Fund's changes in net realized and unrealized gain (loss) on investments, in-kind redemptions, futures and swaps for the period.
|
4
|
Total return is calculated
assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period and redemption on the last day of the period. Total return calculated for
a period of less than one year is not annualized. The total return would have been lower if certain expenses had not been reimbursed/waived or recouped by the investment advisor.
|
5
|
For periods less than a year,
these ratios are annualized.
|
6
|
Net expenses include effects
of any reimbursement/waiver or recoupment.
|
7
|
Portfolio turnover rate is
not annualized and excludes the value of portfolio securities received or delivered as a result of in-kind creations or redemptions of the Fund's capital shares. Portfolio turnover rate does not include effects of turnover of the swap and future
contracts portfolio. Short-term securities with maturities less than or equal to 365 days are also excluded from portfolio turnover calculation.
|
8
|
Commencement of investment
operations.
|
Direxion Shares
ETF Trust Prospectus
|
114
|
1301
Avenue of the Americas (6th Avenue), 28th Floor
|
New York,
New York 10019
|
866-476-7523
|
More Information on the Direxion Shares ETF Trust
Statement of Additional Information
(“SAI”):
The Funds' SAI contains
more information on each Fund and its investment policies. The SAI is incorporated in this Prospectus by reference (meaning it is legally part of this Prospectus). A current SAI is on file with the Securities and Exchange Commission
(“SEC”).
Annual and Semi-Annual Reports
to Shareholders:
The Funds' reports will provide
additional information on the Funds' investment holdings, performance data and a letter discussing the market conditions and investment strategies that significantly affected the Funds' performance during that period.
To Obtain the SAI or Fund Reports Free of Charge:
Write
to:
|
Direxion
Shares ETF Trust
|
|
1301 Avenue
of the Americas (6th Avenue), 28th Floor
New York, New York 10019
|
Call:
|
866-476-7523
|
By
Internet:
|
www.direxioninvestments.com
|
These documents and other
information about the Funds can be reviewed and copied at the SEC Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at (202) 551-8090. Reports and other information
about the Funds may be viewed on screen or downloaded from the EDGAR Database on the SEC’s website at http://www.sec.gov. Copies of these documents may be obtained, after paying a duplicating fee, by electronic request at the following e-mail
address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-1520.
SEC File Number: 811-22201
Direxion Shares ETF Trust
Statement of Additional Information
1301
Avenue of the Americas (6th Avenue), 28th Floor
|
New York,
New York 10019
|
866-476-7523
|
www.direxioninvestments.com
The Direxion Shares ETF Trust
(“Trust”) is an investment company that offers shares of a variety of exchange-traded funds to the public. The shares of the funds offered in this Statement of Additional Information (“SAI”) are, or upon commencement of
operations will be, listed and traded on the NYSE Arca, Inc. This SAI relates to the funds listed below (each, a “Fund” and collectively, the “Funds”).
1X BEAR FUNDS
Direxion Daily S&P 500
®
Bear 1X Shares (SPDN)
Direxion Daily Small Cap Bear 1X Shares
Direxion Daily 7-10 Year Treasury Bear 1X Shares
(TYNS)
Direxion Daily 20+ Year Treasury Bear 1X
Shares (TYBS)
Direxion Daily Municipal Bond Taxable
Bear 1X Shares
Direxion Daily Total Bond Market Bear
1X Shares (SAGG)
Direxion Daily CSI 300 China A
Share Bear 1X Shares (CHAD)
Direxion Daily MSCI
China A Bear 1X Shares
Direxion Daily CSI China
Internet Index Bear 1X Shares
Direxion Daily MSCI Real Estate Bear 1X Shares
The Funds seek
daily
inverse
investment results and are intended to be used as short-term trading vehicles. Each Fund attempts to provide daily investment results that correspond to the inverse (or opposite) of the performance of its underlying index.
The Funds are not intended to be used by, and are not appropriate
for, investors who do not intend to actively monitor and manage their portfolios. The Funds are very different from most mutual funds and exchange-traded funds. Investors should note that:
(1)
|
Each Fund pursues a
daily
investment objective that is inverse to the performance of its underlying index, a result opposite of most mutual funds and exchange-traded funds.
|
(2)
|
The
Funds seek
daily inverse
investment results that are subject to compounding and market volatility risk. The pursuit of their daily investment objective means that the return of a Fund for a period longer than
a full trading day will be the product of a series of daily returns, with daily repositioned exposure, for each trading day during the relevant period. As a consequence, especially in periods of market volatility, the volatility of the underlying
index may affect a Fund’s return as much as, or more than, the return of the underlying index. Further, the return for investors that invest for periods less than a full trading day will not be the product of the return of a Fund’s
stated daily inverse investment objective and the performance of the underlying index for the full trading day. During periods of high volatility, the Funds may not perform as expected and the Funds may have losses when an investor may have expected
gains if the Funds are held for a period that is different than one trading day.
|
The Funds are not suitable for all investors. The Funds are
designed to be utilized only by sophisticated investors, such as traders and active investors employing dynamic strategies. Investors in the Funds should:
(a)
|
understand the consequences
of seeking
daily inverse
investment results;
|
(b)
|
understand the risk of
shorting; and
|
(c)
|
intend
to actively monitor and manage their investments.
|
Investors who do not understand the Funds, or do not intend to
actively manage their funds and monitor their investments, should not buy the Funds.
There is no assurance that any Fund will achieve its daily
inverse investment objective and an investment in a Fund could lose money. No single Fund is a complete investment program.
This SAI, dated February 28, 2019, is not
a prospectus. It should be read in conjunction with the Funds' prospectus dated February 28, 2019 (“Prospectus”). This SAI is incorporated by reference into the Prospectus. In other words, it is legally part of the Prospectus. To receive
a copy of the Prospectus, without charge, write or call the Trust at the address or telephone number listed above.
February 28, 2019
Table of Contents
|
Page
|
|
2
|
|
2
|
|
3
|
|
3
|
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4
|
|
4
|
|
4
|
|
5
|
|
5
|
|
12
|
|
13
|
|
15
|
|
16
|
|
16
|
|
17
|
|
17
|
|
17
|
|
18
|
|
18
|
|
19
|
|
19
|
|
25
|
|
25
|
|
30
|
|
31
|
|
31
|
|
31
|
|
31
|
|
32
|
|
32
|
|
32
|
|
33
|
|
34
|
|
34
|
|
34
|
|
34
|
|
35
|
|
37
|
|
37
|
|
38
|
|
39
|
|
40
|
|
40
|
|
40
|
|
Page
|
|
40
|
|
43
|
|
43
|
|
45
|
|
47
|
|
49
|
|
50
|
|
51
|
|
52
|
|
52
|
|
53
|
|
53
|
|
53
|
|
53
|
|
54
|
|
54
|
|
55
|
|
56
|
|
56
|
|
56
|
|
56
|
|
57
|
|
57
|
|
58
|
|
58
|
|
61
|
|
61
|
|
61
|
|
62
|
|
62
|
|
62
|
|
67
|
|
A-1
|
Direxion Shares ETF Trust
The Trust is a
Delaware statutory trust organized on April 23, 2008 and is registered with the Securities and Exchange Commission (“SEC”) as an open-end management investment company under the Investment Company Act of 1940, as amended (“1940
Act”). The Trust currently consists of 120 separate series or “Funds.”
The Direxion Daily 7-10 Year Treasury
Bear 1X Shares, Direxion Daily 20+ Year Treasury Bear 1X Shares, Direxion Daily Municipal Bond Taxable Bear 1X Shares, and Direxion Daily Total Bond Market Bear 1X Shares are collectively referred to as the “Fixed Income Funds.”
The Direxion Daily CSI 300 China A Share
Bear 1X Shares, Direxion Daily CSI China Internet Index Bear 1X Shares, and the Direxion Daily MSCI China A Bear 1X Shares are collectively referred to as the “China Funds.”
The Funds seek daily inverse
investment results, before fees and expenses, which correspond to 100% of the
inverse
of the performance of an underlying index. If, on a given day, the underlying index gains 1%, the Funds are designed to
lose approximately 1% (which is equal to -100% of 1%). Conversely, if the underlying index loses 1% on a given day, the Funds are designed to gain approximately 1%. The Funds seek inverse investment results on a daily basis
—
from the close of regular trading on one trading day to the close on the next trading
day
—
which should not be equated with seeking an inverse investment objective for any other period.
The Funds are designed as short-term
trading vehicles. The Funds are intended to be used by investors who intend to actively monitor and manage their portfolios.
Shares of each Fund
(“Shares”) are issued and redeemed only in large blocks called “Creation Units.” The Shares offered in this SAI are, or upon commencement of operations will be, listed and traded on the NYSE Arca, Inc. (the
“Exchange”). Most investors will buy and sell Shares of each Fund in secondary market transactions through brokers. Shares can be bought and sold throughout the trading day like other publicly traded shares. There is no minimum
investment. Investors may acquire Shares directly from each Fund, and shareholders may tender their Shares for redemption directly to each Fund, only in Creation Units of 50,000 Shares, as discussed in the “Purchases and Redemptions”
section below.
The
Funds seek
daily inverse
investment results and are subject to compounding and market volatility risks. The Funds are intended to be used as short-term trading vehicles. As such, the Funds are not intended to
be used by, and are not appropriate for, investors who do not intend to actively monitor and manage their portfolios. The Funds are very different from most mutual funds and exchange-traded funds. Investors should note that:
(1) Each Fund pursues a
daily
investment objective that is inverse to the performance of its underlying index, a result opposite of most mutual and exchange-traded funds.
(2) The pursuit of these
daily inverse
investment objectives means that the return of a Fund for a period longer than a full trading day will be the product of the series of daily returns, with daily repositioned exposure, for each trading
day during the relevant period. As a consequence, especially in periods of market volatility, the volatility of the underlying index may affect a Fund’s return as much as, or more than, the return of the underlying index. Further, the return
for investors that invest for periods less than a full trading day will not be the product of the return of a Fund’s stated daily inverse investment objective and the performance of the underlying index for the full trading day. During periods
of high volatility, the Funds may not perform as expected and the Funds may have losses when an investor may have expected gains if the Funds are held for a period that is different than one trading day.
The Funds are not suitable for all
investors. The Funds are designed to be utilized only by sophisticated investors, such as traders and active investors employing dynamic strategies. Investors in the Funds should:
(a) understand the consequences of
seeking
daily inverse
investment results;
(b) understand the risk of shorting;
and
(c) intend to actively monitor
and manage their investments.
Investors who do not understand the
Funds, or do not intend to actively manage their funds and monitor their investments, should not buy the Funds. There is no assurance that any Fund offered in this SAI will achieve its
daily inverse
investment
objective and an investment in a Fund could lose money. No single Fund is a complete investment program.
Classification of the Funds
Each Fund is a
“non-diversified” series of the Trust pursuant to the 1940 Act. A Fund is considered “non-diversified” because a relatively high percentage of its assets may be invested in the securities of a limited number of issuers. To
the extent that a Fund assumes large positions in the securities of a small number of issuers, the Fund’s net asset value ("NAV") may fluctuate to a greater extent than that of a diversified company as a result of changes in the financial
condition or in the market’s assessment of the issuers, and the Fund may be more susceptible to any single economic, political or regulatory occurrence than a diversified company.
Exchange Listing and Trading
The Shares are, or
upon commencement of operations will be, listed and traded on the Exchange and may trade at prices that differ to some degree from their NAV. There can be no assurance that the requirements of the Exchange necessary to maintain the listing of Shares
of each Fund will continue to be met. The Exchange may, but is not required to, remove the Shares of a Fund from listing if (i) following the initial 12-month period beginning at the commencement of trading of a Fund, there are fewer than 50
beneficial owners of the Shares of the Fund; (ii) the value of the underlying index is no longer calculated or available; (iii) a Fund's underlying index no longer meets various liquidity and other metrics as required by the Exchange’s
continued listing standards; or (iv)such other event shall occur or condition exist that, in the opinion of the Exchange, makes further dealings on the Exchange inadvisable. The Exchange will remove the Shares of a Fund from listing and trading upon
termination of such Fund.
As is
the case with other publicly listed securities, when Shares of a Fund are bought or sold through a broker, an investor may incur a brokerage commission determined by that broker, as well as other charges.
The Trust reserves the right to
adjust the price levels of the Shares in the future to help maintain convenient trading ranges for investors. Any adjustments would be accomplished through stock splits or reverse stock splits, which would have no effect on the net assets of a Fund
or an investor’s equity interest in a Fund.
The trading prices of each
Fund’s shares in the secondary market generally differ from each Fund’s daily NAV per share and are affected by market forces such as supply and demand, economic conditions and other factors. Rafferty Asset Management, LLC ("Rafferty" or
"Adviser") may, from time to time, make payments to certain market makers in the Trust’s shares pursuant to an Exchange authorized program.
In order to provide additional
information regarding the value of Shares of a Fund, the Exchange, a market data vendor or other information provider, disseminates an Intraday Optimized Portfolio Value (“IOPV”) for each Fund. Each Fund’s IOPV is expected to be
disseminated every 15 seconds during the regular trading hours of the Exchange. The IOPV is based on the current market value of the securities and cash required to be deposited in exchange for a Creation Unit. The IOPV does not necessarily reflect
the precise composition of the current portfolio holdings of a Fund as of a particular point in time, or an accurate valuation of the current portfolio. The quotations of certain Fund holdings may not be updated during U.S. trading hours if such
holdings do not trade in the U.S. The Funds are not involved in, nor responsible for, the calculation or dissemination of the IOPV and make no representations or warranty as to its accuracy.
Investment Policies and Techniques
Each Fund seeks investment
results that correspond to the inverse (-100%) of the performance of an underlying index, before fees and expenses, as follows:
Fund
|
Underlying
Index
|
Direxion
Daily S&P 500
®
Bear 1X Shares
|
S&P
500
®
Index
|
Direxion
Daily Small Cap Bear 1X Shares
|
Russell
2000
®
Index
|
Direxion
Daily 7-10 Year Treasury Bear 1X Shares
|
ICE
U.S. Treasury 7-10 Year Bond Index
|
Direxion
Daily 20+ Year Treasury Bear 1X Shares
|
ICE
U.S. Treasury 20+ Year Bond Index
|
Direxion
Daily Municipal Bond Taxable Bear 1X Shares
|
S&P
National AMT-Free Municipal Bond Index
|
Direxion
Daily Total Bond Market Bear 1X Shares
|
Bloomberg
Barclays US Aggregate Bond Index
|
Direxion
Daily CSI 300 China A Shares Bear 1X shares
|
CSI
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Daily MSCI China A Bear 1X Shares
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MSCI
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Overseas China Internet Index
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Each Fund’s investment objective
is a non-fundamental policy of the Fund that may be changed by the Board without shareholder approval.
With the exception of limitations
described in the “Investment Restrictions” section, each Fund may engage in the investment strategies discussed below. There is no assurance that any of these strategies or any other strategies and methods of investment available to a
Fund will result in the achievement of the Fund’s investment objective.
This section provides a description
of the securities in which a Fund may invest to achieve its investment objective, the strategies it may employ and the corresponding risks of such securities and strategies. The greatest risk of investing in an exchange-traded fund ("ETF") is that
its returns will fluctuate and you could lose money.
A Fund may invest in asset-backed
securities of any rating or maturity. Asset-backed securities are securities issued by trusts and special purpose entities that are backed by pools of assets, such as automobile and credit-card receivables and home equity loans, which pass through
the payments on the underlying obligations to the security holders (less servicing fees paid to the originator or fees for any credit enhancement). Typically, the originator of the loan or accounts receivable paper transfers it to a specially
created trust, which repackages it as securities with a minimum denomination and a specific term. The securities are then privately placed or publicly offered. Examples include certificates for automobile receivables and so-called plastic bonds,
backed by credit card receivables.
The value of an asset-backed security
is affected by, among other things, changes in the market’s perception of the asset backing the security, the creditworthiness of the servicing agent for the loan pool, the originator of the loans and the financial institution providing any
credit enhancement. Payments of principal and interest passed through to holders of asset-backed securities are frequently supported by some form of credit enhancement, such as a letter of credit, surety bond, limited guarantee by another entity or
by having a priority to certain of the borrower’s other assets. The degree of credit enhancement varies, and generally applies to only a portion of the asset-backed security’s par value. Value is also affected if any credit enhancement
has been exhausted.
Money Market Instruments
. A Fund may invest in bankers’ acceptances, certificates of deposit, demand and time deposits, savings shares and commercial paper of domestic
banks and savings and loans that have assets of at least $1 billion and capital, surplus, and undivided profits of over $100 million as of the close of their most recent fiscal year, or instruments that are insured by the Bank Insurance Fund or the
Savings Institution Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”). A Fund also may invest in high quality, short-term, corporate debt obligations, including variable rate demand notes, having terms-to-maturity of
less than 397 days. Because there is no secondary trading market in demand notes, the inability of the issuer to make required payments could impact adversely a Fund’s ability to resell when it deems advisable to do so.
A Fund may invest in foreign money
market instruments, which typically involve more risk than investing in U.S. money market instruments. See “Foreign Securities” below. These risks include, among others, higher brokerage commissions, less public information, and less
liquid markets in which to sell and meet large shareholder redemption requests.
Bankers’ Acceptances
. Bankers’ acceptances generally are negotiable instruments (time drafts) drawn to finance the export, import, domestic shipment or storage
of goods. They are termed “accepted” when a bank writes on the draft its agreement to pay it at maturity, using the word “accepted.” The bank is, in effect, unconditionally guaranteeing to pay the face value of the instrument
on its maturity date. The acceptance may then be held by the accepting bank as an asset, or it may be sold in the secondary market at the going rate of interest for a specified maturity.
Certificates of Deposit (“CDs”)
. The FDIC is an agency of the U.S. government that insures the deposits of certain banks and savings and loan associations up to
$250,000 per deposit. The interest on such deposits may not be insured to the extent this limit is exceeded. Current federal regulations also permit such institutions to issue insured negotiable CDs in amounts of $250,000 or more without regard to
the interest rate ceilings on other deposits. To remain fully insured, these investments must be limited to $250,000 per insured bank or savings and loan association.
Commercial Paper
. Commercial paper includes notes, drafts or similar instruments payable on demand or having a maturity at the time of issuance not exceeding nine months,
exclusive of days of grace or any renewal thereof. A Fund may invest in commercial paper rated A-l or A-2 by Standard & Poor’s
®
Ratings
Services (“S&P
®
”) or Prime-1 or Prime-2 by Moody’s Investors Service
®
, Inc. (“Moody’s”), and in other lower quality commercial paper.
Corporate Debt Securities
A Fund may invest in investment
grade corporate debt securities of any rating or maturity. Investment grade corporate bonds are those rated BBB or better by S&P
®
or Baa or
better by Moody’s. Securities rated BBB by S&P
®
are considered investment grade, but Moody’s considers securities rated Baa to have
speculative characteristics. See Appendix A for a description of corporate bond ratings. A Fund may also invest in unrated securities.
Corporate debt securities are
fixed-income securities issued by businesses to finance their operations, although corporate debt instruments may also include bank loans to companies. Notes, bonds, debentures and commercial paper are the most common types of corporate debt
securities, with the primary difference being their maturities and secured or un-secured status. Commercial paper has the shortest term and is usually unsecured.
The broad category of corporate debt
securities includes debt issued by domestic or foreign companies of all kinds, including those with small-, mid- and large-capitalizations. Corporate debt may be rated investment-grade or below investment-grade and may carry variable or floating
rates of interest.
Because of the wide range of types
and maturities of corporate debt securities, as well as the range of creditworthiness of its issuers, corporate debt securities have widely varying potentials for return and risk profiles. For example, commercial paper issued by a large established
domestic corporation that is rated investment grade may have a modest return on principal, but carries relatively limited risk. On the other hand, a long-term corporate note issued by a small foreign corporation from an emerging market country that
has not been rated may have the potential for relatively large returns on principal, but carries a relatively high degree of risk.
Corporate debt securities carry both
credit risk and interest rate risk. Credit risk is the risk that a Fund could lose money if the issuer of a corporate debt security is unable to pay interest or repay principal when it is due. Some corporate debt securities that are rated below
investment grade are generally considered speculative because they present a greater risk of loss, including default, than higher-quality debt securities. The credit risk of a particular issuer’s debt security may vary based on its priority
for repayment. For example, higher ranking (senior) debt securities have a higher priority than lower ranking (subordinated) securities. This means that the issuer might not make payments on subordinated securities while continuing to make payments
on senior securities. In addition, in the event of bankruptcy, holders of higher-ranking senior securities may receive amounts otherwise payable to the holders of more junior securities. Interest rate risk is the risk that the value of certain
corporate debt securities will tend to fall when interest rates rise. In general, corporate debt securities with longer terms tend to fall more in value when interest rates rise than corporate debt securities with shorter terms.
On July 27, 2017, the U.K.-based
Financial Conduct Authority (the “FCA”) announced its intention to cease sustaining LIBOR after 2021. It is possible that the ICE Benchmark Administration (“IBA”) and the banks that offer reference rates could continue to
produce LIBOR on the current basis after 2021, but it cannot be assured that LIBOR will survive in its current form. The effect of the FCA’s decision not to sustain LIBOR, or, if changes are ultimately made to LIBOR, the effect of those
changes, cannot be predicted. In addition, it cannot be predicted what alternative index would be chosen should this occur. If LIBOR in its current form does not survive or if an alternative index is chosen, the market value and/or liquidity of
securities with distributions or interest rates based on LIBOR could be adversely affected.
Common Stocks
. A Fund may invest in common stocks. Common stocks represent the residual ownership interest in the issuer and are entitled to the income and increase in the
value of the assets and business of the entity after all of its obligations and preferred stock are satisfied. Common stocks generally have voting rights. Common stocks fluctuate in price in response to many factors including historical and
prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity.
Convertible Securities
. A Fund may invest in convertible securities that may be considered high yield securities. Convertible securities include corporate bonds, notes and
preferred stock that can be converted into or exchanged for a prescribed amount of common stock of the same or a different issue within a particular period of time at a specified price or formula. A convertible security entitles the holder to
receive interest paid or accrued on debt or dividends paid on preferred stock until the convertible stock matures or is redeemed, converted or exchanged. While no securities investment is without some risk, investments in convertible securities
generally entail less risk than the issuer’s common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a fixed income security. The
market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline. While convertible securities generally offer lower interest or dividend yields than nonconvertible debt
securities of similar quality, they do enable the investor to benefit from increases in the market price of the underlying common stock. When investing in convertible securities, a Fund may invest in the lowest credit rating category.
Preferred Stock
. A Fund may invest in preferred stock. A preferred stock blends the characteristics of a bond and common stock. It can offer the higher yield of a bond and
has priority over common stock in equity ownership, but does not have the seniority of a bond and its participation in the issuer’s growth may be limited. Preferred stock has preference over common stock in the receipt of dividends and in any
residual assets after payment to creditors if the issuer is dissolved. Although the dividend is set at a fixed annual rate, in some circumstances it can be changed or omitted by the issuer. When investing in preferred stocks, a Fund may invest in
the lowest credit rating category.
Warrants and Rights
. A Fund may purchase warrants and rights, which are instruments that permit a Fund to acquire, by subscription, the capital stock of a corporation at a
set price, regardless of the market price for such stock. Warrants may be either perpetual or of limited duration, but they usually do not have voting rights or pay dividends. The market price of warrants is usually significantly less than the
current price of the underlying stock. Thus, there is a greater risk that warrants might drop in value at a faster rate than the underlying stock.
A Fund may have both direct and
indirect exposure to foreign securities through investments in publicly traded securities such as stocks and bonds, stock index futures contracts, options on stock index futures contracts and options on securities
and on stock indices
to foreign securities. In most cases, the best available market for foreign securities will be on exchanges or in OTC markets located outside the United States.
Investing in foreign securities
carries political and economic risks distinct from those associated with investing in the United States. Non-U.S. securities may be subject to currency risks or to foreign government taxes. There may be less information publicly available about a
non-U.S. issuer than about a U.S. issuer, and a foreign issuer may or may not be subject uniform accounting, auditing and financial reporting standards and practices comparable to those in the U.S. Other risks of investing in such securities include
political or economic instability in the country involved, the difficulty of predicting international trade patterns and the possibility of the imposition of exchange controls. The prices of such securities may be more volatile than those of U.S.
securities. There maybe also be the possibility of expropriation of assets or nationalization, imposition of withholding taxes on dividend or interest payments, difficulty obtaining and enforcing judgments against foreign entities or diplomatic
developments which could affect investment in these countries. Losses and other expenses may be incurred in converting currencies in connection with purchases and sales of foreign securities.
Non-U.S. stocks markets may not be as
developed or efficient as, and may be more volatile than, those in the U.S. While the volume of shares traded on non-U.S. stock markets generally has been growing, such markets usually have substantially less volume than U.S. markets. Therefore, a
Fund’s investment in non-U.S. equity securities may be less liquid and subject to more rapid and erratic price movements than comparable securities listed for trading on U.S. exchanges. Non-U.S. equity securities may trade at price/earnings
multiples higher than comparable U.S. securities and such levels may not be sustainable. There may be less government supervision and regulation of foreign stock exchanges, brokers, banks and listed companies abroad than in the U.S. Moreover,
settlement practices for transactions in foreign markets may differ from those in U.S. markets. Such differences may include delays beyond periods customary in the U.S. and practices, such as delivery of securities prior to receipt of payment, that
increase the likelihood of a failed settlement, which can result in losses to a Fund. The value of non-U.S. investments and the investment income derived from them may also be affected unfavorably by changes in currency exchange control regulations.
Foreign brokerage commissions, custodial expenses and other fees are also generally higher than for securities traded in the U.S. This may cause a Fund to incur higher portfolio transaction costs than domestic equity funds. Fluctuations in exchanges
rates may also affect the earning power and asset value of the foreign entity issuing a security, even on denominated in U.S. dollars. Dividend and interest payments may be repatriated based on the exchange rate at the time of disbursement, and
restrictions on capital flows may be imposed.
Developing and Emerging Markets
.
Emerging and developing markets abroad may offer special opportunities for
investing,
but may have greater risks than more developed foreign markets, such as those in Europe,
Canada,
Australia,
New Zealand and Japan.
There may be even less liquidity in their securities markets, and settlements of purchases and sales of
securities may be subject to additional delays. They are subject to greater risks of limitations on the repatriation of income and profits because of currency restrictions imposed by local governments. Those countries may also be subject to the risk
of greater political and economic instability, which can greatly affect the volatility of prices of securities in those countries.
Investing in emerging market
securities imposes risks different from, or greater than, risks of investing in foreign developed countries. These risks include: smaller market capitalization of securities markets, which may suffer periods of relative illiquidity; significant
price volatility; restrictions on foreign investment; and possible repatriation of investment income and capital. In addition, foreign investors may be required to register the proceeds of sales; future economic or political crises could lead to
price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization, or creation of government monopolies. The currencies of emerging market countries may experience significant declines against the U.S. Dollar.
Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries. Additional risks of emerging markets securities may include:
greater social, economic and political uncertainty and instability; more substantial governmental involvement in the economy; less governmental supervision and regulation; unavailability of currency hedging techniques; companies that are newly
organized and small; differences in auditing and financial reporting standards, which may result in unavailability of material information about issuers; and less developed legal systems. In addition, emerging securities markets may have different
clearance and settlement procedures, which may be unable to keep pace with the volume of securities transactions or otherwise make it difficult to engage in such transactions.
Asia-Pacific Countries
. In addition to the risks associated with foreign and emerging markets, the developing market Asia-Pacific countries in which a Fund may invest are
subject to certain additional or specific risks. A Fund may make substantial investments in Asia-Pacific countries. In the Asia-Pacific markets, there is a high concentration of market capitalization and trading volume in a small number of issuers
representing a limited number of industries, as well as a high concentration of investors and financial intermediaries. Many of these markets also may be affected by developments with respect to more established markets in the region, such as Japan
and Hong Kong. Brokers in developing market Asia-Pacific countries typically are fewer in number and less well-capitalized than brokers in the United States. These factors, combined with the U.S. regulatory requirements for open-end investment
companies and the restrictions on foreign investment, result in potentially fewer investment opportunities for a Fund and may have an adverse impact on a Fund’s investment performance.
Many of the developing market
Asia-Pacific countries may be subject to a greater degree of economic, political and social instability than is the case in the United States and Western European countries. Such instability may result from, among other things: (i) authoritarian
governments or military involvement in political and economic decision-making, including
changes in government through extra-constitutional
means; (ii) popular unrest associated with demands for improved political, economic and social conditions; (iii) internal insurgencies; (iv) hostile relations with neighboring countries; and/or (v) ethnic, religious and racial disaffection. In
addition, the governments of many of such countries, such as Indonesia, have a heavy role in regulating and supervising the economy.
An additional risk common to most
such countries is that the economy is heavily export-oriented and, accordingly, is dependent upon international trade. The existence of overburdened infrastructure and obsolete financial systems also present risks in certain countries, as do
environmental problems. Certain economies also depend to a significant degree upon exports of primary commodities and, therefore, are vulnerable to changes in commodity prices that, in turn, may be affected by a variety of factors. The legal systems
in certain developing market Asia-Pacific countries also may have an adverse impact on a Fund. For example, while the potential liability of a shareholder in a U.S. corporation with respect to acts of the corporation is generally limited to the
amount of the shareholder's investment, the notion of limited liability is less clear in certain emerging market Asia-Pacific countries. Similarly, the rights of investors in developing market Asia-Pacific companies may be more limited than those of
shareholders of U.S. corporations. It may be difficult or impossible to obtain and/or enforce a judgment in a developing market Asia-Pacific country.
Governments of many developing
market Asia-Pacific countries have exercised and continue to exercise substantial influence over many aspects of the private sector. In certain cases, the government owns or controls many companies, including the largest in the country. Accordingly,
government actions in the future could have a significant effect on economic conditions in developing market Asia-Pacific countries, which could affect private sector companies and a Fund itself, as well as the value of securities in a Fund's
portfolio. In addition, economic statistics of developing market Asia-Pacific countries may be less reliable than economic statistics of more developed nations.
It is possible that developing market
Asia-Pacific issuers may not be subject to the same accounting, auditing and financial reporting standards as U.S. companies. Inflation accounting rules in some developing market Asia-Pacific countries require companies that keep accounting records
in the local currency, for both tax and accounting purposes, to restate certain assets and liabilities on the company’s balance sheet in order to express items in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits for certain developing market Asia-Pacific companies. In addition, satisfactory custodial services for investment securities may not be available in some developing Asia-Pacific countries, which may result in a
Fund incurring additional costs and delays in providing transportation and custody services for such securities outside such countries.
Certain developing Asia-Pacific
countries are especially large debtors to commercial banks and foreign governments. Fund management may determine that, notwithstanding otherwise favorable investment criteria, it may not be practicable or appropriate to invest in a particular
developing Asia-Pacific country. A Fund may invest in countries in which foreign investors, including management of the Fund, have had no or limited prior experience.
Brazil
. Investing in Brazil involves certain considerations not typically associated with investing in the United States. Additional considerations include: (i) investment
and repatriation controls, which could affect a Fund’s ability to operate, and to qualify for the favorable tax treatment afforded to RICs for U.S. federal income tax purposes; (ii) fluctuations in the rate of exchange between the Brazilian
Real and the U.S. Dollar; (iii) the generally greater price volatility and lesser liquidity that characterize Brazilian securities markets, as compared with U.S. markets; (iv) the effect that balance of trade could have on Brazilian economic
stability and the Brazilian government's economic policy; (v) potentially high rates of inflation, a rising unemployment rate, and a high level of debt, each of which may hinder economic growth; (vi) governmental involvement in and influence on the
private sector; (vii) Brazilian accounting, auditing and financial standards and requirements, which differ from those in the United States; (viii) political and other considerations, including changes in applicable Brazilian tax laws; and (ix)
restrictions on investments by foreigners. In addition, commodities, such as oil, gas and minerals, represent a significant percentage of Brazil’s exports and, therefore, its economy is particularly sensitive to fluctuations in commodity
prices. Additionally, an investment in Brazil is subject to certain risks stemming from political and economic corruption. For example, the Brazilian Federal Police conducted a criminal investigation into corruption allegations, known as Operation
Car Wash, which led to charges against high level politicians and corporate executives and resulted in substantial fines for some of Brazil’s largest companies. This has had a widespread political and economic impact and may continue to affect
negatively the country and the reputation of Brazilian companies connected with the investigation, and therefore, the trading price of securities issued by those companies. While the economy of Brazil has enjoyed substantial economic growth in
recent years, there can be no guarantee that this growth will continue.
China
. Investing in China involves special considerations not typically associated with investing in countries with more democratic governments or more established economies
or currency markets. These risks include: (i) the risk of nationalization or expropriation of assets or confiscatory taxation; (ii) greater governmental involvement in and control over the economy, interest rates and currency exchange rates; (iii)
controls on foreign investment and limitations on repatriation of invested capital; (iv) greater social, economic and political uncertainty (including the risk of war); (v) dependency on exports and the corresponding importance of international
trade; (vi) currency exchange rate fluctuations; (vii) differences in, or lack of, auditing and financial reporting standards that may result in unavailability of material information about issuers; and (viii) the risk that certain companies in
which the Fund may invest may have dealings with countries subject to sanctions or embargoes imposed by the U.S. government or identified as state sponsors of terrorism.
For over three
decades, the Chinese government has been reforming economic and market practice and has been providing a larger sphere for private ownership of property. While currently contributing to growth and prosperity, the government may decide not to
continue to support these economic reform programs and could possible return to the completely centrally planned economy that existed prior to 1978. There is also a greater risk in China than in many other countries of currency fluctuations,
currency non-convertibility, interest rate fluctuations and higher rates of inflation as a result of internal social unrest or conflicts with other countries. China is an emerging market and demonstrates significantly higher volatility from time to
time in comparison to developed markets. The government of China maintains strict currency controls in support of economic, trade and political objectives and regularly intervenes in the currency market. The government's actions in this respect may
not be transparent or predictable. As a result, the value of the Yuan, and the value of securities designed to provide exposure to the Yuan, can change quickly and arbitrarily. Furthermore, it is difficult for foreign investors to directly access
money market securities in China because of investment and trading restrictions. While the economy of China has enjoyed substantial economic growth in recent years, there can be no guarantee this growth will continue. Reduction in spending on
Chinese products and services, the institution of additional tariffs or other trade barriers, including as a result of heightened trade tensions between China and the United States, or a downturn in any of the economies of China’s key trading
partners may have an adverse impact on the Chinese economy. These and other factors may decrease the value and liquidity of a Fund's investments. The Chinese economy may experience a significant slowdown as a result of, among other things, a
deterioration of global demand for Chinese exports, as well as contraction in spending on domestic goods by Chinese consumers. In addition, China may experience substantial rates of inflation or economic recessions, which would have a negative
effect on its economy and securities market.
Recently, there has been increased
attention from the SEC and the Public Company Accounting Oversight Board (“PCAOB”) with regard to international auditing standards of U.S.-listed companies with significant operations in China as well as PCAOB-registered auditing firms
in China. Currently, the SEC and PCAOB are only able to get limited information about these auditing firms and are restricted from inspecting the audit work and practices of registered accountants in China. These restrictions may result in the
unavailability of material information about the Chinese issuers.
China A-shares are equity securities
of companies based in mainland China that trade on Chinese stock exchanges such as the Shanghai Stock Exchange (“SSE”) and the Shenzhen Stock Exchange (“SZSE”) (“A-shares”). Foreign investment in A-shares on the
SSE and SZSE has historically not been permitted other than through licenses granted by the People’s Republic of China (“PRC”) known as the Qualified Foreign Institutional Investor (“QFII”) and Renminbi Qualified
Foreign Institutional Investor (“RQFII”) licenses. Each license permits investment in A-shares only up to a specified quota.
Because restrictions continue to
exist and capital therefore cannot flow freely into and out of the A-Share market, it is possible that in the event of a market disruption, the liquidity of the A-Share market and trading prices of A-Shares could be more severely affected than the
liquidity and trading prices of markets where securities are freely tradable and capital therefore flows more freely. The nature and duration of such a market disruption or the impact that it may have on the A-Share market are unknown. In the event
that a Fund invests in A-Shares directly, a Fund may incur significant losses, or may not be able fully to implement or pursue its investment objectives or strategies, due to investment restrictions on RQFIIs and QFIIs, illiquidity of the Chinese
securities markets, or delay or disruption in execution or settlement of trades. A-Shares may become subject to frequent and widespread trading halts.
The Chinese government has in the
past taken actions that benefitted holders of A-Shares. As A-Shares become more available to foreign investors, such as a Fund, the Chinese government may be less likely to take action that would benefit holders of A-Shares. In addition, there is no
guarantee that an A-Shares quota will be sufficient for a Fund’s intended scope of investment.
The regulations which apply to
investments by RQFIIs and QFIIs, including the repatriation of capital, are relatively new. The application and interpretation of such regulations are therefore relatively untested. In addition, there is little precedent or certainty evidencing how
such discretion may be exercised now or in the future; and even if there were precedent, it may provide little guidance as PRC authorities would likely continue to have broad discretion.
Investment in eligible A-shares
listed and traded on the SSE is now permitted through the Stock Connect program. Stock Connect is a securities trading and clearing program established by Hong Kong Securities Clearing Company Limited, the SSE and Chinese Securities Depositary and
Clearing Corporation that aims to provide mutual stock market access between China and Hong Kong by permitting investors to trade and settle shares on each market through their local exchanges. Certain Funds may invest in other investment companies
that invest in A-shares through Stock Connect or on such other stock exchanges in China which participate in Stock Connect from time to time. Under Stock Connect, a Fund’s trading of eligible A-shares listed on the SSE would be effectuated
through its Hong Kong broker.
Although no individual investment
quotas or licensing requirements apply to investors in Stock Connect, trading through Stock Connect’s Northbound Trading Link is subject to aggregate and daily investment quota limitations that require that buy orders for A-shares be rejected
once the remaining balance of the relevant quota drops to zero or the daily quota is exceeded (although a Fund will be permitted to sell A-shares regardless of the quota balance). These limitations may restrict a Fund from investing in A-shares on a
timely basis, which could affect a Fund’s ability to effectively pursue its investment strategy. Investment quotas are also subject to change. Investment in eligible A-shares through Stock Connect is subject
to trading, clearance and settlement procedures that
could pose risks to a Fund. A-shares purchased through Stock Connect generally may not be sold or otherwise transferred other than through Stock Connect in accordance with applicable rules. In addition, Stock Connect will only operate on days when
both the Chinese and Hong Kong markets are open for trading and when banks in both markets are open on the corresponding settlement days. Therefore, an investment in A-shares through Stock Connect may subject a Fund to a risk of price fluctuations
on days where the Chinese market is open, but Stock Connect is not trading.
Europe
.
Investing in European countries may impose economic and political risks associated with Europe in general and the specific European countries in which it invests.
The economies and markets of European countries are often closely connected and interdependent, and events in one European country can have an adverse impact on other European countries. A Fund makes investments in securities of issuers that are
domiciled in, or have significant operations in, member countries of the Economic and Monetary Union of the European Union (the “EU”), which requires member countries to comply with restrictions on inflation rates, deficits, interest
rates, debt levels and fiscal and monetary controls, each of which may significantly affect every country in Europe. Decreasing imports or exports, changes in governmental or EU regulations on trade, changes in the exchange rate of the euro (the
common currency of certain EU countries), the default or threat of default by an EU member country on its sovereign debt, and/or an economic recession in an EU member country may have a significant adverse effect on the economies of EU member
countries and their trading partners, including some or all of the emerging markets materials sector countries. Although certain European countries do not use the euro, many of these countries are obliged to meet the criteria for joining the euro
zone. Consequently, these countries must comply with many of the restrictions noted above. The European financial markets have experienced volatility and adverse trends in recent years due to concerns about economic downturns, rising government debt
levels and the possible default of government debt in several European countries, including Greece, Ireland, Italy, Portugal and Spain. In order to prevent further economic deterioration, certain countries, without prior warning, can institute
“capital controls.” Countries may use these controls to restrict volatile movements of capital entering and exiting their country. Such controls may negatively affect a Fund’s investments. A default or debt restructuring by any
European country would adversely impact holders of that country’s debt and sellers of credit default swaps linked to that country’s creditworthiness, which may be located in countries other than those listed above. In addition, the
credit ratings of certain European countries were recently downgraded. These downgrades may result in further deterioration of investor confidence. These events have adversely affected the value and exchange rate of the euro and may continue to
significantly affect the economies of every country in Europe, including countries that do not use the euro and non-EU member countries. Responses to the financial problems by European governments, central banks and others, including austerity
measures and reforms, may not produce the desired results, may result in social unrest and may limit future growth and economic recovery or have other unintended consequences. Further defaults or restructurings by governments and other entities of
their debt could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, one or more countries may abandon the euro and/or withdraw from the EU, including, with respect to the latter, the
United Kingdom, which is a significant market in the global economy. The impact of these actions, especially if they occur in a disorderly fashion, is not clear but could be significant and far-reaching and could adversely impact the value of
investments in the region.
In a referendum
held on June 23, 2016, the United Kingdom (the “UK”) resolved to leave the EU (referred to as “Brexit”). The referendum has introduced significant uncertainties and instability in the financial markets as the UK negotiates
its exit from the EU, which is currently scheduled for March 29, 2019, however, this timing could change. The outcome of negotiations and the potential consequences remain uncertain. The effects of Brexit will depend on any agreements the UK makes
to retain access to the EU Common Market either during a transitional period or more permanently. Brexit could lead to legal and tax uncertainty and potentially divergent national laws and regulations as the UK determines which EU laws to replace or
replicate. Additionally, Brexit could lead to global economic uncertainty and result in significant volatility in the global stock markets and currency exchange rate fluctuations. The UK has one of the largest economies in Europe and is a major
trading partner with the other EU countries and the United States. If implemented, Brexit might negatively affect the City of London’s economy, which is heavily dominated by financial services, as banks might be forced to move staff and comply
with two separate sets of rules or lose business to banks in Continental Europe. In addition, Brexit would likely create additional economic stresses for the UK, including the potential for decreased trade, capital outflows, devaluation of the
British pound, wider corporate bond spreads due to uncertainty, and declines in business and consumer spending as well as foreign direct investment.
Brexit may also have a destabilizing
impact on the EU to the extent that other member states similarly seek to withdraw from the EU. Any further exits from the EU would likely cause additional market disruptions globally and introduce new legal and regulatory uncertainties.
India
. Investments in India involve special considerations not typically associated with investing in countries with more established economies or currency markets.
Political, religious, and border disputes persist in India. India has recently experienced and may continue to experience civil unrest and hostilities with certain of its neighboring countries, including Pakistan, and the Indian government has
confronted separatist movements in several Indian states, including Kashmir. Government control over the economy, currency fluctuations or blockage, and the risk of nationalization or expropriation of assets offer higher potential losses.
Governmental actions could have a negative effect on the economic conditions in India, which
could adversely affect the value and liquidity of
investments made by a Fund. The securities markets in India are comparatively underdeveloped with some exceptions and consist of a small number of listed companies with small market capitalization, greater price volatility and substantially less
liquidity than companies in more developed markets. The limited liquidity of the Indian securities market may also affect a Fund’s ability to acquire or dispose of securities at the price or time that it desires or the Fund’s ability to
track its underlying index.
The
Indian government exercises significant influence over many aspects of the economy, and the number of public sector enterprises in India is substantial. While the Indian government has implemented economic structural reform with the objectives of
liberalizing India's exchange and trade policies, reducing the fiscal deficit, controlling inflation, promoting a sound monetary policy, reforming the financial sector, and placing greater reliance on market mechanisms to direct economic activity,
there can be no assurance that these policies will continue or that the economic recovery will be sustained.
Global factors and foreign actions
may inhibit the flow of foreign capital on which India is dependent to sustain its growth. In addition, the Reserve Bank of India has imposed limits on foreign ownership of Indian companies, which may decrease the liquidity of a Fund’s
portfolio and result in extreme volatility in the prices of Indian securities. In November 2016, the Indian government eliminated certain large denomination cash notes as legal tender, causing uncertainty in certain financial markets. These factors,
coupled with the lack of extensive accounting, auditing and financial reporting standards and practices, as applicable in the United States, may increase the risk of loss for a Fund.
Securities laws in India are
relatively new and unsettled and, as a result, there is a risk of significant and unpredictable change in laws governing foreign investment, securities regulation, title to securities and shareholder rights. Foreign investors in particular may be
adversely affected by new or amended laws and regulations. Certain Indian regulatory approvals, including approvals from the Securities and Exchange Board of India, the central government and the tax authorities (to the extent that tax benefits need
to be utilized), may be required before a Fund can make investments in Indian companies. Foreign investors in India still face burdensome taxes on investments in income producing securities.
While the Indian economy has enjoyed
substantial economic growth in recent years, there can be no guarantee this growth will continue. Technology and software sectors represent a significant portion of the total capitalization of the Indian securities markets. The value of these
companies will generally fluctuate in response to technological and regulatory developments, and, as a result, a Fund’s holdings are expected to experience correlated fluctuations. Natural disasters, such as tsunamis, flooding or droughts,
could occur in India or surrounding areas and could negatively affect the Indian economy. Agriculture occupies a prominent position in the Indian economy, therefore, it may be negatively affected by adverse weather conditions and the effects of
global climate change. These and other factors may decrease the value and liquidity of a Fund's investments.
Italy
.
Investment in Italian issuers involves risks that are specific to Italy, including, regulatory, political, currency, and economic risks. Italy’s economy is
dependent upon external trade with other economies
—
specifically Germany, France and
other Western European developed countries. As a result, Italy is dependent on the economies of these other countries and any change in the price or demand for Italy’s exports may have an adverse impact on its economy. Interest rates on
Italy’s debt may rise to levels that may make it difficult for it to service high debt levels without significant financial help from the EU and could potentially lead to default. Recently, the Italian economy has experienced volatility due to
concerns about economic downturn and rising government debt levels. Italy has been warned by the Economic and Monetary Union of the EU to reduce its public spending and debt and actions by Italy to cut spending or increase taxes in response could
have significant adverse effects on the Italian economy. These events have adversely impacted the Italian economy, causing credit agencies to lower Italy’s sovereign debt rating and could decrease outside investment in Italian companies. High
amounts of debt and public spending may stifle Italian economic growth or cause prolonged periods of recession.
Japan
. Japanese investments may be significantly affected by events influencing Japan’s economy and changes in the exchange rate between the Japanese yen and the U.S.
Dollar. Japan’s economy fell into a long recession in the 1990s. After a few years of mild recovery in the mid-2000s, Japan’s economy fell into another recession as a result of the recent global economic crisis. Japan is heavily
dependent on exports and foreign oil and may be adversely affected by higher commodity prices, trade tariffs, protectionist measures, competition from emerging economies, and the economic conditions of its trading partners, such as China.
Furthermore, Japan is located in a seismically active area, and in 2011 experienced an earthquake of a sizeable magnitude and a tsunami that significantly affected important elements of its infrastructure and resulted in a nuclear crisis. Since
these events, Japan’s financial markets have fluctuated dramatically. The full extent of the impact of these events on Japan’s economy and on foreign investment in Japan is difficult to estimate. The risks of natural disaster of varying
degrees, such as earthquakes and tsunamis, and the resulting damage, continue to exist. Japan’s economic prospects may be affected by the political and military situations of its near neighbors, notably North and South Korea, China, and
Russia. In addition, Japan’s labor market is adapting to an aging workforce, declining population, and demand for increased labor mobility. These demographic shifts and fundamental structural changes to the labor markets may negatively impact
Japan’s economic competiveness.
South Korea
. South Korean investments may be significantly affected by events influencing its economy, which is heavily dependent on exports and the demand for certain
finished goods. South Korea’s main industries include electronics, automobile production, chemicals, shipbuilding, steel, textiles, clothing, footwear, and food processing. Conditions that weaken demand for such products worldwide or in other
Asian countries could have a negative impact on the South Korean economy as a
whole. The South Korean economy’s reliance on
international trade makes it highly sensitive to fluctuations in international commodity prices, currency exchanges rates and government regulation, and vulnerable to downturns of the world economy, particularly with respects to its four largest
export markets (the EU, Japan, United States, and China). South Korea has experienced modest economic growth in recent years, but such continued growth may slow due, in part, to the economic slowdown in China and the increased competitive advantage
of Japanese exports with the weakened yen. The South Korean economy’s long-term challenges include an aging population, inflexible labor market, and overdependence on exports to drive economic growth. Relations with North Korea could also have
as significant impact on the economy of South Korea. Relations between South Korea and North Korea remain tense, as exemplified in periodic acts of hostility, and the possibility of serious military engagement still exists. Armed conflict between
North Korea and South Korea could have a severe adverse impact on the South Korean economy and its securities markets.
Latin America
. Investments in Latin American countries involve special considerations not typically associated with investing in the United States. Most Latin American
countries have experienced, at one time or another, severe and persistent levels of inflation, including, in some cases, hyperinflation. This has, in turn, led to high interest rates, extreme measures by governments to keep inflation in check, and a
generally debilitating effect on economic growth. Although inflation in many countries has lessened, there is no guarantee it will remain at lower levels. In addition, the political history of certain Latin American countries has been characterized
by political uncertainty, military intervention in civilian and economic spheres, and political corruption. Such developments, if they were to reoccur, could reverse favorable trends toward market and economic reform, privatization, and removal of
trade barriers, and result in significant disruption to the securities markets. Certain Latin American countries may also have managed currencies, which are maintained at artificial levels to the U.S. Dollar rather than at levels determined by the
market. This type of system can lead to sudden and large adjustments in the currency which, in turn, can have a disruptive and negative effect on foreign investors. For example, in late 1994, the value of the Mexican peso lost more than one-third of
its value relative to the U.S. Dollar. Certain Latin American countries also restrict the free conversion of their currency into foreign currencies, including the U.S. Dollar. There is no significant foreign exchange market for many currencies and
it would, as a result, be difficult for the Fund to engage in foreign currency transactions designed to protect the value of the Fund’s interests in securities denominated in such currencies. Finally, a number of Latin American countries are
among the largest debtors of developing countries. There have been moratoria on, and reschedulings of, repayment with respect to these debts. Such events can restrict the flexibility of these debtor nations in the international markets and result in
the imposition of onerous conditions on their economies.
Mexico
. Investment in Mexican issuers involves risks that are specific to Mexico, including regulatory, political, and economic risks. In the past, Mexico has experienced
high interest rates, economic volatility, significant devaluation of its currency (the peso), and high unemployment rates. The Mexican economy is dependent upon external trade with other economies, specifically with the United States and certain
Latin American countries. Additionally, a high level of foreign investment in Mexican assets may increase Mexico’s exposure to risks associated with changes in international investor sentiment. Recent political developments in the U.S. may
also have potential implications for the current trade arrangements between the U.S. and Mexico, which could affect the value of securities held by the Fund. For example, uncertainty regarding the status of the North American Free Trade Agreement
(NAFTA) or its recently negotiated successor -- the United States-Mexico-Canada Agreement -- may have a significant impact on Mexico’s economic outlook and the value of a fund’s investment in Mexico.
The Mexican economy is heavily
dependent on trade with, and foreign investment from, the U.S. and Canada, which are Mexico’s principal trading partners. Any changes in the supply, demand, price or other economic component of Mexico’s imports or exports, as well as any
reductions in foreign investment from, or changes in the economies of, the U.S. or Canada, may have an adverse impact on the Mexican economy. Because commodities such as oil and gas, minerals and metals represent a large portion of the
region’s exports, the economies of these countries are particularly sensitive to fluctuations in commodity prices. Mexico’s economy has also become increasingly oriented toward manufacturing in the years since NAFTA entered into force.
Because Mexico’s top export is automotive vehicles, its economy is strongly tied to the U.S. automotive market, and changes to certain segments in the U.S. market could have an impact on the Mexican economy. The automotive industry and other
industrial products can be highly cyclical, and companies in these industries may suffer periodic operating losses. These industries can also be significantly affected by labor relations and fluctuating component prices. The agricultural and mining
sectors of Mexico’s economy also account for a large portion of its exports, and Mexico is susceptible to fluctuations in the price and demand for agricultural products and natural resources. In addition, Mexico has privatized or has begun the
process of privatization of certain entities and industries, and some investors have suffered losses due to the inability of the newly privatized entities to adjust to a competitive environment and changing regulatory standards.
Mexico has been destabilized by local
insurrections, social upheavals and drug related violence. Additionally, violence near border areas, border-related political disputes, and other social upheaval may lead to strained international relations. Mexico has also experienced contentious
and very closely decided elections. Changes in political parties and other political events may affect the economy and contribute to additional instability. Recurrence of these or similar conditions may adversely impact the Mexican economy.
Russia
. Investing in Russia involves risks and special considerations not typically associated with investing in United States. Since the breakup of the Soviet Union at the
end of 1991, Russia has experienced dramatic political, economic, and social change. The political system in Russia is emerging from a long history of extensive state involvement in economic affairs.
The country is undergoing a rapid transition from a
centrally-controlled command system to a market-oriented, democratic model. As a result, companies in Russia are characterized by a lack of: (i) management with experience of operating in a market economy; (ii) modern technology; and, (iii) a
sufficient capital base with which to develop and expand their operations. It is unclear what will be the future effect on Russian companies, if any, of Russia’s continued attempts to move toward a more market-oriented economy. Russia’s
economy has experienced severe economic recession, if not depression, since 1990 during which time the economy has been characterized by high rates of inflation, high rates of unemployment, declining gross domestic product, deficit government
spending, and a devalued currency. The economic reform program has involved major disruptions and dislocations in various sectors of the economy, and those problems have been exacerbated by growing liquidity problems. Russia’s economy is also
heavily reliant on the energy and defense-related sectors, and is therefore susceptible to the risks associated with these industries. Further, Russia presently receives significant financial assistance from a number of countries through various
programs. To the extent these programs are reduced or eliminated in the future, Russian economic development may be adversely impacted. The laws and regulations in Russia affecting Western business investment continue to evolve in an unpredictable
manner. Russian laws and regulations, particularly those involving taxation, foreign investment and trade, title to property or securities, and transfer of title, which may be applicable to a Fund’s activities are relatively new and can change
quickly and unpredictably in a manner far more volatile than in the United States or other developed market economies. Although basic commercial laws are in place, they are often unclear or contradictory and subject to varying interpretation, and
may at any time be amended, modified, repealed or replaced in a manner adverse to the interest of the Funds.
As a result of
recent events involving Ukraine and Russia and other political conflicts, the United States and the European Union imposed sanctions on certain Russian individuals and companies, including certain financial institutions, and have limited certain
exports and imports to and from Russia. The United States and other nations or international organizations may impose additional, broader economic sanctions or take other actions that may adversely affect Russian-related issuers in the future. These
sanctions, any future sanctions or other actions, or even the threat of further sanctions or other actions, may negatively affect the value and liquidity of a Fund’s investments. Russia may undertake countermeasures or retaliatory actions
which may further impair the value and liquidity of a Fund’s investments.
To the extent a Fund invests in
stocks of foreign corporations, a Fund’s investment in such stocks may also be in the form of depositary receipts or other securities convertible into securities of foreign issuers. Depository receipts are receipts, typically issued by a
financial institution, with evidence of underlying securities issued by a non-U.S. issuer. Types of depositary receipts include American Depositary Receipts (“ADRs”), Global Depositary Receipts (“GDRs”) and European
Depositary Receipts (“EDRs”). Depository receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted.
ADRs are receipts typically issued by
an American bank or trust company that evidence ownership of underlying securities issued by a foreign corporation. Investments in ADRs have certain advantages over direct investment in the underlying foreign securities because: (i) ADRs are U.S.
dollar-denominated investments that are easily transferable and for which market quotations are readily available, and (ii) issuers whose securities are represented by ADRs are generally subject to auditing, accounting and financial reporting
standards similar to those applied to domestic issuers. By investing in ADRs rather than directly in the stock of foreign issuers outside the U.S. a Fund may avoid certain risks related to investing in foreign securities in non-U.S. markets,
however, ADRs do not eliminate all risks inherent in investing in the securities of foreign issuers.
EDRs are receipts issued in Europe
that evidence a similar ownership arrangement. GDRs are receipts issued throughout the world that evidence a similar arrangement. Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are
designed for use in European securities markets. GDRs are tradable both in the United States and in Europe and are designed for use throughout the world.
Depositary receipts may be purchased
through “sponsored” or “unsponsored” facilities, in which a Fund may invest. A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a depositary may establish an
unsponsored facility without participation by the issuer of the depositary security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts of the deposited securities.
Fund investments in depositary receipts,
which include ADRs, GDRs and EDRs, are deemed to be investments in foreign securities for purposes of a Fund’s investment strategy.
A Fund may invest directly and
indirectly in foreign currencies. Investments in foreign currencies are subject to numerous risks not least being the fluctuation of foreign currency exchange rates with respect to the U.S. Dollar. Exchange rates fluctuate for a number of
reasons.
Inflation
. Exchange rates change to reflect changes in a currency’s buying power. Different countries experience different inflation rates due to different monetary
and fiscal policies, different product and labor market conditions, and a host of other factors.
Trade
Deficits
. Countries with trade deficits tend to experience a depreciating currency. Inflation may be the cause of a trade deficit, making a country’s goods more expensive and less competitive and so
reducing demand for its currency.
Interest
Rates
. High interest rates may raise currency values in the short term by making such currencies more attractive to investors. However, since high interest rates are often the result of high inflation,
long-term results may be the opposite.
Budget Deficits and Low Savings Rates
. Countries that run large budget deficits and save little of their national income tend to suffer a depreciating currency because they
are forced to borrow abroad to finance their deficits. Payments of interest on this debt can inundate the currency markets with the currency of the debtor nation. Budget deficits also can indirectly contribute to currency depreciation if a
government chooses inflationary measures to cope with its deficits and debt.
Political
Factors
. Political instability in a country can cause a currency to depreciate. Demand for a certain currency may fall if a country appears a less desirable place in which to invest and do
business.
Government Control
. Through their own buying and selling of currencies, the world’s central banks sometimes manipulate exchange rate movements. In addition,
governments occasionally issue statements to influence people’s expectations about the direction of exchange rates, or they may instigate policies with an exchange rate target as the goal.
The value of a Fund’s
investments is calculated in U.S. Dollars each day that the New York Stock Exchange (“NYSE”) is open for business. As a result, to the extent that a Fund’s assets are invested in instruments denominated in foreign currencies and
the currencies appreciate relative to the U.S. Dollar, a Fund’s NAV per share as expressed in U.S. Dollars (and, therefore, the value of your investment) should increase. If the U.S. Dollar appreciates relative to the other currencies, the
opposite should occur.
The
currency-related gains and losses experienced by a Fund will be based on changes in the value of portfolio securities attributable to currency fluctuations only in relation to the original purchase price of such securities as stated in U.S. Dollars.
Gains or losses on shares of a Fund will be based on changes attributable to fluctuations in the NAV of such shares, expressed in U.S. Dollars, in relation to the original U.S. Dollar purchase price of the shares. The amount of appreciation or
depreciation in a Fund’s assets also will be affected by the net investment income generated by the money market instruments in which each Fund invests and by changes in the value of the securities that are unrelated to changes in currency
exchange rates.
A Fund may incur
currency exchange costs when it sells instruments denominated in one currency and buys instruments denominated in another.
Currency Transactions
. A Fund conducts currency exchange transactions on a spot basis. Currency transactions made on a spot basis are for cash at the spot rate prevailing in
the currency exchange market for buying or selling currency. A Fund also enters into forward currency contracts. See “Futures Contracts, Options, and Other Derivative Strategies” section below. A forward currency contract is an
obligation to buy or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are entered into on the
interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A currency forward contract will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the
currency that is purchased, similar to when a fund sells a security denominated in one currency and purchases a security denominated in another currency. For example, a Fund may enter into a forward contract when it owns a security that is
denominated in a non-U.S. currency and desires to “lock in” the U.S. dollar value of the security.
A Fund may invest in a combination of
forward currency contracts and U.S. Dollar-denominated market instruments in an attempt to obtain an investment result that is substantially the same as a direct investment in a foreign currency-denominated instrument. This investment technique
creates a “synthetic” position in the particular foreign-currency instrument whose performance the Adviser is trying to duplicate. For example, the combination of U.S. Dollar-denominated instruments with “long” forward
currency exchange contracts creates a position economically equivalent to a money market instrument denominated in the foreign currency itself. Such combined positions are sometimes necessary when the money market in a particular foreign currency is
small or relatively illiquid.
A
Fund may invest in forward currency contracts to hedge either specific transactions (transaction hedging) or portfolio positions (position hedging). Transaction hedging is the purchase or sale of forward currency contracts with respect to
specific receivables or payables of a Fund in
connection with the purchase and sale of portfolio securities. Position hedging is the sale of a forward currency contract on a particular currency with respect to portfolio positions denominated or quoted in that currency.
A Fund may use forward currency
contracts for position hedging if consistent with its policy of trying to expose its net assets to foreign currencies. A Fund is not required to enter into forward currency contracts for hedging purposes and it is possible that a Fund may not be
able to hedge against a currency devaluation that is so generally anticipated that a Fund is unable to contract to sell the currency at a price above the devaluation level it anticipates. It also is possible, under certain circumstances, that a Fund
may have to limit its currency transactions to qualify, or to continue to qualify, as a “regulated investment company” (“RIC”) under Subchapter M of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986, as amended
(“Code”). See “Dividends, Other Distributions and Taxes.”
Each Fund currently does not intend
to enter into a forward currency contract with a term of more than one year, or to engage in position hedging with respect to the currency of a particular country to more than the aggregate market value (at the time the hedging transaction is
entered into) of its portfolio securities denominated in (or quoted in or currently convertible into or directly related through the use of forward currency contracts in conjunction with money market instruments to) that particular currency.
Under definitions adopted by the
Commodity Futures Trading Commission (“CFTC”) and SEC, non-deliverable forwards are considered swaps, and therefore are included in the definition of “commodity interests.” Although non-deliverable forwards have historically
been traded in the over-the-counter (“OTC”) market, as swaps they may in the future be required to be centrally cleared and traded on public facilities. For more information on central clearing and trading of cleared swaps, see
“Cleared swaps,” “Risks of cleared swaps,” “Comprehensive swaps regulation” and “Developing government regulation of derivatives.” Currency forwards that qualify as deliverable forwards are not
regulated as swaps for most purposes, and are not included in the definition of “commodity interests.” However these forwards are subject to some requirements applicable to swaps, including reporting to swap data repositories,
documentation requirements, and business conduct rules applicable to swap dealers. CFTC regulation of currency forwards, especially non-deliverable forwards, may restrict a Fund’s ability to use these instruments in the manner described above
or subject the investment manager to CFTC registration and regulation as a commodity pool operator (“CPO”).
At or before the maturity of a
forward currency contract, a Fund may either sell a portfolio security and make delivery of the currency, or retain the security and terminate its contractual obligation to deliver the currency by buying an “offsetting” contract
obligating it to buy, on the same maturity date, the same amount of the currency. If a Fund engages in an offsetting transaction, it may later enter into a new forward currency contract to sell the currency.
If a Fund engages in an offsetting
transaction, it will incur a gain or loss to the extent that there has been movement in forward currency contract prices. If forward prices go down during the period between the date a Fund enters into a forward currency contract for the sale of a
currency and the date it enters into an offsetting contract for the purchase of the currency, a Fund will realize a gain to the extent that the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to buy. If
forward prices go up, a Fund will suffer a loss to the extent the price of the currency it has agreed to buy exceeds the price of the currency it has agreed to sell.
Since a Fund invests in money market
instruments denominated in foreign currencies, it may hold foreign currencies pending investment or conversion into U.S. Dollars. Although a Fund values its assets daily in U.S. Dollars, it does not convert its holdings of foreign currencies into
U.S. Dollars on a daily basis. A Fund will convert its holdings from time to time, however, and incur the costs of currency conversion. Foreign exchange dealers do not charge a fee for conversion, but they do realize a profit based on the difference
between the prices at which they buy and sell various currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one rate, and offer to buy the currency at a lower rate if a Fund tries to resell the currency to the dealer.
Risks of currency forward contracts
.
The successful use of these transactions will usually depend on the Adviser’s ability to accurately forecast currency exchange
rate movements. Should exchange rates move in an unexpected manner, a Fund may not achieve the anticipated benefits of the transaction, or it may realize losses. In addition, these techniques could result in a loss if the counterparty to the
transaction does not perform as promised, including because of the counterparty’s bankruptcy or insolvency. While a Fund uses only counterparties that meet its credit quality standards, in unusual or extreme market conditions, a
counterparty’s creditworthiness and ability to perform may deteriorate rapidly, and the availability of suitable replacement counterparties may become limited. Currency forward contracts may limit potential gain from a positive change in the
relationship between the U.S. Dollar and foreign currencies. Unanticipated changes in currency prices may result in poorer overall performance for a Fund than if it had not engaged in such contracts. Moreover, there may be an imperfect correlation
between a Fund’s portfolio holdings of securities denominated in a particular currency and the currencies bought or sold in the forward contracts entered into by a Fund. This imperfect correlation may cause a Fund to sustain losses that will
prevent the Fund from achieving a complete hedge or expose the Fund to risk of foreign exchange loss.
Foreign Currency Options
. A Fund may invest in foreign currency-denominated securities and may buy or sell put and call options on foreign currencies. A Fund may buy or sell
put and call options on foreign currencies either on exchanges or in
the OTC market. A put option on a foreign currency
gives the purchaser of the option the right to sell a foreign currency at the exercise price until the option expires. A call option on a foreign currency gives the purchaser of the option the right to purchase the currency at the exercise price
until the option expires. Currency options traded on U.S. or other exchanges may be subject to position limits which may limit the ability of a Fund to reduce foreign currency risk using such options. OTC options differ from traded options in that
they are two-party contracts with price and other terms negotiated between buyer and seller, and generally do not have as much market liquidity as exchange-traded options.
Foreign Currency
Exchange-Related Securities
Foreign Currency Warrants
. Foreign currency warrants such as Currency Exchange Warrants
SM
(“CEWs
SM
”) are warrants which entitle the
holder to receive from their issuer an amount of cash (generally, for warrants issued in the United States, in U.S. Dollars) which is calculated pursuant to a predetermined formula and based on the exchange rate between a specified foreign currency
and the U.S. Dollar as of the exercise date of the warrant. Foreign currency warrants generally are exercisable upon their issuance and expire as of a specified date and time. Foreign currency warrants have been issued in connection with U.S.
Dollar-denominated debt offerings by major corporate issuers in an attempt to reduce the foreign currency exchange risk which, from the point of view of prospective purchasers of the securities, is inherent in the international fixed-income
marketplace. Foreign currency warrants may attempt to reduce the foreign exchange risk assumed by purchasers of a security by, for example, providing for a supplemental payment in the event that the U.S. Dollar depreciates against the value of a
major foreign currency such as the Japanese yen or the Euro. The formula used to determine the amount payable upon exercise of a foreign currency warrant may make the warrant worthless unless the applicable foreign currency exchange rate moves in a
particular direction (
e.g.
, unless the U.S. Dollar appreciates or depreciates against the particular foreign currency to which the warrant is linked or indexed). Foreign currency warrants are severable from
the debt obligations with which they may be offered, and may be listed on exchanges. Foreign currency warrants may be exercisable only in certain minimum amounts, and an investor wishing to exercise warrants who possesses less than the minimum
number required for exercise may be required either to sell the warrants or to purchase additional warrants, thereby incurring additional transaction costs. In the case of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate relating to exercise is determined, during which time the exchange rate could change significantly, thereby affecting both the market and cash settlement values of the
warrants being exercised. The expiration date of the warrants may be accelerated if the warrants should be delisted from an exchange or if their trading should be suspended permanently, which would result in the loss of any remaining “time
value” of the warrants (
i.e.
, the difference between the current market value and the exercise value of the warrants), and, in the case the warrants were “out-of-the-money,” in a total loss
of the purchase price of the warrants.
Warrants are generally unsecured
obligations of their issuers and are not standardized foreign currency options issued by the Options Clearing Corporation (“OCC”). Unlike foreign currency options issued by OCC, the terms of foreign exchange warrants generally will not
be amended in the event of governmental or regulatory actions affecting exchange rates or in the event of the imposition of other regulatory controls affecting the international currency markets. The initial public offering price of foreign currency
warrants is generally considerably in excess of the price that a commercial user of foreign currencies might pay in the interbank market for a comparable option involving significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to significant foreign exchange risk, including risks arising from complex political or economic factors.
Principal Exchange Rate Linked Securities
. Principal exchange rate linked securities (“PERLs
SM
”) are debt obligations the principal on which is payable at maturity in an amount that may vary based on the exchange rate between the U.S. Dollar
and a particular foreign currency at or about that time. The return on “standard” principal exchange rate linked securities is enhanced if the foreign currency to which the security is linked appreciates against the U.S. Dollar, and is
adversely affected by increases in the foreign exchange value of the U.S. Dollar; “reverse” principal exchange rate linked securities are like the “standard” securities, except that their return is enhanced by increases in
the value of the U.S. Dollar and adversely impacted by increases in the value of foreign currency. Interest payments on the securities are generally made in U.S. Dollars at rates that reflect the degree of foreign currency risk assumed or given up
by the purchaser of the notes (
i.e.
, at relatively higher interest rates if the purchaser has assumed some of the foreign exchange risk, or relatively lower interest rates if the issuer has assumed some of the
foreign exchange risk, based on the expectations of the current market). Principal exchange rate linked securities may in limited cases be subject to acceleration of maturity (generally, not without the consent of the holders of the securities),
which may have an adverse impact on the value of the principal payment to be made at maturity.
Performance Indexed Paper
. Performance indexed paper
(“PIPs
SM
”)
is U.S.
Dollar-denominated commercial paper the yield of which
is
linked
to certain foreign exchange rate movements.
The
yield to the investor on
performance indexed paper is established at maturity as a function of spot exchange rates between the U.S. Dollar
and a designated currency as
of
or about that time
(generally, the index maturity two days prior to maturity).
The yield to the
investor will be within a range stipulated at the time of purchase of the obligation, generally with a guaranteed minimum rate of return that is below, and a potential maximum rate of return that is above,
market yields on U.S. Dollar-denominated commercial paper, with
both the minimum and
maximum rates of return on the investment corresponding to the minimum and maximum values of the spot exchange rate two business days prior to maturity.
A Fund may invest in hybrid
instruments. A hybrid instrument is a type of potentially high-risk derivative that combines a traditional stock, bond, or commodity with an option or forward contract. Generally, the principal amount, amount payable upon maturity or redemption, or
interest rate of a hybrid is tied (positively or negatively) to the price of some commodity, currency or securities index or another interest rate or some other economic factor (each a “benchmark”). The interest rate or (unlike most
fixed income securities) the principal amount payable at maturity of a hybrid security may be increased or decreased, depending on changes in the value of the benchmark. A hybrid could be, for example, a bond issued by an oil company that pays a
small base level of interest, in addition to interest that accrues when oil prices exceed a certain predetermined level. Such a hybrid instrument would be a combination of a bond and a call option on oil.
Hybrids can be used as an efficient
means of pursuing a variety of investment goals, including currency hedging, and increased total return. Hybrids may not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a result,
may be leveraged and move (up or down) more steeply and rapidly than the benchmark. These benchmarks may be sensitive to economic and political events, such as commodity shortages and currency devaluations, which cannot be readily foreseen by the
purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero. Thus, an investment in a hybrid may entail significant market risks that are not associated with a similar investment in a traditional, U.S.
Dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest. The purchase of hybrids also exposes a Fund to the credit risk of the issuer of the hybrids. These risks may cause significant fluctuations
in the NAV of a Fund.
Certain
issuers of structured products such as hybrid instruments may be deemed to be investment companies as defined in the 1940 Act. As a result, a Fund’s investment in these products may be subject to limits applicable to investments in investment
companies and may be subject to restrictions contained in the 1940 Act.
Illiquid Investments and Restricted
Securities
Each Fund
may purchase and hold illiquid investments. A Fund will not purchase or otherwise acquire any security if, as a result, more than 15% of its net assets (taken at current value) would be invested in investments that are illiquid.
The term “illiquid
investments” for this purpose means any investment that a Fund reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value
of the investment. A Fund will not acquire illiquid securities if, as a result, such securities would comprise more than 15% of the value of the Fund’s net assets. Rafferty, subject to oversight by the Board of Trustees, has the ultimate
authority to determine, to the extent permissible under the federal securities laws, which securities are liquid or illiquid for purposes of this 15% limitation under a Fund’s liquidity risk management program, adopted pursuant to Rule 22e-4
under the 1940 Act. Illiquid securities will be priced at fair value as determined in good faith under procedures adopted by the Board of Trustees. If, through the appreciation of illiquid securities or the depreciation of liquid securities, a Fund
should be in a position where more than 15% of the value of its net assets are invested in illiquid securities, including restricted securities which are not readily marketable, Rafferty will report such occurrence to the Board of Trustees and take
such steps as are deemed advisable to protect liquidity in accordance with a Fund’s liquidity risk management program.
A Fund may not be able to sell
illiquid investments when Rafferty considers it desirable to do so or may have to sell such investments at a price that is lower than the price that could be obtained if the investments were liquid. In addition, the sale of illiquid investments may
require more time and result in higher dealer discounts and other selling expenses than does the sale of investments that are not illiquid. Illiquid investments also may be more difficult to value due to the unavailability of reliable market
quotations for such investments, and investment in illiquid investments may have an adverse impact on NAV.
Rule 144A
establishes a “safe harbor” from the registration requirements of the 1933 Act for resales of certain securities to qualified institutional buyers. Institutional markets for restricted securities that have developed as a result of Rule
144A provide both readily ascertainable values for certain restricted securities and the ability to liquidate an investment to satisfy share redemption orders. This policy does not include restricted securities eligible for resale pursuant to Rule
144A under the Securities Act of 1933, as amended (“1933 Act”), which the Trust’s Board of Trustees (“Board” or “Trustees”), or Rafferty, under Board-approved guidelines, has determined are liquid. Each Fund
currently does not anticipate investing in such restricted securities. However, to the extent that a Fund does invest in such restricted securities, an insufficient number of qualified institutional buyers interested in purchasing Rule 144A-eligible
securities held by a Fund could adversely affect the marketability of such portfolio securities, and a Fund may be unable to dispose of such securities promptly or at reasonable prices.
A Fund may purchase indexed
securities, which are securities, the value of which varies positively or negatively in relation to the value of other securities, securities indices or other financial indicators, consistent with its investment objective. Indexed securities may be
debt securities or deposits whose value at maturity or coupon rate is determined by reference to a specific instrument or statistic. Recent issuers of indexed securities have included banks, corporations and certain U.S. government agencies.
The performance of indexed securities
depends to a great extent on the performance of the security or other instrument to which they are indexed and also may be influenced by interest rate changes in the United States and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values may decline substantially if the issuer’s creditworthiness deteriorates. Indexed securities may be more volatile than the underlying instruments. Certain indexed
securities that are not traded on an established market may be deemed illiquid. See “Illiquid Investments and Restricted Securities” above.
Inflation Protected Securities
Inflation protected securities
are fixed income securities whose value is periodically adjusted according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers utilize a structure that accrues inflation into the principal value of the bond.
Other issuers pay out the Consumer Price Index (“CPI”) accruals as part of a semiannual coupon. Inflation protected securities issued by the U.S. Treasury have maturities of approximately five, ten or thirty years, although it is
possible that securities with other maturities will be issued in the future. The U.S. Treasury securities pay interest on a semi-annual basis equal to a fixed percentage of the inflation adjusted principal amount.
If the periodic adjustment rate
measuring inflation falls, the principal value of inflation protected bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of
the original bond principal upon maturity (as adjusted for inflation) is guaranteed by the U.S. Treasury in the case of U.S. Treasury inflation indexed bonds, even during a period of deflation. However, the current market value of the bonds is not
guaranteed and will fluctuate. A Fund may also invest in other inflation related bonds which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond to be repaid at maturity
may be less than the original principal amount and, therefore, is subject to credit risk.
The value of inflation protected
bonds is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate
than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation protected bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to
a decrease in value of inflation protected bonds. While these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other
than inflation, investors in these securities may not be protected to the extent that the increase is not reflected in the bond’s inflation measure.
The periodic adjustment of U.S.
inflation protected bonds is tied to the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (“CPI-U”), published monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of
changes in the cost of living, made up of components such as housing, food, transportation and energy.
Any increase in principal for an
inflation protected security resulting from inflation adjustments is considered by the IRS to be taxable income in the year it occurs. A Fund’s distributions to shareholders include interest income and the income attributable to principal
adjustments, both of which will be taxable to shareholders. The tax treatment of the income attributable to principal adjustments may result in the situation where a Fund needs to make its required annual distributions to shareholders in amounts
that exceed the cash received. As a result, a Fund may need to liquidate certain investments when it is not advantageous to do so. Also, if the principal value of an inflation protected security is adjusted downward due to deflation, amounts
previously distributed in the taxable year may be characterized in some circumstances as a return of capital.
A Fund may invest in lower-rated
debt securities, including securities in the lowest credit rating category, of any maturity, otherwise known as “junk bonds.”
Junk bonds generally offer a higher
current yield than that available for higher-grade issues. However, lower-rated securities involve higher risks, in that they are especially subject to adverse changes in general economic conditions and in the industries in which the issuers are
engaged, to changes in the financial condition of the issuers and to price fluctuations in response to changes in interest rates. During periods of economic downturn or rising interest rates, highly leveraged issuers may
experience financial stress that could adversely
affect their ability to make payments of interest and principal and increase the possibility of default. In addition, the market for lower-rated debt securities has expanded rapidly in recent years, and its growth paralleled a long economic
expansion. At times in recent years, the prices of many lower-rated debt securities declined substantially, reflecting an expectation that many issuers of such securities might experience financial difficulties. As a result, the yields on
lower-rated debt securities rose dramatically, but such higher yields did not reflect the value of the income stream that holders of such securities expected, but rather, the risk that holders of such securities could lose a substantial portion of
their value as a result of the issuers’ financial restructuring or default. There can be no assurance that such declines will not recur.
The market for lower-rated debt
issues generally is thinner and less active than that for higher quality securities, which may limit a Fund’s ability to sell such securities at fair value in response to changes in the economy or financial markets. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may also decrease the values and liquidity of lower-rated securities, especially in a thinly traded market. Changes by recognized rating services in their rating of a fixed-income
security may affect the value of these investments. A Fund will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase. However, Rafferty will monitor the investment to determine whether continued
investment in the security will assist in meeting a Fund’s investment objective.
Master Limited Partnerships
Investing in master limited
partnerships ("MLPs") involves certain risks related to investing in the underlying assets of the MLPs and risks associated with pooled investment vehicles. MLPs holding credit-related investments are subject to interest rate risk and the risk of
default on payment obligations by debt issuers. MLPs that concentrate in a particular industry or a particular geographic region are subject to risks associated with such industry or region. Investments held by MLPs may be relatively illiquid,
limiting the MLPs’ ability to vary their portfolios promptly in response to changes in economic or other conditions. MLPs may have limited financial resources, their securities may trade infrequently and in limited volume, and they may be
subject to more abrupt or erratic price movements than securities of larger or more broadly based companies. Distributions from an MLP may consist in part of a return of the amount originally invested, which would not be taxable to the extent the
distributions do not exceed the investor’s adjusted basis in its MLP interest. These reductions in the Fund’s adjusted tax basis in the MLP securities will increase the amount of gain (or decrease the amount of loss) recognized by the
Fund on a subsequent sale of the securities. The risks of investing in an MLP generally include those inherent in investing in a partnership as opposed to a corporation. For example, state law governing partnerships is often less restrictive than
state law governing corporations. Accordingly, there may be fewer protections afforded investors in an MLP than investors in a corporation. Although unitholders of an MLP are generally limited in their liability, similar to a corporation’s
shareholders, creditors typically have the right to seek the return of distributions made to unitholders if the liability in question arose before the distributions were paid. This liability may stay attached to a unitholder even after it sells its
units.
Mortgage-Backed Securities
A Fund may invest in
mortgage-backed securities. A mortgage-backed security is a type of pass-through security, which is a security representing pooled debt obligations repackaged as interests that pass income through an intermediary to investors. In the case of
mortgage-backed securities, the ownership interest is in a pool of mortgage loans.
Mortgage-backed securities are most
commonly issued or guaranteed by the Government National Mortgage Association (“Ginnie Mae
®
” or “GNMA”), Federal National
Mortgage Association (“Fannie Mae
®
” or “FNMA”) or Federal Home Loan Mortgage Corporation (“Freddie Mac
®
” or “FHLMC”), but may also be issued or guaranteed by other private issuers. GNMA is a government-owned corporation that is an
agency of the U.S. Department of Housing and Urban Development. It guarantees, with the full faith and credit of the United States, full and timely payment of all monthly principal and interest on its mortgage-backed securities. FNMA is a publicly
owned, government-sponsored corporation that mostly packages mortgages backed by the Federal Housing Administration, but also sells some non-governmentally backed mortgages. Pass-through securities issued by FNMA are guaranteed as to timely payment
of principal and interest only by FNMA. FHLMC is a publicly chartered agency that buys qualifying residential mortgages from lenders, re-packages them and provides certain guarantees. Pass-through securities issued by FHLMC are guaranteed as to
timely payment of principal and interest only by FHLMC.
The Federal
Housing Finance Agency (“FHFA”) is mandating that Fannie Mae
®
and Freddie Mac
®
cease issuing their own mortgage-backed securities and begin issuing "Uniform Mortgage-Backed Securities" or "UMBS" in 2019. Each UMBS will have a
55-day remittance cycle and can be used as collateral in either a Fannie Mae
®
or Freddie Mac
®
security or held for investment. Investors may be approached to convert existing mortgage-backed securities into UMBS, possibly with an inducement fee
being offered to holders of Freddie Mac
®
mortgage-backed securities. Mortgage-backed securities issued by private issuers, whether or not such
obligations are subject to guarantees by the private issuer, may entail greater risk than obligations directly guaranteed by the U.S. government. The average life of a mortgage-backed security is likely to be substantially less than the original
maturity of the mortgage pools underlying the securities. Prepayments of principal by mortgagors and mortgage foreclosures will usually result in the return of the greater part of principal invested far in advance of the maturity of the mortgages in
the pool.
Collateralized mortgage obligations
(“CMOs”) are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collateral collectively hereinafter referred to as “Mortgage Assets”). Multi-class pass-through securities are interests in a
trust composed of Mortgage Assets and all references in this section to CMOs include multi-class pass-through securities. Principal prepayments on the Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated
maturities or final distribution dates, resulting in a loss of all or part of the premium if any has been paid. Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly or semi-annual basis. The principal and interest payments
on the Mortgage Assets may be allocated among the various classes of CMOs in several ways. Typically, payments of principal, including any prepayments, on the underlying mortgages are applied to the classes in the order of their respective stated
maturities or final distribution dates, so that no payment of principal is made on CMOs of a class until all CMOs of other classes having earlier stated maturities or final distribution dates have been paid in full.
Stripped
mortgage-backed securities (“SMBS”) are derivative multi-class mortgage securities. A Fund will only invest in SMBS issued by Ginnie
Mae
®
, which are obligations backed by the full faith and credit of the U.S. government. SMBS are usually structured with two or more classes that
receive different proportions of the interest and principal distributions from a pool of Mortgage Assets. A Fund will only invest in SMBS whose Mortgage Assets are U.S. government obligations. A common type of SMBS will be structured so that one
class receives some of the interest and most of the principal from the Mortgage Assets, while the other class receives most of the interest and the remainder of the principal. If the underlying Mortgage Assets experience greater than anticipated
prepayments of principal, each Fund may fail to fully recoup its initial investment in these securities. The market value of any class which consists primarily, or entirely, of principal payments generally is unusually volatile in response to
changes in interest rates.
Investment in mortgage-backed
securities poses several risks, including among others, prepayment, market and credit risk. Prepayment risk reflects the risk that borrowers may prepay their mortgages faster than expected, thereby affecting the investment’s average life and
perhaps its yield. Whether or not a mortgage loan is prepaid is almost entirely controlled by the borrower. Borrowers are most likely to exercise prepayment options at the time when it is least advantageous to investors, generally prepaying
mortgages as interest rates fall, and slowing payments as interest rates rise. Besides the effect of prevailing interest rates, the rate of prepayment and refinancing of mortgages may also be affected by home value appreciation, ease of the
refinancing process and local economic conditions. Market risk reflects the risk that the price of a security may fluctuate over time. The price of mortgage-backed securities may be particularly sensitive to prevailing interest rates, the length of
time the security is expected to be outstanding, and the liquidity of the issue. In a period of unstable interest rates, there may be decreased demand for certain types of mortgage-backed securities, and a Fund invested in such securities wishing to
sell them may find it difficult to find a buyer, which may in turn decrease the price at which they may be sold. Credit risk reflects the risk that a Fund may not receive all or part of its principal because the issuer or credit enhancer has
defaulted on its obligations. Obligations issued by U.S. government-sponsored entities are guaranteed as to the payment of principal and interest, but are not backed by the full faith and credit of the U.S. government. The performance of private
label mortgage-backed securities, issued by private institutions, is based on the financial health of those institutions. With respect to GNMA certificates, although GNMA guarantees timely payment even if homeowners delay or default, tracking the
“pass-through” payments may, at times, be difficult.
A Fund may invest in municipal
obligations. Municipal securities are fixed-income securities issued by states, counties, cities and other political subdivisions and authorities. Although most municipal securities are exempt from federal income tax, municipalities also may issue
taxable securities. Tax exempt securities are generally classified by their source of payment. In addition to the usual risks associated with investing for income, the value of municipal obligations can be affected by changes in the actual or
perceived credit quality of the issuers. The credit quality of a municipal obligation can be affected by, among other factors: a) the financial condition of the issuer or guarantor; b) the issuer’s future borrowing plans and sources of
revenue; c) the economic feasibility of the revenue bond project or general borrowing purpose; d) political or economic developments in the region or jurisdiction where the security is issued; and e) the liquidity of the security. Because municipal
obligations are generally traded OTC, the liquidity of a particular issue often depends on the willingness of dealers to make a market in the security. The liquidity of some municipal issues can be enhanced by demand features, which enable a Fund to
demand payment from the issuer or a financial intermediary on short notice.
Futures Contracts, Options, and
Other Derivative Strategies
Generally, derivatives are
financial instruments whose value depends on, or is derived from, the value of one or more underlying assets, reference rates, or indices or other market factors (“reference assets”) and may relate to stocks bonds, interest rates, credit
currencies, commodities or related indices. Derivative instruments can provide an efficient means to gain long or short exposure to the value of a reference asset without actually owning or selling the instrument. Examples of derivative instruments
include futures contracts, swap agreements, options, options on futures contracts and forward currently contracts.
Each Fund may enter into derivatives
instruments which may include futures contracts, forward contracts, options on currencies, commodities, indices, or futures contracts and swaps which provide long and short exposure to reference assets. Derivatives
may be more sensitive to changes in interest rates
or to sudden fluctuations in market prices and thus a Fund’s losses may be greater if it invests in derivatives than if it invests in non-derivative instruments. Derivatives are also subject to counterparty risk, which is the risk that the
other party in the transaction will not fulfill its contractual obligations.
The use of derivative instruments is
subject to applicable regulations of the SEC, the several exchanges upon which they are traded and the CFTC. In addition, a Fund’s ability to use derivative instruments will be limited by tax considerations. See “Dividends, Other
Distributions and Taxes.”
Under current CFTC regulations, if a
Fund uses commodity interests (such as futures contracts, options on futures contracts and swaps) other than for bona fide hedging purposes (as defined by the CFTC) the aggregate initial margin and premiums required to establish these positions
(after taking into account unrealized profits and unrealized losses on any such positions and excluding the amount by which options that are “in-the-money” at the time of purchase) may not exceed 5% of a Fund’s NAV, or
alternatively, the aggregate net notional value of those positions, as determined at the time the most recent position was established, may not exceed 100% of the fund’s NAV (after taking into account unrealized profits and unrealized losses
on any such positions). Accordingly, each Fund has registered, or will register prior to commencement of operations, as a commodity pool, and the Adviser has registered as a CPO, with the National Futures Association.
Each Fund is subject to the risk that
a change in U.S. law and related regulations will impact the way a Fund operates, increase the particular costs of a Fund’s operation and/or change the competitive landscape. In this regard, any further amendment to the Commodity Exchange Act
or its related regulations that subject a Fund to additional regulation may have adverse impacts on a Fund’s operations and expenses.
In addition to the
instruments, strategies and risks described below and in the Prospectus, Rafferty may discover additional opportunities in connection with derivative instruments and other similar or related techniques. These new opportunities may become available
as Rafferty develops new techniques, as regulatory authorities broaden the range of permitted transactions and as new derivative instruments or other techniques are developed. Rafferty may utilize these opportunities to the extent that they are
consistent with a Fund’s investment objective and permitted by a Fund’s investment limitations and applicable regulatory authorities. A Fund’s Prospectus or this SAI will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or in the Prospectus.
Special Risks
. The use of derivative instruments involves special considerations and risks, certain of which are described below. Risks pertaining to particular derivative instruments are described in the sections that
follow.
(1) Options and
futures prices can diverge from the prices of their underlying instruments. Options and futures prices are affected by such factors as current and anticipated short-term interest rates, changes in volatility of the underlying instrument and the time
remaining until expiration of the contract, which may not affect security prices the same way. Imperfect or no correlation also may result from differing levels of demand in the options and futures markets and the securities markets, from structural
differences in how options and futures and securities are traded, and from imposition of daily price fluctuation limits or trading halts.
(2) As described below, a Fund might
be required to maintain assets as “cover,” maintain segregated accounts or make margin payments when it takes positions in Financial Instruments involving obligations to third parties (
e.g.
,
Financial Instruments other than purchased options). If a Fund were unable to close out its positions in such Financial Instruments, it might be required to continue to maintain such assets or accounts or make such payments until the position
expired or matured. These requirements might impair a Fund’s ability to sell a portfolio security or make an investment when it would otherwise be favorable to do so or require that a Fund sell a portfolio security at a disadvantageous time. A
Fund’s ability to close out a position in a Financial Instrument prior to expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of the other party to the
transaction (the “counterparty”) to enter into a transaction closing out the position. Therefore, there is no assurance that any position can be closed out at a time and price that is favorable to a Fund.
(3) Losses may arise due to
unanticipated market price movements, lack of a liquid secondary market for any particular instrument at a particular time or due to losses from premiums paid by a Fund on options transactions.
Cover
. Transactions using derivative instruments, other than purchased options, expose a Fund to an obligation to another party. A Fund will not enter into any such
transactions unless it owns either (1) an offsetting (“covered”) position in securities or other options or futures contracts or (2) cash and liquid assets with a value, marked-to-market daily, sufficient to cover its potential
obligations to the extent not covered as provided in (1) above. Each Fund will comply with SEC guidelines regarding cover for these instruments and will, if the guidelines so require, set aside cash or liquid assets in an account with its custodian,
the Bank of New York Mellon ("BNYM"), in the prescribed amount as determined daily.
Assets used as cover or held in an
account cannot be sold while the position in the corresponding derivative instrument is open, unless they are replaced with other appropriate assets. As a result, the commitment of a large portion of a Fund’s assets to cover or accounts could
impede portfolio management or a Fund’s ability to meet redemption requests or other current obligations.
Futures Contracts
. A Fund may use certain options (traded on an exchange or OTC, or otherwise), futures contracts (sometimes referred to as “futures”) and
options on futures contracts as a substitute for a comparable market position in the underlying
security or index, to attempt to hedge or limit the
exposure of a Fund’s position, to create a synthetic money market position, for certain tax-related purposes or to effect closing transactions.
Generally, a futures contract is a
standard binding agreement to buy or sell a specified quantity of an underlying reference instrument, such as a specific security, currency or commodity, at a specified price at a specified later date. A “sale” of a futures contract
means the acquisition of a contractual obligation to deliver the underlying reference instrument called for by the contract at a specified price on a specified date. A “purchase” of a futures contract means the acquisition of a
contractual obligation to acquire the underlying reference instrument called for by the contract at a specified price on a specified date. The purchase or sale of a futures contract will allow a Fund to increase or decrease its exposure to the
underlying reference instrument without having to buy the actual instrument.
The underlying reference instruments
to which futures contracts may relate include non-U.S. currencies, interest rates, stock and bond indices and debt securities, including U.S. government debt obligations. In most cases the contractual obligation under a futures contract may be
offset, or “closed out,” before the settlement date so that the parties do not have to make or take delivery. The closing out of a contractual obligation is usually accomplished by buying or selling, as the case may be, an identical,
offsetting futures contract. This transaction, which is effected through a member of an exchange, cancels the obligation to make or take delivery of the underlying instrument or asset. If the original position entered into is a long position
(futures contract purchased), there will be a gain (loss) if the offsetting sell transaction is carried out at a higher (lower) price, inclusive of commissions. If the original position entered into is a short position (futures contract sold) there
will be a gain (loss) if the offsetting buy transaction is carried out at a lower (higher) price, inclusive of commissions.
Certain futures contracts are
cash-settled, meaning the futures contract obligates the seller to deliver (and purchaser to accept) an amount of cash equal to a specific dollar amount multiplied by the difference between the final settlement price of a specific futures contract
and the price at which the agreement is made. No physical delivery of the underlying asset is made.
Whether a Fund realizes a gain/loss
from futures activities depends generally upon the movements in the underlying reference asset (generally a commodity, currency, security or index). The extent of a Fund’s loss from an unhedged short position in a futures contract is
potentially unlimited, and investors may lose the amount that they invest plus any profits recognized on their investment.
Futures contracts may be bought and
sold on U.S. and non-U.S. exchanges. Futures contracts in the U.S. have been designed by exchanges that have been designated “contract markets” by the CFTC and must be executed through a futures commission merchant (“FCM”),
which is a brokerage firm that is a member of the relevant contract market. Each exchange guarantees performance of the contracts as between the clearing members of the exchange, thereby reducing the risk of counterparty default. Because all
transactions in the futures market are made, offset, or fulfilled by an FCM through a clearinghouse associated with the exchange on which the contracts are traded, a Fund will incur brokerage fees when it buys or sells futures contracts. A Fund
generally buys and sells futures contracts only on contract markets (including exchanges or boards of trade) where there appears to be an active market for the futures contracts, but there is no assurance that an active market will exist for any
particular contract or at any particular time. An active market makes it more likely that futures contracts will be liquid and bought and sold at competitive market prices. In addition, many of the futures contracts available may be relatively new
instruments without a significant trading history. As a result, there can be no assurance that an active market will develop or continue to exist.
When a Fund enters into a futures
contract, it must deliver to an account controlled by the FCM (that has been selected by the Fund), an amount referred to as “initial margin” that is typically calculated as an amount equal to the volatility in market value of a contract
over a fixed period. Initial margin requirements are determined by the respective exchanges on which the futures contracts are traded and the FCM. Thereafter, a “variation margin” amount may be required to be paid by a Fund or received
by a Fund in accordance with margin controls set for such accounts, depending upon changes in the marked-to-market value of the futures contract. The account is marked-to-market daily and the variation margin is monitored by a Fund’s
investment manager and custodian on a daily basis. When the futures contract is closed out, if a Fund has a loss equal to, or greater than, the margin amount, the margin amount is paid to the FCM along with any loss in excess of the margin amount.
If a Fund has a loss of less than the margin amount, the excess margin is returned to a Fund. If a Fund has a gain, the full margin amount and the amount of the gain is paid to the Fund. Some futures contracts provide for the delivery of securities
that are different than those that are specified in the contract. For a futures contract for delivery of debt securities, on the settlement date of the contract, adjustments to the contract can be made to recognize differences in value arising from
the delivery of debt securities with a different interest rate from that of the particular debt securities that were specified in the contract. In some cases, securities called for by a futures contract may not have been issued when the contract was
written.
Risks of futures
contracts.
A Fund’s use of futures contracts is subject to the risks associated with derivative instruments generally. A Fund may not be able to properly effect its strategy when a liquid market is unavailable
for the futures contract the Fund wishes to close, which may at times occur. If a Fund were unable to liquidate a futures position due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial losses.
A Fund would continue to
be subject to market risk with respect to the position.
In addition, a Fund would continue to be required to make daily variation margin payments and might be required to maintain cash or liquid assets in an account.
A purchase or sale of a futures
contract may result in losses to a Fund in excess of the amount that the Fund delivered as initial margin. Because of the relatively low margin deposits required, futures trading involves a high degree of leverage; as a result, a relatively small
price movement in a futures contract may result in immediate and substantial loss, or gain, to a Fund. In addition, if a Fund has insufficient cash to meet daily variation margin requirements or close out a futures position, it may have to sell
securities from its portfolio at a time when it may be disadvantageous to do so. Adverse market movements could cause a Fund to experience substantial losses on an investment in a futures contract. There is a risk of loss by a Fund of the initial
and variation margin deposits in the event of bankruptcy of the FCM with which the Fund has an open position in a futures contract. The assets of a Fund may not be fully protected in the event of the bankruptcy of the FCM or central counterparty
because the Fund might be limited to recovering only a pro rata share of all available funds and margin segregated on behalf of an FCM’s customers. If the FCM does not provide accurate reporting, a Fund is also subject to the risk that the FCM
could use a Fund’s assets, which are held in an omnibus account with assets belonging to the FCM’s other customers, to satisfy its own financial obligations or the payment obligations of another customer to the central
counterparty.
The difference
(called the “spread”) between prices in the cash market for the purchase and sale of the underlying reference instrument and the prices in the futures market is subject to fluctuations and distortions due to differences in the nature of
those two markets. First, all participants in the futures market are subject to initial deposit and variation margin requirements. Rather than meeting additional variation margin requirements, investors may close futures contracts through offsetting
transactions that could distort the normal pricing spread between the cash and futures markets. Second, the liquidity of the futures markets depends on participants entering into offsetting transactions rather than making or taking delivery of the
underlying instrument. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, resulting in pricing distortion. Third, from the point of view of speculators, the margin deposit requirements that
apply in the futures market are less onerous than similar margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions. When such distortions occur, a
correct forecast of general trends in the price of an underlying reference instrument by the investment manager may still not necessarily result in a profitable transaction.
Futures contracts that are traded on
non-U.S. exchanges may not be as liquid as those purchased on CFTC-designated contract markets. In addition, non-U.S. futures contracts may be subject to varied regulatory oversight. The price of any non-U.S. futures contract and, therefore, the
potential profit and loss thereon, may be affected by any change in the non-U.S. exchange rate between the time a particular order is placed and the time it is liquidated, offset or exercised.
The CFTC and the various exchanges
have established limits referred to as “speculative position limits” on the maximum net long or net short position that any person, such as a Fund, may hold or control in a particular futures contract. Trading limits are also imposed on
the maximum number of contracts that any person may trade on a particular trading day. An exchange may order the liquidation of positions found to be in violation of these limits and it may impose other sanctions or restrictions. The regulation of
futures, as well as other derivatives, is a rapidly changing area of law.
Futures exchanges may also limit the
amount of fluctuation permitted in certain futures contract prices during a single trading day. This daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day’s settlement
price. Once the daily limit has been reached in a futures contract subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and does not
limit potential losses because the limit may prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of positions and subjecting some holders of futures contracts to substantial losses.
Risks Associated with Commodity Futures
Contracts
. There are several additional risks associated with transactions in commodity futures contracts.
Unlike the financial futures markets,
in the commodity futures markets there are costs of physical storage associated with purchasing the underlying commodity. The price of the commodity futures contract will reflect the storage costs of purchasing the physical commodity, including the
time value of money invested in the physical commodity. To the extent that the storage costs for an underlying commodity change while a Fund is invested in futures contracts on that commodity, the value of the futures contract may change
proportionately.
In the
commodity futures markets, producers of the underlying commodity may decide to hedge the price risk of selling the commodity by selling futures contracts today to lock in the price of the commodity at delivery tomorrow. In order to induce
speculators to purchase the other side of the same futures contract, the commodity producer generally must sell the futures contract at a lower price than the expected future spot price. Conversely, if most hedgers in the futures market are
purchasing futures contracts to hedge against a rise in prices, then speculators will only sell the other side of the futures contract at a higher futures price than the expected future spot price of the commodity. The changing nature of the hedgers
and speculators in the commodity markets will influence whether futures prices are above or below the expected future
spot price, which can have significant implications
for a Fund. If the nature of hedgers and speculators in futures markets has shifted when it is time for a Fund to reinvest the proceeds of a maturing contract in a new futures contract, the Fund might reinvest at higher or lower futures prices, or
choose to pursue other investments.
The commodities which underlie
commodity futures contracts may be subject to additional economic and non-economic variables, such as drought, floods, weather, livestock disease, embargoes, tariffs, and international economic, political and regulatory developments. These factors
may have a larger impact on commodity prices and commodity-linked instruments, including futures contracts, than on traditional securities. Certain commodities are also subject to limited pricing flexibility because of supply and demand factors.
Others are subject to broad price fluctuations as a result of the volatility of the prices for certain raw materials and the instability of supplies of other materials. These additional variables may create additional investment risks which subject
a Fund’s investments to greater volatility than investments in traditional securities.
Forward Contracts
. Each Fund may enter into equity, equity index or interest rate forward contracts for purposes of attempting to gain exposure to an index or group of
securities without actually purchasing these securities, or to hedge a position. Forward contracts are two-party contracts pursuant to which one party agrees to pay the counterparty a fixed price for an agreed upon amount of commodities, securities,
or the cash value of the commodities, securities or the securities index, at an agreed upon date. Because they are two-party contracts and may have terms greater than seven days, forward contracts may be considered to be illiquid for a Fund’s
illiquid investment limitations. A Fund will not enter into any forward contract unless Rafferty believes that the other party to the transaction is creditworthy. A Fund bears the risk of loss of the amount expected to be received under a forward
contract in the event of the default or bankruptcy of a counterparty. If such a default occurs, a Fund will have contractual remedies pursuant to the forward contract, but such remedies may be subject to bankruptcy and insolvency laws which could
affect the Fund’s rights as a creditor.
Options
. The value of an option position will reflect, among other things, the current market value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying investment and general market conditions. Options that expire unexercised have no value. Options currently are traded on the Chicago Board Options Exchange
®
and other exchanges, as well as the OTC markets.
By buying a call option on a
security, a Fund has the right, in return for the premium paid, to buy the security underlying the option at the exercise price. By writing (selling) a call option and receiving a premium, a Fund becomes obligated during the term of the option to
deliver securities underlying the option at the exercise price if the option is exercised. By buying a put option, a Fund has the right, in return for the premium, to sell the security underlying the option at the exercise price. By writing a put
option, a Fund becomes obligated during the term of the option to purchase the securities underlying the option at the exercise price.
Because options premiums paid or
received by a Fund are small in relation to the market value of the investments underlying the options, buying and selling put and call options can be more speculative than investing directly in securities.
A Fund may effectively terminate its
right or obligation under an option by entering into a closing transaction. For example, a Fund may terminate its obligation under a call or put option that it had written by purchasing an identical call or put option; this is known as a closing
purchase transaction. Conversely, a Fund may terminate a position in a put or call option it had purchased by writing an identical put or call option; this is known as a closing sale transaction. Closing transactions permit a Fund to realize profits
or limit losses on an option position prior to its exercise or expiration.
Risks of Options on Currencies and
Securities
. Exchange-traded options in the United States are issued by a clearing organization affiliated with the exchange on which the option is listed that, in effect, guarantees completion of every
exchange-traded option transaction. In contrast, OTC options are contracts between a Fund and its counterparty (usually a securities dealer or a bank) with no clearing organization guarantee. Thus, when a Fund purchases an OTC option, it relies on
the counterparty from which it purchased the option to make or take delivery of the underlying investment upon exercise of the option. Failure by the counterparty to do so would result in the loss of any premium paid by a Fund as well as the loss of
any expected benefit of the transaction.
A Fund’s ability to establish
and close out positions in exchange-traded options depends on the existence of a liquid market. However, there can be no assurance that such a market will exist at any particular time. Closing transactions can be made for OTC options only by
negotiating directly with the counterparty, or by a transaction in the secondary market if any such market exists. There can be no assurance that a Fund will in fact be able to close out an OTC option position at a favorable price prior to
expiration. In the event of insolvency of the counterparty, a Fund might be unable to close out an OTC option position at any time prior to its expiration.
If a Fund were unable to effect a
closing transaction for an option it had purchased, it would have to exercise the option to realize any profit. The inability to enter into a closing purchase transaction for a covered call option written by a Fund could cause material losses
because a Fund would be unable to sell the investment used as cover for the written option until the option expires or is exercised.
Options on Indices
. An index fluctuates with changes in the market values of the securities included in the index. Options on indices give the holder the right to receive an
amount of cash upon exercise of the option. Receipt of this cash amount will depend upon the closing level of the index upon which the option is based being greater than (in the case of a call)
or less than (in the case of put) the exercise price
of the option. Some stock index options are based on a broad market index such as the S&P 500
®
Composite Stock Index, the NYSE Composite Index
or the NYSE Arca Major Market Index or on a narrower index such as the Philadelphia Stock Exchange Over-the-Counter Index.
Each of the exchanges has established
limitations governing the maximum number of call or put options on the same index that may be bought or written by a single investor, whether acting alone or in concert with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through one or more brokers). Under these limitations, option positions of all investment companies advised by Rafferty are combined for purposes of these limits. Pursuant to
these limitations, an exchange may order the liquidation of positions and may impose other sanctions or restrictions. These position limits may restrict the number of listed options that a Fund may buy or sell.
Puts and calls on indices are similar
to puts and calls on securities or futures contracts except that all settlements are in cash and gain or loss depends on changes in the index in question rather than on price movements in individual securities or futures contracts. When a Fund
writes a call on an index, it receives a premium and agrees that, prior to the expiration date, the purchaser of the call, upon exercise of the call, will receive from a Fund an amount of cash if the closing level of the index upon which the call is
based is greater than the exercise price of the call. The amount of cash is equal to the difference between the closing price of the index and the exercise price of the call multiplied by a specific factor (“multiplier”), which
determines the total value for each point of such difference. When a Fund buys a call on an index, it pays a premium and has the same rights to such call as are indicated above. When a Fund buys a put on an index, it pays a premium and has the
right, prior to the expiration date, to require the seller of the put, upon a Fund’s exercise of the put, to deliver to a Fund an amount of cash if the closing level of the index upon which the put is based is less than the exercise price of
the put, which amount of cash is determined by the multiplier, as described above for calls. When a Fund writes a put on an index, it receives a premium and the purchaser of the put has the right, prior to the expiration date, to require a Fund to
deliver to it an amount of cash equal to the difference between the closing level of the index and the exercise price times the multiplier if the closing level is less than the exercise price.
Risks of Options on Indices
. If a Fund has purchased an index option and exercises it before the closing index value for that day is available, it runs the risk that the level of the index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, a Fund will be required to pay the difference between the closing index value and the exercise price of the option (times the applicable multiplier) to the assigned writer.
OTC Options
. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size and strike price, the terms of
OTC options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract. While this type of arrangement allows a Fund great flexibility to tailor the option to its needs, OTC options
generally involve greater risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded.
Options on Futures Contracts
. When a Fund writes an option on a futures contract, it becomes obligated, in return for the premium paid, to assume a position in the futures
contract at a specified exercise price at any time during the term of the option. If a Fund writes a call, it assumes a short futures position. If it writes a put, it assumes a long futures position. When a Fund purchases an option on a futures
contract, it acquires the right in return for the premium it pays to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put).
Whether a Fund realizes a gain or
loss from futures activities depends upon movements in the underlying security or index. The extent of a Fund’s loss from an unhedged short position from writing unhedged call options on futures contracts is potentially unlimited. A Fund only
purchases and sells options on futures contracts that are traded on a U.S. exchange or board of trade.
Purchasers and sellers of options on
futures can enter into offsetting closing transactions, similar to closing transactions in options, by selling or purchasing, respectively, an instrument identical to the instrument purchased or sold. Positions in options on futures contracts may be
closed only on an exchange or board of trade that provides a secondary market. However, there can be no assurance that a liquid secondary market will exist for a particular contract at a particular time. In such event, it may not be possible to
close a futures contract or options position.
Under certain circumstances, futures
exchanges may establish daily limits on the amount that the price of an option on a futures contract can vary from the previous day’s settlement price; once that limit is reached, no trades may be made that day at a price beyond the limit.
Daily price limits do not limit potential losses because prices could move to the daily limit for several consecutive days with little or no trading, thereby preventing liquidation of unfavorable positions.
If a Fund were unable to liquidate an
option on a futures position due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial losses. A Fund would continue to be subject to market risk with respect to the position. In addition, except
in the case of purchased options, a Fund would continue to be required to make daily variation margin payments and might be required to maintain cash or liquid assets in an account.
Risks of Options on Futures Contracts
. The ordinary spreads between prices in the cash and futures markets (including the options on futures markets), due to differences in the natures of those markets, are subject to the following factors,
which
may create distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions, which could distort the normal
relationships between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus producing distortion. Third, from the point of view of speculators, the deposit requirements in the futures market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may cause temporary price distortions.
Combined Positions
.
A Fund may purchase
and write options in combination with each other. For
example, a Fund may purchase a put option and write a call option on the same underlying instrument, in order to construct a combined position whose risk and return characteristics are similar to selling a futures contract. Another possible combined
position would involve writing a call option at one strike price and buying a call option at a lower price, in order to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out.
A Fund may enter into
caps, floors and collars relating to securities, interest rates or currencies. In a cap or floor, the buyer pays a premium (which is generally, but not always, a single up-front amount) for the right to receive payments from the other party if, on
specified payment dates, the applicable rate, index or asset is greater than (in the case of a cap) or less than (in the case of a floor) an agreed level, for the period involved and the applicable notional amount. A collar is a combination
instrument in which the same party buys a cap and sells a floor. Depending upon the terms of the cap and floor comprising the collar, the premiums will partially, or entirely, offset each other. The notional amount of a cap, collar or floor is used
to calculate payments, but is not itself exchanged. A Fund may be both a buyer and seller of these instruments. In addition, a Fund may engage in combinations of put and call options on securities (also commonly known as collars), which may involve
physical delivery of securities. Like swaps, caps, floors and collars are very flexible products. The terms of the transactions entered by the Funds may vary from the typical examples described here.
A Fund may enter into swap and
other derivatives to obtain short exposure to an underlying asset without actually purchasing such asset. Swap agreements are generally two-party contracts entered into primarily by institutional investors for periods ranging from a day to more than
one year. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or
“swapped” between the parties are calculated with respect to a “notional amount,”
i.e.
, the return on, or increase/decrease, in value of a particular dollar amount invested in a
“basket” of securities representing a particular index or an ETF representing a particular index or group of securities.
Each Fund may enter into swaps to
invest in a market without owning or taking physical custody of securities. For example, in one common type of total return swap, a Fund’s counterparty will agree to pay the Fund the rate at which the specified asset or indicator (
e.g.
, an ETF, or securities comprising a benchmark index, plus the dividends or interest that would have been received on those assets) increased in value multiplied by the relevant notional amount of the swap. A
Fund will agree to pay to the counterparty an interest fee (based on the notional amount) and the rate at which, the specified asset or indicator would decreased in value multiplied by the notional amount of the swap, plus, in certain instances,
commissions or trading spreads on the notional amount.
As a result, the swap has a similar
economic effect as if a Fund were to invest in the assets underlying the swap in an amount equal to the notional amount of the swap. The return to the Fund on such swap should be the gain or loss on the notional amount plus dividends or interest on
the assets less the interest paid by a Fund on the notional amount. However, unlike cash investments in the underlying assets, a Fund will not be an owner of the underlying assets and will not have voting or similar rights in respect of such
assets.
As a trading technique,
Rafferty may substitute physical securities with a swap having investment characteristics substantially similar to the underlying securities. A Fund may also enter into swaps that provide the opposite return of their benchmark or a security. Their
operations are similar to that of the swaps discussed above except that the counterparty pays interest to each Fund on the notional amount outstanding and that dividends or interest on the underlying instruments reduce the value of the swap, plus,
in certain instances, each Fund will agree to pay to the counterparty commissions or trading spreads on the notional amount. These amounts are often netted with any unrealized gain or loss to determine the value of the swap.
The use of swaps is a highly
specialized activity which involves investment techniques and risks in addition to, and in some cases different from, those associated with ordinary portfolio securities transactions. The primary risks associated with the use of swaps are mispricing
or improper valuation, imperfect correlation between movements in the notional amount and
the price of the
underlying investments, and the inability of the counterparties or clearing organization to perform. If a counterparty’s creditworthiness for an over-the-counter swap declines, the value of the swap would likely decline. Moreover, there is no
guarantee that a Fund could eliminate its exposure under an outstanding swap by entering into an offsetting swap with the same or another party. In addition, a Fund may use a combination of swaps on an underlying index and swaps on an ETF that is
designed to track the performance of that index. The performance of an ETF may deviate from the performance of its underlying index due to embedded costs and other factors. Thus, to the extent a Fund invests in swaps that use an ETF as the reference
asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of correlation with its underlying index as it would if a Fund used only swaps on the underlying index. Rafferty, under the supervision of the Board of
Trustees, is responsible for determining and monitoring the liquidity of a Fund’s transactions in swaps.
Common
Types of Swaps
A Fund may
enter into any of several types of swaps, including:
Total Return Swaps.
Total return swaps may be used either as economically similar substitutes for owning the reference asset specified in the swap, such as the securities that comprise a given market index,
particular securities or commodities, or other assets or indicators. They
also may be used as a means of obtaining exposure in markets
where
the reference asset is unavailable or it may otherwise be impossible or impracticable for a Fund to own that asset.
“Total return”
refers to the
payment
(or receipt)
of the total return on the underlying reference asset, which is then exchanged for the receipt
(or
payment)
of an interest rate.
Total return swaps provide a Fund with the additional flexibility of gaining exposure to a market or sector index by
using the most cost-effective vehicle available.
Interest Rate Swaps.
Interest rate swaps, in their most basic form, involve the exchange by a Fund with another party of their respective commitments to pay or receive interest. For example, a Fund might exchange its right to receive certain
floating rate payments in exchange for another party’s right to receive fixed rate payments. Interest rate swaps can take a variety of other forms, such as agreements to pay the net differences between two different interest indexes or rates.
Despite their differences in form, the function of interest rate swaps is generally the same: to increase or decrease a Fund’s exposure to long- or short-term interest rates. For example, a Fund may enter into an interest rate swap to preserve
a return or spread on a particular investment or a portion of its portfolio or to protect against any increase in the price of securities a Fund anticipates purchasing at a later date.
Other Financial Instruments
. Other forms of swaps that a Fund may enter into include: interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified
rate, or “cap”; interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified level, or “floor,” and interest rate collars,
under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels.
Mechanics
of Swaps
Payments
. Most swaps entered into by a Fund calculate and settle the obligations of the parties to the agreement on a “net basis” with a single payment. Consequently, a Fund’s current obligations (or rights)
under a swap will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the “net amount”). Other swaps may require initial
premium (discount) payments as well as periodic payments (receipts) related to the interest leg of the swap or to the default of the reference entity. A Fund’s current obligations under most swaps (
e.g.
,
total return swaps, equity/index swaps, interest rate swaps) will be accrued daily (offset against any amounts owed to a Fund by the counterparty to the swap) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by
segregating or earmarking cash or other assets determined to be liquid. However, typically no payments will be made until the settlement date. The net amount of the excess, if any, of a Fund’s obligations over its entitlements with respect to
a swap agreement entered into on a net basis will be accrued daily and an amount of cash or liquid asset having an aggregate NAV at least equal to the accrued excess will be maintained in an account with the Custodian that satisfies the 1940 Act. A
Fund also will establish and maintain such accounts with respect to its total obligations under any swaps that are not entered into on a net basis. Obligations under swap agreements so covered will not be construed to be “senior
securities” for purposes of a Fund’s investment restriction concerning senior securities.
Counterparty Credit Risk
. A Fund will not enter into any uncleared swap (
i.e.
, not cleared by a central counterparty) unless Rafferty believes that the other party to the transaction is creditworthy. The
counterparty to an uncleared swap will typically be a major global financial institution. A Fund bears the risk of loss of the amount expected to be received under a swap in the event of the default or bankruptcy of a swap counterparty. If such a
default occurs, a Fund will have contractual remedies pursuant to the swaps, but such remedies may be subject to bankruptcy and insolvency laws that could affect the Fund’s rights as a creditor. The counterparty risk for cleared swaps is
generally lower than for uncleared over-the-counter swaps because, in a cleared swap, a clearing organization becomes substituted for each counterparty to a cleared swap. The clearing organization takes on the obligations of each side of the swap
and a Fund would only to the clearing organization for performance of financial obligations. However, there can be no assurance that the clearing organization, or its members,
will satisfy its obligations to a Fund. Upon
entering into a cleared swap, a Fund may be required to deposit with its futures commission merchant an amount of cash or cash equivalents equal to a small percentage of the notional amount (this amount is subject to change by the clearing
organization that clears the trade). This amount, known as “initial margin,” is in the nature of a performance bond or good faith deposit on the cleared swap and is returned to a Fund upon termination of the swap, assuming all
contractual obligations have been satisfied. Subsequent payments, known as “variation margin” to and from the broker will be made daily as the price of the swap fluctuates, making the long and short position in the swap contract more or
less valuable, a process known as “marking-to-market.” The premium (discount) payments are built into the daily price of the swap and thus are amortized through the variation margin. The variation margin payment also includes the daily
portion of the periodic payment stream.
Termination and Default Risk
. Swap agreements do not involve the delivery of securities or other underlying assets. Accordingly, if a swap is entered into on a net basis, if the other party to a swap agreement defaults, a Fund’s risk of loss
consists of the net amount of payments that the Fund is contractually entitled to receive, if any.
Regulatory
Margin
In recent years,
regulators across the globe, including the CFTC and the U.S. banking regulators, have adopted margin requirements applicable to uncleared swaps. While a Fund is not directly subject to these requirements, where a Fund’s counterparty is subject
to the requirements, uncleared swaps between a Fund and that counterparty are required to be marked-to-market on a daily basis, and collateral is required to be exchanged to account for any changes in the value of such swaps. The rules impose a
number of requirements as to these exchanges of margin, including as to the timing of transfers, the type of collateral (and valuations for such collateral) and other matters that may be different than what a Fund would agree with its counterparty
in the absence of such regulation. In all events, where a Fund is required to post collateral to its swap counterparty, such collateral will be posted to an independent bank custodian, where access to the collateral by the swap counterparty will
generally not be permitted unless a Fund is in default on its obligations to the swap counterparty.
In addition to the variation margin
requirements, regulators have adopted “initial” margin requirements applicable to uncleared swaps. Where applicable, these rules require parties to an uncleared swap to post, to a custodian that is independent from the parties to the
swap, collateral (in addition to any “variation margin” collateral noted above) in an amount that is either (i) specified in a schedule in the rules or (ii) calculated by the regulated party in accordance with a model that has been
approved by that party’s regulator(s). At this time, the initial margin rules do not apply to a Fund’s swap trading relationships. However, the rules are being implemented on a phased basis, and it is possible that in the future, the
rules could apply to the Funds. In the event that the rules apply, they would impose significant costs on a Fund’s ability to engage in uncleared swaps and, as such, could adversely affect Rafferty’s ability to manage a Fund, may impair
a Fund’s ability to achieve its investment objective and/or may result in reduced returns to a Fund’s investors.
Comprehensive swaps regulation.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and related regulatory developments have imposed comprehensive new regulatory requirements on swaps and swap market
participants. The regulatory framework includes: (1) registration and regulation of swap dealers and major swap participants; (2) requiring central clearing and execution of standardized swaps; (3) imposing margin requirements on swap transactions;
(4) regulating and monitoring swap transactions through position limits and large trader reporting requirements; and (5) imposing record keeping and centralized and public reporting requirements, on an anonymous basis, for most swaps. The CFTC is
responsible for the regulation of most swaps. The SEC has jurisdiction over a small segment of the market referred to as “security-based swaps,” which includes swaps on single securities or credits, or narrow-based indices of securities
or credits.
Uncleared
swaps.
In an
uncleared swap,
the swap counterparty is typically a brokerage firm, bank or other financial institution. A Fund
customarily enters into uncleared swaps based on the standard terms and conditions of an International Swaps and Derivatives Association (“ISDA”) Master Agreement.
ISDA is a voluntary industry
association of participants in the OTC derivatives markets that has developed standardized contracts used by such participants that have agreed to be bound by such standardized contracts. In the event that one party to a swap transaction defaults
and the transaction is terminated prior to its scheduled termination date, one of the parties may be required to make an early termination payment to the other. An early termination payment may be payable by either the defaulting or non-defaulting
party, depending upon which of them is
“in-the-money” with respect to the swap at the time of its termination. Early termination payments may be calculated in various ways, but are intended to
approximate the amount the “in-the-money” party would have to pay to replace the swap as of the date of its termination. During the term of an uncleared swap, a Fund will be required to pledge to the swap counterparty, from time to time,
an amount of cash and/or other assets equal to the total net amount (if any) that would be payable by a Fund to the counterparty if all outstanding swaps between the parties were terminated on the date in question, including any early termination
payments (variation margin). Periodically, changes in the amount pledged are made to recognize changes in value of the contract resulting from, among other things, interest on the notional value of the contract, market value changes in the
underlying investment, and/or dividends paid by the issuer of the underlying instrument. Likewise,
the counterparty will be required to pledge cash or other assets to cover its obligations to a Fund.
However,
the amount pledged may not always be equal to or more than the amount due to the other party. Therefore,
if a counterparty defaults in its obligations to a
Fund, the amount pledged by the counterparty and available to a Fund
may not be sufficient to cover all the amounts due
to a Fund and the Fund may sustain a loss. Currently, a Fund does not typically provide initial margin in connection with uncleared swaps. However, rules requiring initial margin to be posted by certain market participants for uncleared swaps have
been adopted and are being phased in over time. When these rules take effect with respect to the Funds, if a Fund is deemed to have material swaps exposure under applicable swap regulations, it will be required to post initial margin in addition to
variation margin.
Cleared
swaps.
Certain standardized swaps are subject to mandatory central clearing and exchange-trading. The Dodd-Frank Act and implementing rules will ultimately require the clearing and exchange-trading of many swaps.
Mandatory exchange-trading and clearing will occur on a phased-in basis based on the type of market participant, CFTC approval of contracts for central clearing and public trading facilities making such cleared swaps available to trade. To date, the
CFTC has designated only certain of the most common types of credit default index swaps and interest rate swaps as subject to mandatory clearing and certain public trading facilities have made certain of those cleared swaps available to trade, but
it is expected that additional categories of swaps will in the future be designated as subject to mandatory clearing and trade execution requirements. Central clearing is intended to reduce counterparty credit risk and increase liquidity, but
central clearing does not eliminate these risks and may involve additional costs and risks not involved with uncleared swaps. For more information, see “Risks of cleared swaps” below.
In a cleared swap, a Fund’s
ultimate counterparty is a central clearinghouse rather than a brokerage firm, bank or other financial institution. Cleared swaps are submitted for clearing through each party’s FCM, which must be a member of the clearinghouse that serves as
the central counterparty. Transactions executed on a swap execution facility may increase market transparency and liquidity but may require a Fund to incur increased expenses to access the same types of swaps that it has used in the past. When a
Fund enters into a cleared swap, it must deliver to the central counterparty (via the FCM) an amount referred to as “initial margin.” Initial margin requirements are determined by the central counterparty, and are typically calculated as
an amount equal to the volatility in market value of the cleared swap over a fixed period, but an FCM may require additional initial margin above the amount required by the central counterparty. During the term of the swap agreement, a
“variation margin” amount may also be required to be paid by a Fund or may be received by a Fund in accordance with margin controls set for such accounts. If the value of the Fund’s cleared swap declines, the Fund will be required
to make additional “variation margin” payments to the FCM to settle the change in value. Conversely, if the market value of a Fund’s position increases, the FCM will post additional “variation margin” to the
Fund’s account. At the conclusion of the term of the swap agreement, if a Fund has a loss equal to or greater than the margin amount, the margin amount is paid to the FCM along with any loss in excess of the margin amount. If a Fund has a loss
of less than the margin amount, the excess margin is returned to a Fund. If a Fund has a gain, the full margin amount and the amount of the gain is paid to a Fund.
Risks of swaps generally.
The use of swap transactions is a highly specialized activity, which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. Whether a Fund will be
successful in using swap agreements to achieve its investment goal depends on the ability of the Adviser to correctly predict which types of investments are likely to produce greater returns. If the Adviser, in using swap agreements, is incorrect in
its forecasts of market values, interest rates, inflation, currency exchange rates or other applicable factors, the investment performance of a Fund will be less than its performance would have been if it had not used the swap agreements. The risk
of loss to a Fund for swap transactions that are entered into on a net basis depends on which party is obligated to pay the net amount to the other party. If the counterparty is obligated to pay the net amount to a Fund, the risk of loss to the Fund
is loss of the entire amount that the Fund is entitled to receive. If a Fund is obligated to pay the net amount, the Fund’s risk of loss is generally limited to that net amount. If the swap agreement involves the exchange of the entire
principal value of a security, the entire principal value of that security is subject to the risk that the other party to the swap will default on its contractual delivery obligations. In addition, a Fund’s risk of loss also includes any
margin at risk in the event of default by the counterparty (in an uncleared swap) or the central counterparty or FCM (in a cleared swap), plus any transaction costs.
Because bilateral swap agreements are
structured as two-party contracts and may have terms of greater than seven days, these swaps may be considered to be illiquid and, therefore, subject to a Fund’s limitation on investments in illiquid securities. If a swap transaction is
particularly large or if the relevant market is illiquid, a Fund may not be able to establish or liquidate a position at an advantageous time or price, which may result in significant losses. Participants in the swap markets are not required to make
continuous markets in the swap contracts they trade. Participants could refuse to quote prices for swap contracts or quote prices with an unusually wide spread between the price at which they are prepared to buy and the price at which they are
prepared to sell. Some swap agreements entail complex terms and may require a greater degree of subjectivity in their valuation. However, the swap markets have grown substantially in recent years, with a large number of financial institutions acting
both as principals and agents, utilizing standardized swap documentation. As a result, the swap markets have become increasingly liquid. In addition, central clearing and the trading of cleared swaps on public facilities are intended to increase
liquidity.
Rafferty, under the
supervision of the Board of Trustees, is responsible for determining and monitoring the liquidity of a Fund’s swap transactions. Rules adopted under the Dodd-Frank Act require centralized reporting of detailed information about many swaps,
whether cleared or uncleared. This information is available to regulators and also, to a more limited
extent and on an anonymous basis, to the public.
Reporting of swap data is intended to result in greater market transparency. This may be beneficial to funds that use swaps in their trading strategies. However, public reporting imposes additional recordkeeping burdens on these funds, and the
safeguards established to protect anonymity are not yet tested and may not provide protection of a Fund’s identity as intended. Certain IRS positions may limit a Fund’s ability to use swap agreements in a desired tax strategy. It is
possible that developments in the swap markets and/or the laws relating to swap agreements, including potential government regulation, could adversely affect the Fund’s ability to benefit from using swap agreements, or could have adverse tax
consequences. For more information about potentially changing regulation, see “Developing government regulation of derivatives” below.
Risks of uncleared swaps.
Uncleared swaps are typically executed bilaterally with a swap dealer rather than traded on exchanges. As a result, swap participants may not be as protected as participants on organized exchanges. Performance of a swap
agreement is the responsibility only of the swap counterparty and not of any exchange or clearinghouse. As a result, a Fund is subject to the risk that a counterparty will be unable or will refuse to perform under such agreement, including because
of the counterparty’s bankruptcy or insolvency. A Fund risks the loss of the accrued but unpaid amounts under a swap agreement, which could be substantial, in the event of a default, insolvency or bankruptcy by a swap counterparty. In such an
event, a Fund will have contractual remedies pursuant to the swap agreements, but bankruptcy and insolvency laws could affect the Fund’s rights as a creditor. If the counterparty’s creditworthiness declines, the value of a swap agreement
would likely decline, potentially resulting in losses. The Adviser will only approve a swap agreement counterparty for a Fund if the Adviser deems the counterparty to be creditworthy. However, in unusual or extreme market conditions, a
counterparty’s creditworthiness and ability to perform may deteriorate rapidly, and the availability of suitable replacement counterparties may become limited.
Risks of cleared swaps.
As noted above, under recent financial reforms, certain types of swaps are, and others eventually are expected to be, required to be cleared through a central counterparty, which may affect counterparty risk and other
risks faced by a Fund.
Central clearing is designed to
reduce counterparty credit risk and increase liquidity compared to uncleared swaps because central clearing interposes the central clearinghouse as the counterparty to each participant’s swap, but it does not eliminate those risks completely
and may involve additional costs and risks not involved with uncleared swaps. There is also a risk of loss by a Fund of the initial and variation margin deposits in the event of bankruptcy of the FCM with which a Fund has an open position, or the
central counterparty in a swap contract. The assets of a Fund may not be fully protected in the event of the bankruptcy of the FCM or central counterparty because a Fund might be limited to recovering only a pro rata share of all available funds and
margin segregated on behalf of an FCM’s customers. If the FCM does not provide accurate reporting, a Fund is also subject to the risk that the FCM could use the Fund’s assets, which are held in an omnibus account with assets belonging to
the FCM’s other customers, to satisfy its own financial obligations or the payment obligations of another customer to the central counterparty. Credit risk of cleared swap participants is concentrated in a few clearinghouses, and the
consequences of insolvency of a clearinghouse are not clear.
With cleared swaps, a Fund may not be
able to obtain terms as favorable as it would be able to negotiate for a bilateral, uncleared swap. In addition, an FCM may unilaterally amend the terms of its agreement with the Fund, which may include the imposition of position limits or
additional margin requirements with respect to a Fund’s investment in certain types of swaps. Central counterparties and FCMs can require termination of existing cleared swap transactions upon the occurrence of certain events, and can also
require increases in margin above the margin that is required at the initiation of the swap agreement. Currently, depending on a number of factors, the margin required under the rules of the clearinghouse and FCM may be in excess of the collateral
required to be posted by a Fund to support its obligations under a similar uncleared swap. However, regulators have proposed and are expected to adopt rules imposing certain margin requirements on uncleared swaps in the near future, which are likely
to impose higher margin requirements on uncleared swaps.
Finally, a Fund is subject to the
risk that, after entering into a cleared swap with an executing broker, no FCM or central counterparty is willing or able to clear the transaction. In such an event, a Fund may be required to break the trade and make an early termination payment to
the executing broker.
Developing government regulation of
derivatives.
The regulation of cleared and uncleared swaps, as well as other derivatives, is a rapidly changing area of law and is subject to modification by government and judicial action. In addition, the
SEC,
CFTC and the exchanges are authorized to take extraordinary actions in the event of a market emergency, including, for example, the implementation or reduction of speculative position limits, the
implementation of higher margin requirements, the establishment of daily price limits and the suspension of trading. It is not possible to predict fully the effects of current or future regulation. However, it is possible that developments in
government regulation of various types of derivative instruments, such as speculative position limits on certain types of derivatives, or limits or restrictions on the counterparties with which a Fund engages in derivative transactions, may limit or
prevent the Fund from using or limit the Fund’s use of these instruments effectively as a part of its investment strategy, and could adversely affect the Fund’s ability to achieve its investment goal(s). The Adviser will continue to
monitor developments in the area, particularly to the extent regulatory changes affect a Fund’s ability to enter into desired swap agreements. New requirements, even if not directly applicable to a Fund, may increase the cost of a Fund’s
investments and cost of doing business.
Other Investment Companies
Each Fund may invest in the securities of other
investment companies, including open- and closed-end funds and ETFs. Investments in the securities of other investment companies may involve duplication of advisory fees and certain other expenses. By investing in another investment company, a Fund
becomes a shareholder of that investment company. As a result, Fund shareholders indirectly will bear a Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses Fund shareholders
bear in connection with a Fund’s own operations.
Each Fund intends
to limit its investments in securities issued by other investment companies in accordance with the 1940 Act. Section 12(d)(1) of the 1940 Act precludes a Fund from acquiring (i) more than 3% of the total outstanding shares of another investment
company; (ii) shares of another investment company having an aggregate value in excess of 5% of the value of the total assets of the Fund; or (iii) shares of another registered investment company and all other investment companies having an
aggregate value in excess of 10% of the value of the total assets of the Fund. In addition, the Fund is subject to Section 12(d)(1)(C), which provides that the Fund may not acquire shares of a closed-end fund if, immediately after such acquisition,
the Fund and other investment companies having the same adviser as the Fund would hold more than 10% of the closed-end fund’s total outstanding voting stock.
Section 12(d)(1)(F) of the 1940 Act
provides that the provisions of paragraph 12(d)(1)(A) and (B) shall not apply to securities purchased or otherwise acquired by a Fund if (i) immediately after such purchase or acquisition not more than 3% of the total outstanding shares of such
investment company is owned by the Fund and all affiliated persons of the Fund; and (ii) the Fund has not offered or sold, and is not proposing to offer or sell its shares through a principal underwriter or otherwise at a public or offering price
that includes a sales load of more than 1 1/2%. If a Fund invests in investment companies pursuant to Section 12(d)(1)(F), it must comply with the following voting restrictions: when the Fund exercises voting rights, by proxy or otherwise, with
respect to investment companies owned by the Fund, the Fund will either seek instruction from the Funds' shareholders with regard to the voting of all proxies and vote in accordance with such instructions, or vote the shares held by a Fund in the
same proportion as the vote of all other holders of such security. In addition, an investment company purchased by a Fund pursuant to Section 12(d)(1)(F) shall not be required to redeem its shares in an amount exceeding 1% of such investment
company’s total outstanding shares in any period of less than thirty days. Also, to the extent that an ETF has exemptive relief under Section 12(d)(1)(J), a Fund may rely on that exemptive relief to exceed the limits imposed by Section
12(d)(1)(A).
Shares of
another investment company or ETF that has received exemptive relief from the SEC to permit other funds to invest in its shares without these limitations are excluded from such restrictions to the extent that a Fund has complied with the
requirements of such orders. To the extent that a Fund invests in open-end or closed-end investment companies that invest primarily in the securities of companies located outside the United States, see the risks related to foreign securities set
forth above.
Exchange-Traded Products
. Each Fund may invest in Exchange Traded Products (“ETPs”), which include ETFs, partnerships, commodity pools or trusts that are bought
and sold on a securities exchange. A Fund may also invest in exchange-traded notes (“ETNs”), which are structured debt securities, whereby the issuer of the ETN promises to pay ETN holders the return on an index or market segment over a
certain period of time and then return the principal of the investment at maturity. Whereas ETPs’ liabilities are secured by their portfolio securities, ETNs’ liabilities are unsecured general obligations of the issuer. Therefore, ETNs
are subject to the credit risk of the issuer of the ETN, which is different than other ETPs. The value of an ETN security should also be expected to fluctuate with the credit rating of the issuer. Most ETPs and ETNs are designed to track a
particular market segment or index, although an ETP or ETN may be actively managed. ETPs and ETNs share expenses associated with their operation, typically including advisory fees and other management expenses. When a Fund invests in an ETP or ETN,
in addition to directly bearing expenses associated with its own operations, it will bear its pro rata portion of the ETP’s or ETN’s expenses. ETPs and ETNs trade like stocks on a securities exchange at market prices rather than NAV and
as a result ETP or ETN shares may trade at a price greater than NAV (premium) or less than NAV (discount). The risks of owning an ETP or ETN generally reflect the risks of owning the underlying securities the ETP or ETN is designed to track,
although lack of liquidity in an ETP or ETN could result in it being more volatile than the underlying portfolio of securities. In addition, because of ETP or ETN expenses, compared to owning the underlying securities directly, it may be more costly
to own an ETP or ETN.
Additionally, a Fund may invest in swap
agreements referencing ETFs. If a Fund invests in ETFs or swap agreements referencing ETFs, the underlying ETFs may not necessarily track the same index as a Fund.
Money Market Funds
. Money market funds are open-end registered investment companies which have historically traded at a stable $1.00 per share price. In October 2016, the
SEC implemented amendments to money market fund regulations (“Amendments”) intended to address perceived systemic risks associated with money market funds and to improve transparency for money market fund investors. In general, the
Amendments require money market funds that do not meet the definitions of a retail money market fund or government money market fund to transact at a floating NAV per share (similar to all other non-money market mutual funds), instead of at a $1
stable share price, as has traditionally been the case. The Amendments also permit all money market funds to impose liquidity fees and redemption gates for use in times of market stress. The
SEC also implemented additional diversification,
stress testing, and disclosure measures. The Amendments represented significant departures from the traditional operation of money market funds. Any impact on the trading and value of money market instruments may negatively affect a Fund’s
yield and return potential.
A Fund may make investments in
the securities of real estate companies, which are regarded as those which derive at least 50% of their respective revenues from the ownership, construction, financing, management or sale of commercial, industrial, or residential real estate, or
have at least 50% of their respective assets in such real estate. Such investments include common stocks (including real estate investment trust shares, see “Real Estate Investment Trusts” below), rights or warrants to purchase common
stocks, securities convertible into common stocks where the conversion feature represents, in Rafferty’s view, a significant element of the securities’ value, and preferred stocks.
Real Estate Investment Trusts
(“REITs”)
A Fund may make investments in
REITs. REITs include equity, mortgage and hybrid REITs. Equity REITs own real estate properties, and their revenue comes principally from rent. Mortgage REITs loan money to real estate owners, and their revenue comes principally from interest earned
on their mortgage loans. Hybrid REITs combine characteristics of both equity and mortgage REITs. The value of an equity REIT may be affected by changes in the value of the underlying property, while a mortgage REIT may be affected by the quality of
the credit extended. The performance of both types of REITs depends upon conditions in the real estate industry, management skills and the amount of cash flow. The risks associated with REITs include defaults by borrowers, self-liquidation, failure
to qualify as a pass-through entity under the federal tax law, failure to qualify as an exempt entity under the 1940 Act and the fact that REITs are not diversified.
A Fund may enter into repurchase
agreements with banks that are members of the Federal Reserve System or securities dealers who are members of a national securities exchange or are primary dealers in U.S. government securities. Repurchase agreements generally are for a short period
of time, usually less than a week. Under a repurchase agreement, a Fund purchases a U.S. government security and simultaneously agrees to sell the security back to the seller at a mutually agreed-upon future price and date, normally one day or a few
days later. The resale price is greater than the purchase price, reflecting an agreed-upon market interest rate during a Fund’s holding period. While the maturities of the underlying securities in repurchase agreement transactions may be more
than one year, the term of each repurchase agreement always will be less than one year. Repurchase agreements with a maturity of more than seven days are considered to be illiquid investments. A Fund may not enter into such a repurchase agreement
if, as a result, more than 15% of the value of its net assets would then be invested in such repurchase agreements and other illiquid investments. See “Illiquid Investments and Restricted Securities” above.
A Fund will always receive, as
collateral, securities whose market value, including accrued interest, at all times will be at least equal to 100% of the dollar amount invested by a Fund in each repurchase agreement. In the event of default or bankruptcy by the seller, a Fund will
liquidate those securities (whose market value, including accrued interest, must be at least 100% of the amount invested by a Fund) held under the applicable repurchase agreement, which securities constitute collateral for the seller’s
obligation to repurchase the security. If the seller defaults, a Fund might incur a loss if the value of the collateral securing the repurchase agreement declines and might incur disposition costs in connection with liquidating the collateral. In
addition, if bankruptcy or similar proceedings are commenced with respect to the seller of the security, realization upon the collateral by a Fund may be delayed or limited.
Reverse Repurchase Agreements
A Fund may borrow by entering
into reverse repurchase agreements with the same parties with whom it may enter into repurchase agreements. Under a reverse repurchase agreement, a Fund sells securities and agrees to repurchase them at a mutually agreed to price. At the time a Fund
enters into a reverse repurchase agreement, it will establish and maintain a segregated account with an approved custodian containing liquid high-grade securities, marked-to-market daily, having a value not less than the repurchase price (including
accrued interest). Reverse repurchase agreements involve the risk that the market value of securities retained in lieu of sale by a Fund may decline below the price of the securities a Fund has sold but is obliged to repurchase. If the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce a Fund’s obligation to repurchase the securities.
During that time, a Fund’s use of the proceeds of the reverse repurchase agreement effectively may be restricted. Reverse repurchase agreements create leverage, a speculative factor, and are considered borrowings for the purpose of a
Fund’s limitation on borrowing.
Each Fund may lend portfolio
securities to certain borrowers that Rafferty determines to be creditworthy. The borrowers provide collateral that is maintained in an amount at least equal to the current market value of the securities loaned, marked to market daily. Borrowers
continuously secure their obligations to return securities on loan from a Fund by depositing any combination of short-term U.S. government securities and cash as collateral with a Fund. No securities loan will be made on behalf of a Fund if, as a
result, the aggregate value of all securities loaned by a Fund exceeds one-third of the value of the Fund's total assets (including the value of the collateral received) or such lower limit as set by Rafferty or the Board. A Fund may terminate a
loan at any time and obtain the return of the securities loaned. Each Fund receives, by way of substitute payment, the value of any interest or cash or non-cash distributions paid on the loaned securities that it would have received if the
securities were not on loan. Any gain or loss in the market price of the borrowed securities that occurs during the term of the loan inures to the lending Fund and that Fund’s shareholders.
With respect to loans that are
collateralized by cash, the borrower may be entitled to receive a fee based on the amount of cash collateral. The Funds are typically compensated by the difference between the amount earned on the reinvestment of cash collateral and the fee paid to
the borrower. In the case of collateral other than cash, a Fund is typically compensated by a fee paid by the borrower equal to a percentage of the market value of the loaned securities. A Fund may also receive such fees on “special”
loans that are cash-collateralized. Any cash collateral may be reinvested in money market funds. Such money market fund shares will not be subject to a sales load, redemption fee, distribution fee or service fee. However, such investments are
subject to investment risk.
Securities lending involves exposure
to certain risks, including operational risk (
i.e.
, the risk of losses resulting from problems in the settlement and accounting process), “gap” risk (
i.e.
,
the risk of a mismatch between the return of cash collateral reinvestments and the fees a Fund has agreed to pay a borrower), and credit, legal, counterparty and market risk. If a securities lending counterparty were to default, a Fund would be
subject to the risk of a possible delay in receiving collateral or in recovering the loaned securities, or to a possible loss of rights in the collateral. In the event a borrower does not return a Fund’s securities as agreed, the Fund could
experience losses if the proceeds received from liquidating the collateral do not at least equal the value of the loaned security at the time the collateral is liquidated, plus the transaction costs incurred in purchasing replacement securities.
This event could trigger adverse tax consequences for a Fund. A Fund could lose money if its investment of cash collateral declines in value over the period of the loan. Substitute payments for dividends received by a Fund while its securities are
loaned out will not be considered qualified dividend income.
A Fund may engage
in short sale transactions under which a Fund sells a security it does not own. To complete such a transaction, a Fund must borrow the security to make delivery to the buyer. A Fund then is obligated to replace the security borrowed by purchasing
the security at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by a Fund. Until the security is replaced, a Fund is required to pay to the lender amounts equal to
any dividends that accrue during the period of the loan. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet the margin requirements, until the short position is closed out. A Fund will also incur
transactions costs when conducting short sales.
Until a Fund closes its short
position or replaces the borrowed stock, a Fund will: (1) maintain an account containing cash or liquid assets at such a level that (a) the amount deposited in the account plus the amount deposited with the broker as collateral will equal the
current value of the stock sold short and (b) the amount deposited in the account plus the amount deposited with the broker as collateral will not be less than the market value of the stock at the time the stock was sold short; or (2) otherwise
cover a Fund’s short position.
A Fund will incur a loss as a result
of a short sales or short exposure to reference assets utilizing derivatives if the price of the security or reference asset increases between the date of the short sale or exposure and the date on which a Fund replaces the borrowed security or
terminates the derivatives providing short exposure. A Fund will realize a gain if the price of a security or reference asset declines in price between those dates. The amount of any gain will be decreased, and the amount of any loss will be
increased, by the amount of the premium, dividends or interest a Fund may be required to pay, if any, in connection with a short sale or derivatives that provide short exposure.
A Fund may also invest in unrated
debt securities. Unrated debt, while not necessarily lower in quality than rated securities, may not have as broad a market. Because of the size and perceived demand for the issue, among other factors, certain issuers may decide not to pay the cost
of getting a rating for their bonds. The creditworthiness of the issuer, as well as any financial institution or other party responsible for payments on the security, will be analyzed to determine whether to purchase unrated bonds.
U.S. Government Securities
A Fund may invest in securities
issued or guaranteed by the U.S. government or its agencies or instrumentalities (“U.S. government securities”) in pursuit of its investment objective, in order to deposit such securities as initial or variation margin, as
“cover” for the investment techniques it employs, as part of a cash reserve or for liquidity purposes.
U.S. government securities are
high-quality instruments issued or guaranteed as to principal or interest by the U.S. Treasury Department (“U.S. Treasury”) or by an agency or instrumentality of the U.S. government. Not all U.S. government securities are backed by the
full faith and credit of the United States. Some are backed by the right of the issuer to borrow from the U.S. Treasury; others are backed by discretionary authority of the U.S. government to purchase the agencies’ obligations; while others
are supported only by the credit of the instrumentality. In the case of securities not backed by the full faith and credit of the United States, the investor must look principally to the agency issuing or guaranteeing the obligation for ultimate
repayment.
Yields on short-,
intermediate- and long-term U.S. government securities are dependent on a variety of factors, including the general conditions of the money and bond markets, the size of a particular offering and the maturity of the obligation. Debt securities with
longer maturities tend to produce higher capital appreciation and depreciation than obligations with shorter maturities and lower yields. The market value of U.S. government securities generally varies inversely with changes in the market interest
rates. An increase in interest rates, therefore, generally would reduce the market value of a Fund’s portfolio investments in U.S. government securities, while a decline in interest rates generally would increase the market value of a
Fund’s portfolio investments in these securities. U.S. government securities include U.S. Treasury obligations, which includes U.S. Treasury Bills (which mature within one year of the date they are issued), U.S. Treasury Notes (which have
maturities of one to ten years) and U.S. Treasury Bonds (which generally have maturities of more than 10 years). All such U.S. Treasury obligations are backed by the full faith and credit of the United States.
U.S. government securities also
include obligations issued by U.S. government agencies and instrumentalities (“GSEs”) that are backed by the full faith and credit of the U.S. government (such as securities issued or guaranteed by the Federal Housing Administration,
Ginnie Mae
®
, the Export-Import Bank of the United States, the General Services Administration and the Maritime Administration and certain securities
issued by the Small Business Administration).
Also, U.S.
government securities include securities that are guaranteed by U.S. government-sponsored entities that are not backed by the full faith and credit of the U.S. government (such as Fannie Mae
®
, Freddie Mac
®
, or the Federal Home Loan Banks).
These U.S. government-sponsored entities, although chartered and sponsored by the U.S. Congress, are not guaranteed, nor insured, by the U.S. government. They are supported only by the credit of the issuing agency, instrumentality or
corporation.
Since 2008, Fannie
Mae
®
and Freddie Mac
®
have been in
conservatorship and have received significant capital support through U.S. Treasury preferred stock purchases, as well as U.S. Treasury and Federal Reserve purchases of their mortgage backed securities (“MBS”). The FHFA and the U.S.
Treasury (through its agreement to purchase Fannie Mae
®
and Freddie Mac
®
preferred stock) have imposed strict limits on the size of their mortgage portfolios. The MBS purchase programs technically ended in 2010 but the U.S.
Treasury has continued its support for the entities’ capital as necessary to prevent a negative net worth through at least 2012 and other governmental entities have provided significant support to Fannie Mae
®
and Freddie Mac
®
. There is no guarantee, however,
that they will continue to do so. An FHFA stress test suggested that in a “severely adverse scenario” additional Treasury support of between $42.1 billion and $77.6 billion (depending on the treatment of deferred tax assets) might be
required. Since then Congress has permanently reduced the corporate income tax rate from 35% to 21% starting January 1, 2018. This reduction could cause a substantial net loss and net worth deficit for the year in which the legislation is enacted.
Should they experience such a net worth deficit, they could be required to draw additional funds from the U.S. Treasury to avoid being placed in receivership. Accordingly, no assurance can be given that Fannie Mae
®
and Freddie Mac
®
will remain successful in
meeting their obligations with respect to the debt and MBSs that they issue.
In addition, the problems faced by
Fannie Mae
®
and Freddie Mac
®
, resulting in
their being placed into federal conservatorship and receiving significant U.S. government support, have sparked serious debate among federal policy makers regarding the continued role of the U.S. government in providing liquidity for mortgage loans.
In December 2011, Congress enacted the Temporary Payroll Tax Cut Continuation Act (“TCCA”) of 2011 which, among other provisions, requires that Fannie Mae
®
and Freddie Mac
®
increase their single-family
guaranty fees by at least 10 basis points and remit this increase to Treasury with respect to all loans acquired by Fannie Mae
®
or Freddie Mac
®
on or after April 1, 2012 and before January 1, 2022. Nevertheless, discussions among policymakers have continued as to whether Fannie Mae
®
and Freddie Mac
®
should be nationalized,
privatized, restructured, or eliminated altogether. Fannie Mae reported in the third quarter of 2018 that there was “significant uncertainty regarding the future of our company.” Freddie Mac faces similar uncertainty about its future
role. Fannie Mae
®
and Freddie Mac
®
also are the
subject of several continuing legal actions and investigations related to certain accounting, disclosure, or corporate governance matters, which (along with any resulting financial restatements) may continue to have an adverse effect on the
guaranteeing entities. Congress is currently considering several pieces of legislation that would reform GSEs, proposing to address their structure, mission, portfolio limits, and guarantee fees, among other issues.
U.S. Government Sponsored Enterprises
(“GSEs”)
GSE securities are securities
issued by the U.S. government or its agencies or instrumentalities. Some obligations issued by GSEs are supported by the discretionary authority of the U.S. government to purchase certain obligations of the agency or instrumentality and others only
by the credit of the agency or instrumentality. Those securities bear fixed, floating or variable rates of interest. Interest may fluctuate based on generally recognized reference rates or the relationship of rates. While the U.S. government
currently provides financial support to such GSEs or instrumentalities, no assurance can be given that it will always do so, since it is not so obligated by law.
Certain U.S. government debt
securities, such as securities of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury. Others, such as securities issued by Fannie Mae
®
and Freddie Mac
®
, are supported only by the
credit of the corporation. In the case of securities not backed by the full faith and credit of the United States, a fund must look principally to the agency issuing or guaranteeing the obligation in the event the agency or instrumentality does not
meet its commitments. The U.S. government may choose not to provide financial support to GSEs or instrumentalities if it is not legally obligated to do so. A fund will invest in securities of such instrumentalities only when Rafferty is satisfied
that the credit risk with respect to any such instrumentality is comparatively minimal.
A Fund may enter into firm
commitment agreements for the purchase of securities on a specified future date. A Fund may purchase, for example, new issues of fixed-income instruments on a when-issued basis, whereby the payment obligation, or yield to maturity, or coupon rate on
the instruments may not be fixed at the time of transaction. A Fund will not purchase securities on a when-issued basis if, as a result, more than 15% of its net assets would be so invested. If a Fund enters into a firm commitment agreement,
liability for the purchase price and the rights and risks of ownership of the security accrue to a Fund at the time it becomes obligated to purchase such security, although delivery and payment occur at a later date. Accordingly, if the market price
of the security should decline, the effect of such an agreement would be to obligate a Fund to purchase the security at a price above the current market price on the date of delivery and payment. During the time a Fund is obligated to purchase such
a security, it will be required to segregate assets with an approved custodian in an amount sufficient to settle the transaction.
Zero-Coupon, Payment-In-Kind and Strip
Securities
A Fund
may invest in zero-coupon, payment-in-kind and strip securities of any rating or maturity. Zero-coupon securities make no periodic interest payment but are sold at a deep discount from their face value, otherwise known as “original issue
discount” or “OID.” The buyer earns a rate of return determined by the gradual appreciation of the security, which is redeemed at face value on a specified maturity date. The OID varies depending on the time remaining until
maturity, as well as market interest rates, liquidity of the security, and the issuer’s perceived credit quality. If the issuer defaults, a Fund may not receive any return on its investment. Because zero-coupon securities bear no interest and
compound semi-annually at the rate fixed at the time of issuance, their value generally is more volatile than the value of other fixed-income securities. Since zero-coupon security holders do not receive interest payments, when interest rates rise,
zero-coupon securities fall more dramatically in value than securities paying interest on a current basis. When interest rates fall, zero-coupon securities rise more rapidly in value because the securities reflect a fixed rate of return.
Payment-in-kind securities allow the issuer, at its option, to make current interest payments either in cash or in additional debt obligations of the issuer. Both zero-coupon securities and payment-in-kind securities allow an issuer to avoid the
need to generate cash to meet current interest payments.
An investment in zero-coupon
securities and delayed interest securities (which do not make interest payments until after a specified time) may cause a Fund to recognize income and be required to make distributions thereof to shareholders before it receives any cash payments on
its investment. Moreover, even though payment-in-kind securities do not pay current interest in cash, a Fund nonetheless is required to accrue interest income on these investments and to distribute the interest income at least annually to
shareholders. See “Dividends, Other Distributions and Taxes
–
Income from Zero Coupon and Payment-in-Kind Securities.” Thus, a Fund could be required at
times to liquidate other investments to satisfy distribution requirements.
A Fund may also invest in strips,
which are debt securities whose interest coupons are taken out and traded separately after the securities are issued but otherwise are comparable to zero-coupon securities. Like zero-coupon securities and payment-in-kind securities, strips are
generally more sensitive to interest rate fluctuations than interest paying securities of comparable term and quality.
Other Investment Risks and Practices
Borrowing
. A Fund may borrow money for investment purposes, which is a form of leveraging. Leveraging investments, by purchasing securities with borrowed money, is a
speculative technique that increases investment risk while increasing
investment opportunity. Leverage will magnify
changes in a Fund’s NAV and on a Fund’s investments. Although the principal of such borrowings will be fixed, a Fund’s assets may change in value during the time the borrowing is outstanding. Leverage also creates interest expenses
for a Fund. To the extent the income derived from securities purchased with borrowed funds exceeds the interest a Fund will have to pay, that Fund’s net income will be greater than it would be if leverage were not used. Conversely, if the
income from the assets obtained with borrowed funds is not sufficient to cover the cost of leveraging, the net income of a Fund will be less than it would be if leverage were not used, and therefore the amount available for shareholders will be
reduced.
A Fund may borrow
money to facilitate management of a Fund’s portfolio by enabling a Fund to meet redemption requests when the liquidation of portfolio instruments would be inconvenient or disadvantageous. Such borrowing is not for investment purposes and will
be repaid by the borrowing Fund promptly.
As required by the 1940 Act, a Fund
must maintain continuous asset coverage (total assets, including assets acquired with borrowed funds, less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If at any time the value of the required asset coverage declines as a
result of market fluctuations or other reasons, a Fund may be required to sell some of its portfolio investments within three days to reduce the amount of its borrowings and restore the 300% asset coverage, even though it may be disadvantageous from
an investment standpoint to sell portfolio instruments at that time.
Under current pronouncements, certain
obligations under futures contracts, forward contracts and swap agreements to the extent that a “covers” its obligations as discussed in the “Futures Contracts, Options, and Other Derivatives Strategies” section will not be
considered a “senior security” and, therefore, will not be subject to the 300% asset coverage requirements otherwise applicable to borrowings.
Portfolio Turnover
. The Trust anticipates that each Fund’s annual portfolio turnover will vary. A Fund’s portfolio turnover rate is calculated by the value of
the securities purchased or securities sold, excluding all securities whose terms-to-maturity at the time of acquisition were less than 397 days, divided by the average monthly value of such securities owned during the year. Based on this
calculation, instruments with remaining terms-to-maturity of less than 397 days are excluded from the portfolio turnover rate. Such instruments generally would include futures contracts and options, since such contracts generally have remaining
terms-to-maturity of less than 397 days. In any given period, all of a Fund’s investments may have remaining terms-to-maturity of less than 397 days; in that case, the portfolio turnover rate for that period would be equal to zero. However,
each Fund’s portfolio turnover rate calculated with all securities whose terms-to-maturity were less than 397 days is anticipated to be unusually high.
High portfolio turnover involves
correspondingly greater expenses to a Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities. Such sales also may result in adverse tax consequences to a
Fund’s shareholders resulting from its distributions of increased net capital gains, if any, recognized as a result of the sales. The trading costs and tax effects associated with portfolio turnover may adversely affect a Fund’s
performance.
Correlation and Tracking Risk
Several factors may affect a
Fund's ability to obtain its daily inverse investment objective. Among these factors are: (1) Fund expenses, including brokerage expenses and commissions and financing costs related to derivatives (which may be increased by high portfolio turnover);
(2) less than all of the securities in the underlying index being held by a Fund and securities not included in the underlying index being held by a Fund; (3) an imperfect correlation between the performance of instruments held by a Fund, such as
other investment companies, including ETFs, futures contracts and options, and the performance of the underlying securities in the cash market comprising an index; (4) bid-ask spreads; (5) a Fund holding instruments that are illiquid or the market
for which becomes disrupted; (6) the need to conform a Fund’s portfolio holdings to comply with the Fund’s investment restrictions or policies, or regulatory or tax law requirements; (7) market movements that run counter to a
Fund’s investments (which will cause divergence between a Fund and its underlying index over time due to the mathematical effects of seeking an inverse underlying index return); and (8) disruptions and illiquidity in the markets for securities
or derivatives held by a Fund.
While index futures and options
contracts closely correlate with the applicable indices over long periods, shorter-term deviation, such as on a daily basis, does occur with these instruments. As a result, a Fund’s short-term performance will reflect such deviation from its
underlying index. A Fund may use a combination of swaps on its underlying index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The
reference ETF may not closely track the performance of its underlying index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that a Fund invests in swaps that use an ETF as a reference asset, a Fund may be subject
to greater correlation risk and may not achieve as high a degree of inverse correlation with its underlying index as it would if a Fund used swaps that utilized an underlying index as the reference asset. Any financing, borrowing or other costs
associated with using derivatives may also reduce a Fund’s return.
Even if there is a perfect inverse
correlation between a Fund and the inverse return of its underlying index on a daily basis, the symmetry between the changes in the underlying index and the changes in a Fund’s NAV can be altered significantly
over time by a compounding effect. For example, if a
Fund achieved a perfect inverse correlation with its underlying index on every trading day over an extended period and the level of returns of that index significantly decreased during that period, a compounding effect for that period would result,
causing an increase in a Fund’s NAV by a percentage that is somewhat greater than the percentage that the underlying index’s returns decreased. Conversely, if a Fund maintained a perfect inverse correlation with its underlying index over
an extended period and if the level of returns of that underlying index significantly increased over that period, a compounding effect would result, causing a decrease of a Fund’s NAV by a percentage that would be somewhat less than the
percentage that the underlying index returns increased.
Special Note Regarding the Correlation
Risks of the Funds
. As discussed in the Prospectus, each Fund has an investment objective to match the inverse of the performance of an underlying index on a given day. Each Fund is subject to all of the correlation
risks described in the Prospectus. In addition, there is a special form of correlation risk that derives from each Fund’s daily investment objective. For periods longer than one day, the pursuit of daily investment returns tends to cause the
performance of a Fund to be either greater than, or less than, -100% times the performance of a Fund’s underlying index.
A Fund’s return for periods longer
than one day is primarily a function of the following:
a) underlying index performance;
b) underlying index volatility;
c) other fund expenses;
d) dividends paid by companies in the
underlying index; and
e) period of
time.
The performance for a
Fund can be estimated given any set of assumptions for the factors described above. The tables below illustrate the impact of two factors, underlying index volatility and underlying index performance, on a Fund. Underlying index volatility is a
statistical measure of the magnitude of fluctuations in the returns of an index and is calculated as the standard deviation of the natural logarithms of one plus the index return (calculated daily), multiplied by the square root of the number of
trading days per year (assumed to be 252). The table shows estimated Fund returns for a number of combinations of underlying index performance and underlying index volatility over a one year period. Assumptions used in the table include: a) no
dividends paid by the companies included in the underlying index; b) no fund expenses; and c) borrowing/lending rates of zero percent. If fund expenses were included, the Fund’s performance would be lower than shown.
As shown below, a Fund would be
expected to lose 6.04% if its underlying index provided no return over a one year period during which the index experienced annualized volatility of 25%. If the underlying index’s annualized volatility were to rise to 75%, the hypothetical
loss for a one year period widens to approximately 42.9%.
At higher ranges of volatility, there
is a chance of a significant loss of value in a Fund. For instance, if the underlying index’s annualized volatility is 100%, a Fund would be expected to lose approximately 63.23% of its value, even if the cumulative index return for the year
was 0%. The volatility of ETFs or instruments that reflect the value of the underlying index such as swaps, may differ from the volatility of a Fund’s underlying index.
In the table below, areas shaded
green represent those scenarios where a Fund with the investment objective described will outperform (
i.e.
, return more than) -100% of the performance of the underlying index; conversely, areas shaded red
represent those scenarios where a Fund will underperform (
i.e.
, return less than) -100% of the performance of the underlying index.
The table below is intended to
underscore the fact that each Fund is designed as a short-term trading vehicle for investors who intend to actively monitor and manage their portfolios. Each Fund is not intended to be used by, and is not appropriate for, investors who do not intend
to actively monitor and manage their portfolios. For additional information regarding correlation and volatility risk for the Funds, see “Effects of Compounding and Market Volatility Risk” in the Prospectus.
One
Year
Index
|
-100%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
60%
|
148.55%
|
134.42%
|
95.28%
|
43.98%
|
-5.83%
|
-50%
|
50%
|
99.13%
|
87.77%
|
56.26%
|
15.23%
|
-24.77%
|
-40%
|
40%
|
66.08%
|
56.57%
|
30.21%
|
-4.08%
|
-37.57%
|
-30%
|
30%
|
42.43%
|
34.25%
|
11.56%
|
-17.98%
|
-46.76%
|
-20%
|
20%
|
24.67%
|
17.47%
|
-2.47%
|
-28.38%
|
-53.72%
|
-10%
|
10%
|
10.83%
|
4.44%
|
-13.28%
|
-36.52%
|
-58.79%
|
0%
|
0%
|
-0.25%
|
-6.04%
|
-22.08%
|
-42.90%
|
-63.23%
|
10%
|
-10%
|
-9.32%
|
-14.64%
|
-29.23%
|
-48.27%
|
-66.67%
|
20%
|
-20%
|
-16.89%
|
-21.75%
|
-35.24%
|
-52.72%
|
-69.67%
|
30%
|
-30%
|
-23.29%
|
-27.84%
|
-40.25%
|
-56.41%
|
-71.94%
|
40%
|
-40%
|
-28.78%
|
-33.01%
|
-44.63%
|
-59.81%
|
-74.32%
|
50%
|
-50%
|
-33.55%
|
-37.52%
|
-48.57%
|
-62.60%
|
-76.19%
|
60%
|
-60%
|
-37.72%
|
-41.51%
|
-51.96%
|
-65.19%
|
-78.12%
|
The
foregoing table is intended to isolate the effect of underlying index volatility and underlying index performance on the return of a Fund. A Fund’s actual returns may be significantly greater or less than the returns shown above as a result of
any of factors discussed above or under “Effects of Compounding and Market Volatility Risk” in the Prospectus.
Since the use of technology has
become more prevalent in the course of business, the Funds may be more susceptible to operational risks through breaches in cybersecurity. A cybersecurity incident may refer to either intentional or unintentional events that allow an unauthorized
party to gain access to fund assets, customer data, or proprietary information, or cause a Fund or a Fund service provider to suffer data corruption or lose operational functionality. A cybersecurity incident could, among other things, result in the
loss or theft of customer data or funds, customers or employees being unable to access electronic systems (“denial of services”), loss or theft of proprietary information or corporate data, physical damage to a computer or network
system, or remediation costs associated with system repairs. Any of these results could have a substantial impact on the Funds. For example, if a cybersecurity incident results in a denial of service, Fund shareholders could lose access to their
electronic accounts for an unknown period of time, and employees could be unable to access electronic systems to perform critical duties for the Funds, such as trading, NAV calculation, shareholder accounting or fulfillment of Fund share purchases
and redemptions. Cybersecurity incidents could cause a Fund or the Funds' Adviser or distributor to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures, or financial loss of a significant
magnitude. They may also cause a Fund to violate applicable privacy and other laws. The Funds' service providers have established risk management systems that seek to reduce the risks associated with cybersecurity, and business continuity plans in
the event there is a cybersecurity breach. However, there is no guarantee that such efforts will succeed, especially since a Fund does not directly control the cybersecurity systems of the issuers of securities in which each Fund invests or the
Funds' third party service providers (including the Funds' transfer agent and custodian).
The Trust, on behalf of each
Fund, has adopted the following investment policies which are fundamental policies that may not be changed without the affirmative vote of a majority of the outstanding voting securities of the Fund. As defined by the 1940 Act, a “vote of a
majority of the outstanding voting securities of the Fund” means the affirmative vote of the lesser of (1) more than 50% of the outstanding shares of the Fund or (2) 67% or more of the shares present at a shareholders’ meeting, if more
than 50% of the outstanding shares are represented at the meeting in person or by proxy.
For purposes of the following
limitations, all percentage limitations apply immediately after a purchase or initial investment. Except with respect to borrowing money, if a percentage limitation is adhered to at the time of the investment, a later increase or decrease in the
percentage resulting from any change in value or net assets will not result in a violation of such restrictions. If at any time a Fund’s borrowings exceed its limitations due to a decline in net assets, such borrowings will be reduced within
three days (not including Sundays and holidays), or such longer period as may be permitted by the 1940 Act, to the extent necessary to comply with the one-third limitation.
Each Fund may not:
1.
|
Borrow money, except to
the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
2.
|
Issue
senior securities, except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
3.
|
Make loans, except to the
extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
4.
|
Except for any Fund
that is “concentrated” in an industry or group of industries within the meaning of the 1940 Act, purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, 25% or more of a Fund’s total assets would be invested in the securities of companies whose principal business activities are in the same industry. However, each Fund that tracks an underlying index will
only concentrate its investment in a particular industry or group of industries to approximately the same extent as its underlying index is so concentrated.
|
5.
|
Purchase or sell real
estate, except that, to the extent permitted by applicable law, each Fund may (a) invest in securities or other instruments directly secured by real estate, and (b) invest in securities or other instruments issued by issuers that invest in real
estate.
|
6.
|
Purchase or sell
commodities or commodity contracts unless acquired as a result of ownership of securities or other instruments issued by persons that purchase or sell commodities or commodities contracts; but this shall not prevent a Fund from purchasing, selling
and entering into financial futures contracts (including futures contracts on indices of securities, interest rates and currencies), and options on financial futures contracts (including futures contracts on indices of securities, interest rates and
currencies), warrants, swaps, forward contracts, foreign currency spot and forward contracts and other financial instruments.
|
7.
|
Underwrite
securities issued by others, except to the extent that a Fund may be considered an underwriter within the meaning of the 1933 Act in the disposition of restricted securities or other investment company securities.
|
Portfolio Transactions and Brokerage
Subject to the general
supervision by the Trustees, Rafferty is responsible for decisions to buy and sell securities for each Fund, the selection of broker-dealers to effect the transactions, and the negotiation of brokerage commissions, if any. Rafferty expects that a
Fund may execute brokerage or other agency transactions through registered broker-dealers, for a commission, in conformity with the 1940 Act, the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.
When selecting a broker or dealer to
execute portfolio transactions, Rafferty considers many factors, including the rate of commission or the size of the broker-dealer’s “spread,” the size and difficulty of the order, the nature of the market for the security,
operational capabilities of the broker-dealer and the research, statistical and economic data furnished by the broker-dealer to Rafferty.
In effecting portfolio transactions
for a Fund, Rafferty seeks to receive the closing prices of securities that are in line with those of the securities included in a Fund's underlying index and seeks to execute trades of such securities at the lowest commission rate reasonably
available. With respect to agency transactions, Rafferty may execute trades at a higher rate of commission if reasonable in relation to brokerage and research services provided to a Fund or Rafferty. Such services may include the following:
information as to the availability of securities for purchase or sale; statistical or factual information or opinions pertaining to investment; wire services; and appraisals or evaluations of portfolio securities. Each Fund believes that the
requirement to always seek the lowest possible commission cost could impede effective portfolio management and preclude a Fund and Rafferty from obtaining a high quality of brokerage and research services. In seeking to determine the reasonableness
of brokerage commissions paid in any transaction, Rafferty relies upon its experience and knowledge regarding commissions generally charged by various brokers and on its judgment in evaluating the brokerage and research services received from the
broker effecting the transaction.
Rafferty may use research and
services provided to it by brokers in servicing a Fund; however, not all such services may be used by Rafferty in connection with a Fund. While the receipt of such information and services is useful in varying degrees and may reduce the amount of
research or services otherwise provided to a Fund by Rafferty, the receipt of such information and these services does not reduce the investment advisory fee paid by a Fund.
Purchases and sales of U.S.
government securities normally are transacted through issuers, underwriters or major dealers in U.S. government securities acting as principals. Such transactions are made on a net basis and do not involve payment of brokerage commissions. The cost
of securities purchased from an underwriter usually includes a commission paid by the issuer to the underwriters; transactions with dealers normally reflect the spread between bid and asked prices.
Aggregate brokerage commissions paid by
each of the following operational Funds for the fiscal periods shown are set forth in the tables below:
Direxion
Daily S&P 500
®
Bear 1X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$16
|
Year
Ended October 31, 2017
|
$91
|
June
6, 2016* - October 31, 2016
|
$3,736
|
*
|
Commencement of Operations
|
|
|
Direxion
Daily 7-10 Year Treasury Bear 1X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$139
|
Year
Ended October 31, 2017
|
$171
|
Year
Ended October 31, 2016
|
$283
|
Direxion
Daily 20+ Year Treasury Bear 1X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$1,256
|
Year
Ended October 31, 2017
|
$2,214
|
Year
Ended October 31, 2016
|
$6,164
|
Direxion
Daily Total Bond Market Bear 1X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$909
|
Year
Ended October 31, 2017
|
$581
|
Year
Ended October 31, 2016
|
$379
|
Direxion
Daily CSI 300 China A Share Bear 1X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$136,562
|
Year
Ended October 31, 2017
|
$67,101
|
Year
Ended October 31, 2016
|
$353,205
|
For the
fiscal year ended October 31, 2018, the brokerage commissions for the Direxion Daily CSI 300 China A Share Bear 1X Shares increased significantly from the brokerage commissions from the fiscal year ended October 31, 2017 as a result of increased net
assets and increased volatility.
For the fiscal year ended October 31,
2018, the brokerage commissions for the Direxion Daily 20+ Year Treasury Bear 1X Shares decreased significantly from the brokerage commissions from the fiscal year ended October 31, 2017 as a result of a decrease in volatility in the Fund's
assets.
Portfolio Holdings Information
A Fund’s
portfolio holdings are, or will be upon commencement of operations, disclosed on the Funds' website at www.direxioninvestments.com each day the Funds are open for business. In addition, disclosure of a Fund’s complete holdings is required to
be made quarterly within 60 days of the end of each fiscal quarter in the Annual Report and Semi-Annual Report to Fund shareholders and in the quarterly holdings report on Form N-Q. These reports are available, free of charge, on the EDGAR database
on the SEC’s website at www.sec.gov.
The portfolio composition file
(“PCF”), which contains portfolio holdings information and the IOPV, which contains certain pricing information related to a Fund’s portfolio holdings, are also made available daily, including to the Funds' service providers to
facilitate the provision of services to the Funds and to certain other entities as necessary for transactions in Creation Units. Such entities include: (i) National Securities Clearing Corporation (“NSCC”) members; (ii) subscribers to
various fee-based services, including entities that publish and/or analyze such information in connection with the process of purchasing or redeeming Creation Units or trading shares of Funds in the secondary market; (iii) investors that have
entered into an “Authorized Participant Agreement” with the Distributor and the transfer agent or purchase Creation Units through a dealer that has entered into such an agreement (“Authorized Participants”); and (iv) certain
personnel of service providers that are involved in portfolio management and providing administrative, operational, or other support to portfolio management including personnel of the Adviser and the Funds' distributor, administrator, custodian and
fund accountant who are involved in functions which may require such information to conduct business in the ordinary course.
In addition, the Funds' Chief
Compliance Officer (“CCO”) may grant exceptions to permit additional disclosure of the complete portfolio holdings information at differing times and with differing lag times to rating agencies and to the parties noted above, provided
that (1) a Fund has a legitimate business purpose for doing so; (2) it is in the best interests of shareholders; (3) the recipient is subject to a confidentiality agreement; and (4) the recipient is subject to a duty not to trade on the
nonpublic information. In this regard, from time to
time, rating and ranking organizations such as Standard & Poor’s
®
and Morningstar
®
, Inc. may request such information. The CCO shall report any disclosures made pursuant to this exception to the Board.
The Board of Trustees
The Trust is governed by its Board
of Trustees (the “Board”). The Board is responsible for and oversees the overall management and operations of the Trust and the Funds, which includes the general oversight and review of the Funds' investment activities, in accordance
with federal law and the law of the State of Delaware, as well as the stated policies of the Funds. The Board oversees the Trust’s officers and service providers, including Rafferty, which is responsible for the management of the day-to-day
operations of the Funds based on policies and agreements reviewed and approved by the Board. In carrying out these responsibilities, the Board regularly interacts with and receives reports from senior personnel of service providers, including
personnel from Rafferty and U.S. Bancorp Fund Services, LLC (“USBFS”). The Board also is assisted by the Trust’s independent auditor (who reports directly to the Trust’s Audit Committee), independent counsel and other
professionals as appropriate.
Risk
Oversight
Consistent with
its responsibility for oversight of the Trust and the Funds, the Board oversees the management of risks relating to the administration and operation of the Trust and the Funds. Rafferty, as part of its responsibilities for the day-to-day operations
of the Funds, is responsible for day-to-day risk management for the Funds. The Board, in the exercise of its reasonable business judgment performs its risk management oversight directly and, as to certain matters, through its committees (described
below) and through the Board members who are not “interested persons” of the Funds as defined in Section 2(a)(19) of the 1940 Act (“Independent Trustees.”) The following provides an overview of the principal, but not all,
aspects of the Board’s oversight of risk management for the Trust and the Funds.
The Board has adopted, and
periodically reviews, policies and procedures designed to address risks to the Trust and the Funds. In addition, under the general oversight of the Board, Rafferty and other service providers to the Funds have themselves adopted a variety of
policies, procedures and controls designed to address particular risks to the Funds. Different processes, procedures and controls are employed with respect to different types of risks.
The Board also oversees risk
management for the Trust and the Funds through review of regular reports, presentations and other information from officers of the Trust and other persons. The Trust’s CCO and senior officers of Rafferty regularly report to the Board on a
range of matters, including those relating to risk management. The Board also regularly receives reports from Rafferty and USBFS with respect to the Funds' investments. In addition to regular reports from these parties, the Board also receives
reports regarding other service providers to the Trust, either directly or through Rafferty, USBFS or the CCO, on a periodic or regular basis. At least annually, the Board receives a report from the CCO regarding the effectiveness of the Funds'
compliance program. Also, on an annual basis, the Board receives reports, presentations and other information from Rafferty in connection with the Board’s consideration of the renewal of each of the Trust’s agreements with Rafferty and
the Trust’s distribution plan under Rule 12b-1 under the 1940 Act.
The CCO reports regularly to the
Board on Fund valuation matters. The Audit Committee receives regular reports from the Trust’s independent registered public accounting firm on internal control and financial reporting matters. On at least a quarterly basis, the Independent
Trustees meet with the CCO to discuss matters relating to the Funds' compliance program.
Board Structure and Related Matters
Independent Trustees constitute
two-thirds of the Board. The Trustees discharge their responsibilities collectively as a Board, as well as through Board committees, each of which operates pursuant to a charter approved by the Board that delineates the specific responsibilities of
that committee. The Board has established three standing committees: the Audit Committee, the Nominating and Governance Committee and the Qualified Legal Compliance Committee. For example, the Audit Committee is responsible for specific matters
related to oversight of the Funds' independent auditors, subject to approval of the Audit Committee’s recommendations by the Board. The members and responsibilities of each Board committee are summarized below.
The Board
periodically evaluates its structure and composition as well as various aspects of its operations. The Chairman of the Board is not an Independent Trustee and the Board has chosen not to have a lead Independent Trustee. However, the Board believes
that its leadership structure, including its Independent Trustees and Board committees, is appropriate for the Trust in light of, among other factors, the asset size and nature of the Funds, the number of series overseen by the Board, the
arrangements for the conduct of the Funds' operations, the number of Trustees, and the Board’s responsibilities. On an annual basis, the Board conducts a self-evaluation that considers, among other matters, whether the Board and its committees
are functioning effectively and whether, given the size and composition of the Board and each of its committees, the Trustees are able to oversee effectively the number of series in the complex.
The Trust is part
of the Direxion Family of Investment Companies, which is comprised of the 120 portfolios within the Trust, 15 portfolios within the Direxion Funds and no portfolios within the Direxion Insurance Trust. The same persons who constitute the Board also
constitute the Board of Trustees of the Direxion Funds and the Direxion Insurance Trust.
The Board holds four regularly
scheduled in-person meetings each year. The Board may hold special meetings, as needed, either in person or by telephone, to address matters arising between regular meetings. During a portion of each in-person meeting, the Independent Trustees meet
outside of management’s presence. The Independent Trustees may hold special meetings, as needed, either in person or by telephone.
The Trustees of
the Trust are identified in the tables below, which provide information regarding their age, business address and principal occupation during the past five years including any affiliation with Rafferty, the length of service to the Trust, and the
position, if any, that they hold on the board of directors of companies other than the Trust as of the date of this SAI. Each of the Trustees of the Trust also serve on the Board of the Direxion Funds and Direxion Insurance Trust, the other
registered investment companies in the Direxion mutual fund complex. Rafferty is also the sole owner of Direxion Advisors, LLC ("Direxion"), investment adviser to certain series of the Trust. Unless otherwise noted, an individual’s business
address is 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019.
Interested Trustee
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(2)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
Daniel
D. O’Neill
(1)
Age: 50
|
Chairman
of the Board of Trustees
|
Lifetime
of Trust until removal or resignation;
Since 2008
|
Managing
Director of Rafferty Asset Management, LLC, January 1999 –
January 2019 and Direxion Advisors, LLC, November 2017
–
January 2019.
|
135
|
None.
|
Independent Trustees
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(3)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
Gerald
E. Shanley III
Age: 75
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2008
|
Retired,
since 2002; Business Consultant, 1985-present; Trustee of Trust Under Will of Charles S. Payson, 1987-present; C.P.A., 1979-present.
|
135
|
None.
|
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(3)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
John
A. Weisser
Age: 77
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2008
|
Retired,
since 1995; Salomon Brothers, Inc., 1971-1995, most recently as Managing Director.
|
135
|
Director
until December 2016: The MainStay Funds Trust, The MainStay Funds, MainStay VP Fund Series, Mainstay Defined Term Municipal Opportunities Fund; Private Advisors Alternative Strategy Fund; Private Advisors Alternative Strategies Master Fund.
|
David
L. Driscoll
Age: 49
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2014
|
Partner,
King Associates, LLP, since 2004; Board Advisor, University Common Real Estate, since 2012; Principal, Grey Oaks LLP since 2003; Member, Kendrick LLC, since 2006.
|
135
|
None.
|
Jacob
C. Gaffey
Age: 71
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2014
|
Managing
Director of Loomis & Co. since 2012; Partner, Bay Capital Advisors, LLC
2008
–
2012.
|
135
|
None.
|
Henry
W. Mulholland
Age: 55
|
Trustee
|
Lifetime
of Trust until removal or resignation; Since 2017
|
Grove
Hill Partners LLC, since 2016 as Managing Partner; Bank of America Merrill Lynch, 1990-2015, most recently as Managing Director and Head of Equities for Americas.
|
135
|
None.
|
(1)
|
Mr. O’Neill is
affiliated with Rafferty and Direxion. Mr. O’Neill owns a beneficial interest in Rafferty.
|
(2)
|
The Direxion Family of
Investment Companies consists of the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 93 of the 120 funds registered with the SEC, the Direxion Funds which, as of the date of this SAI, offers for sale to the
public 15 funds registered with the SEC and the Direxion Insurance Trust which, as of the date of this SAI, does not have any funds registered with the SEC.
|
In addition to the information set
forth in the tables above and other relevant qualifications, experience, attributes or skills applicable to a particular Trustee, the following provides further information about the qualifications and experience of each Trustee.
Daniel D.
O’Neill: Mr. O’Neill has extensive experience in the investment management business, including as managing director of Rafferty and Direxion. Mr. O’Neill was the Managing Director of Rafferty from 1999 through January 2019 and
Managing Director of Direxion from its inception in November 2017 through January 2019.
Gerald E. Shanley III: Mr. Shanley
has extensive audit experience and spent ten years in the tax practice of an international public accounting firm. He is a certified public accountant and has a JD degree. He has extensive business experience as the president of a closely held
manufacturing company, a director of several closely held companies, a business and tax consultant and a trustee of a private investment trust. He has served on the boards of several charitable and not for profit organizations. He also has multiple
years of service as a Trustee.
John A. Weisser: Mr. Weisser has
extensive experience in the investment management business, including as managing director of an investment bank and a director of other registered investment companies. He also has multiple years of service as a Trustee.
David L. Driscoll: Mr. Driscoll has
extensive experience with risk assessment and strategic planning as a partner and manager of various real estate partnerships and companies.
Jacob C. Gaffey: Mr. Gaffey has
extensive experience with providing investment banking and valuation services to various companies. Mr. Gaffey has been a director and a member of an audit committee of a public company since 2011.
Henry W. Mulholland: Mr. Mulholland has
extensive experience with equity trading, risk management, equity market structure as well as managing regulatory and compliance matters.
Board Committees
The Trust has an
Audit Committee, consisting of Messrs. Weisser, Shanley, Driscoll, Gaffey and Mulholland. The members of the Audit Committee are Independent Trustees. The primary responsibilities of the Trust’s Audit Committee are, as set forth in its
charter, to make recommendations to the Board Members as to: the engagement or discharge of the Trust’s independent registered public accounting firm (including the audit fees charged by the auditors); the supervision of investigations into
matters relating to audit matters; the review with the independent registered public accounting firm of the results of audits; and addressing any other matters regarding audits. The Audit Committee met three times during the Trust’s most
recent fiscal year.
The Trust also has a Nominating and
Governance Committee, consisting of Messrs. Weisser, Shanley, Driscoll, Gaffey and Mulholland each of whom is an Independent Trustee. The primary responsibilities of the Nominating and Governance Committee are to make recommendations to the Board on
issues related to the composition and operation of the Board, and communicate with management on those issues. The Nominating and Governance Committee also evaluates and nominates Board member candidates. The Nominating and Governance Committee will
consider nominees recommended by shareholders. Such recommendations should be in writing and addressed to a Fund with attention to the Nominating and Governance Committee Chair. The recommendations must include the following Preliminary Information
regarding the nominee: (1) name; (2) date of birth; (3) education; (4) business professional or other relevant experience and areas of expertise; (5) current business and home addresses and contact information; (6) other board positions or prior
experience; and (7) any knowledge and experience relating to investment companies and investment company governance. The Nominating and Governance Committee met three times during the Trust’s most recent fiscal year.
The Trust has a Qualified Legal
Compliance Committee, consisting of Messrs. Weisser, Shanley, Driscoll, Gaffey and Mulholland. The members of the Qualified Legal Compliance Committee are Independent Trustees of the Trust. The primary responsibility of the Trust’s Qualified
Legal Compliance Committee is to receive, review and take appropriate action with respect to any report (“Report”) made or referred to the Committee by an attorney of evidence of a material violation of applicable U.S. federal or state
securities law, material breach of a fiduciary duty under U.S. federal or state law or a similar material violation by the Trust or by any officer, director, employee or agent of the Trust. The Qualified Legal Compliance Committee did not meet
during the Trust’s most recent fiscal year.
Principal Officers of the Trust
The officers of the Trust conduct
and supervise its daily business. Unless otherwise noted, an individual’s business address is 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019. As of the date of this SAI, the officers of the Trust, their ages,
their business address and their principal occupations during the past five years are as follows:
Name,
Address
and Age
|
Position(s)
Held with
Fund
|
Term
of
Office and
Length of
Time Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in the
Direxion
Family of
Investment
Companies
Overseen
by Trustee
(1)
|
Other
Trusteeships/
Directorships Held
by Trustee During
Past Five Years
|
Robert
D. Nestor
Age: 50
|
President
|
One
Year;
Since 2018
|
President,
Rafferty Asset Management, LLC and Direxion Advisors, LLC, since April 2018; Blackrock, Inc. (May 2007-April 2018), most recently as Managing Director.
|
N/A
|
N/A
|
Patrick
J. Rudnick
Age: 45
|
Principal
Executive
Officer
Principal Financial
Officer
|
One
Year;
Since 2018
One Year;
Since 2010
|
Senior
Vice President, since March 2013, Rafferty Asset Management, LLC; Senior Vice President, since November 2017, Direxion Advisors, LLC.
|
N/A
|
N/A
|
Angela
Brickl
Age: 42
|
Chief
Compliance
Officer
Secretary
|
One
Year;
Since 2018
One Year;
Since 2011
|
General
Counsel, Rafferty Asset Management LLC, since October 2010 and Direxion Advisors, LLC, since November 2017; Chief Compliance Officer, Rafferty Asset Management, LLC, since September 2012 and Direxion Advisors, LLC, since November 2017.
|
N/A
|
N/A
|
(1)
|
The Direxion Family of
Investment Companies consists of the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 93 of the 120 funds registered with the SEC, the Direxion Funds which, as of the date of this SAI, offers for sale to the
public 15 funds registered with the SEC and the Direxion Insurance Trust which, as of the date of this SAI, does not have any funds registered with the SEC.
|
The following table shows the amount
of equity securities owned in each of the following operational Funds and in the Direxion Family of Investment Companies by the Trustees as of the calendar year ended December 31, 2018:
Dollar
Range of Equity Securities Owned:
|
Interested
Trustee:
|
Independent
Trustees:
|
|
Daniel
D.
O’Neill
|
Gerald
E.
Shanley III
|
John
Weisser
|
David
L.
Driscoll
|
Jacob
C.
Gaffey
|
Henry
W.
Mulholland
|
Direxion
Daily S&P 500
®
Bear 1X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily 7-10 Year Treasury Bear 1X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily 20+ Year Treasury Bear 1X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Total Bond Market Bear 1X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily CSI 300 China A Share Bear 1X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Aggregate
Dollar Range of Equity Securities in the Direxion Family of Investment Companies
(1)
|
Over
$100,000
|
$0
|
$1-$10,000
|
$0
|
$0
|
$0
|
(1)
|
The Direxion Family of
Investment Companies consists of the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 93 of the 120 funds registered with the SEC, the Direxion Funds which, as of the date of this SAI, offers for sale to the
public 15 funds registered with the SEC and the Direxion Insurance Trust which, as of the date of this SAI, does not have any funds registered with the SEC.
|
The Trust’s Trust Instrument
provides that the Trustees will not be liable for errors of judgment or mistakes of fact or law. However, they are not protected against any liability to which they would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of their office.
No officer,
director or employee of Rafferty receives any compensation from the Funds for acting as a Trustee or officer of the Trust. The following table shows the compensation earned by each Trustee for the Trust’s fiscal year ended October 31,
2018:
Name
of Person,
Position
|
Aggregate
Compensation
From the
Trust
(1)
|
Pension
or
Retirement Benefits
Accrued As Part of
the Trust’s
Expenses
|
Estimated
Annual Benefits
Upon Retirement
|
Aggregate
Compensation
From the Direxion
Family of
Investment
Companies Paid
to the Trustees
(2)
|
Interested
Trustee
|
Daniel
D. O’Neill
|
$0
|
$0
|
$0
|
$0
|
Independent
Trustees
|
Gerald
E. Shanley III
|
$93,438
|
$0
|
$0
|
$124,583
|
John
A. Weisser
|
$93,438
|
$0
|
$0
|
$124,583
|
David
L. Driscoll
|
$92,188
|
$0
|
$0
|
$122,917
|
Jacob
C. Gaffey
|
$92,188
|
$0
|
$0
|
$122,917
|
Henry
W. Mulholland
(3)
|
$85,938
|
$0
|
$0
|
$114,583
|
(1)
Trustee compensation is
allocated across the operational Funds of the Trust based on the proportion of the Fund’s net assets to the total net assets of the operational Funds of the Trust.
(2)
For the fiscal year ended
October 31, 2018, Trustees’ fees and expenses in the amount of $457,190 were incurred by the Trust.
(3)
Mr. Mulholland was
elected as a Trustee December 1, 2017.
Principal Shareholders, Control Persons and
Management Ownership
A principal shareholder is any
person who owns of record or beneficially 5% or more of the outstanding shares of a Fund. A control person is a shareholder that owns beneficially or through controlled companies more than 25% of the voting securities of a company or acknowledges
the existence of control. Shareholders owning voting securities in excess of 25% may determine the outcome of any matter affecting and voted on by shareholders of a Fund.
As of February 1,
2019, the following shareholders were considered to be either a principal shareholder or control person of the following operational Funds:
Direxion Daily S&P 500
®
Bear 1X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
24.17%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
13.93%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
10.79%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
9.75%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
8.69%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
6.19%
|
Record
|
Vanguard
Marketing Corp
100 Vanguard Boulevard
Malvern, PA 19355
|
N/A
|
N/A
|
5.40%
|
Record
|
Direxion Daily 7-10 Year Treasury Bear 1X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
J.P.
Morgan Chase Bank
14201 Dallas Parkway
Dallas, TX 75254
|
JPMorgan
Chase & Co.
|
DE
|
51.70%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
20.44%
|
Record
|
Mizuho
Trust & Banking
111 River Street
Hoboken, NJ 07030
|
N/A
|
N/A
|
9.20%
|
Record
|
Direxion Daily 20+ Year Treasury Bear 1X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
J.P.
Morgan Chase Bank
14201 Dallas Parkway
Dallas, TX 75254
|
N/A
|
N/A
|
22.60%
|
Record
|
LPL
Financial Corp.
9785 Towne Centre Drive
San Diego, CA 92121
|
N/A
|
N/A
|
18.98%
|
Record
|
Deutsche
Bank Securities, Inc.
5022 Gate Parkway Suite 100
Jacksonville, FL 32256
|
N/A
|
N/A
|
17.23%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
9.55%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
7.90%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
7.63%
|
Record
|
Direxion Daily Total Bond Market Bear 1X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
Merrill
Lynch & Co., Inc.
|
DE
|
33.71%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
19.78%
|
Record
|
J.P.
Morgan Chase Bank
14201 Dallas Parkway
Dallas, TX 75254
|
N/A
|
N/A
|
18.81%
|
Record
|
BNP
Paribas Securities Corp.
555 Croton Road
King of Prussia, PA 19406
|
N/A
|
N/A
|
10.12%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
5.56%
|
Record
|
Direxion Daily CSI 300 China A Share Bear
1X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
J.P.
Morgan Chase Bank
14201 Dallas Parkway
Dallas, TX 75254
|
JPMorgan
Chase & Co.
|
DE
|
28.09%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
9.70%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
9.37%
|
Record
|
HSBC
Bank USA, N.A.
452 5th Avenue
New York, NY 10018
|
N/A
|
N/A
|
7.42%
|
Record
|
Interactive
Brokers
8 Greenwich Office Park 2nd Floor
Greenwich, CT 06831
|
N/A
|
N/A
|
6.96%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
6.34%
|
Record
|
In addition,
as of February 1, 2019, the Trustees and Officers as a group owned less than 1% of the outstanding shares of each operational Fund.
Rafferty, 1301 Avenue of the
Americas (6th Avenue), 28th Floor, New York, New York 10019, provides investment advice to the Funds. Rafferty was organized as a New York limited liability company in June 1997. Lawrence C. Rafferty controls Rafferty through his ownership in
Rafferty Holdings, LLC and Daniel D. O'Neill controls Rafferty through his ownership in Minakian Partners, LLC.
Under an Investment Advisory
Agreement (“Advisory Agreement”) between Rafferty and the Trust, on behalf of each Fund dated August 13, 2008, Rafferty provides a continuous investment program for each Fund’s assets in accordance with its investment objectives,
policies and limitations, and oversees the day-to-day operations of each Fund, subject to the supervision of the Trustees. Rafferty bears all costs associated with providing these advisory services and the expenses of the Trustees who are affiliated
with or interested persons of Rafferty. The Trust bears all other expenses that are not assumed by Rafferty as described in the Prospectus. The Trust also is liable for nonrecurring expenses as may arise, including litigation to which a Fund may be
a party. The Trust also may have an obligation to indemnify its Trustees and officers with respect to any such litigation.
The Advisory
Agreement was initially approved by the Trustees (including all Independent Trustees) and Rafferty, as sole shareholder of each Fund in compliance with the 1940 Act. After an initial approval period of two years, the Advisory Agreement is renewable
at least annually with respect to each Fund, so long as its continuance is approved (1) by the vote, cast in person at a meeting called for that purpose, of a majority of the Independent Trustees of the Trust; and (2) by the
majority vote of either the full Board or the vote of a
majority of the outstanding shares of a Fund. The Advisory Agreement automatically terminates on assignment and is terminable upon a 60-day written notice either by the Trust or Rafferty.
Pursuant to the Advisory Agreement, each
Fund pays Rafferty the following fee at an annualized rate based on a percentage of each Fund's average daily net assets:
Fund
|
Advisory
Fee Charged
|
Direxion
Daily S&P 500
®
Bear 1X Shares
|
0.35%
|
Direxion
Daily Small Cap Bear 1X Shares
|
0.35%
|
Direxion
Daily 7-10 Year Treasury Bear 1X Shares
|
0.35%
|
Direxion
Daily 20+ Year Treasury Bear 1X Shares
|
0.35%
|
Direxion
Daily Municipal Bond Taxable Bear 1X Shares
|
0.35%
|
Direxion
Daily Total Bond Market Bear 1X Shares
|
0.35%
|
Direxion
Daily CSI 300 China A Share Bear 1X Shares
|
0.60%
|
Direxion
Daily MSCI China A Bear 1X Shares
|
0.60%
|
Direxion
Daily CSI China Internet Index Bear 1X Shares
|
0.60%
|
Direxion
Daily MSCI Real Estate Bear 1X Shares
|
0.35%
|
The tables
below show the advisory fees incurred by each of the following operational Funds and the amount of fees waived and/or reimbursed by Rafferty for the fiscal years ended October 31.
Direxion
Daily S&P 500 Bear 1X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$76,619
|
$49,159
|
$27,460
|
Year
Ended October 31, 2017
|
$133,586
|
$57,082
|
$76,504
|
June
8, 2016
(2)
- October 31, 2016
|
$58,008
|
$94,802
|
$(36,794)
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $4,293.
|
(2)
|
Commencement of Operations
|
Direxion
Daily 7-10 Year Treasury Bear 1X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$5,057
|
$46,671
|
$(41,614)
|
Year
Ended October 31, 2017
|
$4,978
|
$54,053
|
$(49,075)
|
Year
Ended October 31, 2016
|
$6,257
|
$49,772
|
$(43,515)
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $2,489.
|
Direxion
Daily 20+ Year Treasury Bear 1X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$18,569
|
$47,120
|
$(28,551)
|
Year
Ended October 31, 2017
|
$19,327
|
$55,559
|
$(36,232)
|
Year
Ended October 31, 2016
|
$57,397
|
$41,780
|
$15,617
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $2,142.
|
Direxion
Daily Total Bond Market Bear 1X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$11,129
|
$52,256
|
$(41,127)
|
Year
Ended October 31, 2017
|
$11,035
|
$59,244
|
$(48,209)
|
Year
Ended October 31, 2016
|
$14,069
|
$55,654
|
$(41,585)
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $2,318.
|
Direxion
Daily CSI 300 China A Share Bear 1X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$635,295
|
$
-
|
$635,295
|
Year
Ended October 31, 2017
(2)
|
$481,232
|
$
9,243
|
$471,989
|
Year
Ended October 31, 2016
(3)
|
$688,154
|
$34,893
|
$653,261
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $39,256.
|
(2)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $13,169.
|
(3)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $2,684.
|
Pursuant to a separate Management
Services Agreement, Rafferty performs certain administrative services on behalf of the Funds, such as negotiating, coordinating and implementing the Trust’s contractual obligations with the Funds' service providers; monitoring, overseeing and
reviewing the performance of such service providers to ensure adherence to applicable contractual obligations; and preparing or coordinating reports and presentations to the Board of Trustees with respect to such service providers as requested or as
deemed necessary; and other services that are described in the Management Services Agreement. For these services, the Trust pays to Rafferty a fee at the annual rate of 0.026% on the first $10 billion of the aggregate average daily net assets of the
Funds in the Trust and 0.024% on the aggregate net assets above $10 billion. This Management Services Fee may be waived under the Operating Expense Limitation Agreement that Rafferty has entered into with each Fund. This arrangement may be
terminated at any time by the Board.
Each Fund is responsible for its own
operating expenses. Rafferty has entered into an Operating Expense Limitation Agreement with each Fund. Under this Operating Expense Limitation Agreement, Rafferty has contractually agreed to cap all or a portion of its advisory and management
services fees and/or reimburse each Fund for Other Expenses (excluding, as applicable, among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses,
brokerage commissions and extraordinary expenses) through September 1, 2020 to the extent that each Fund’s Total Annual Fund Operating Expenses exceed the amount listed in the table below of each Fund’s average daily net assets. Any
expense waiver or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the
time. This agreement may be terminated or revised at any time at the discretion of the Board upon notice to the Adviser and without the approval of Fund shareholders.
Fund
|
Expense
Cap
|
Direxion
Daily S&P 500
®
Bear 1X Shares
|
0.45%
|
Direxion
Daily Small Cap Bear 1X Shares
|
0.45%
|
Direxion
Daily 7-10 Year Treasury Bear 1X Shares
|
0.45%
|
Direxion
Daily 20+ Year Treasury Bear 1X Shares
|
0.45%
|
Direxion
Daily Municipal Bond Taxable Bear 1X Shares
|
0.45%
|
Direxion
Daily Total Bond Market Bear 1X Shares
|
0.45%
|
Direxion
Daily CSI 300 China A Share Bear 1X Shares
|
0.80%
|
Direxion
Daily MSCI China A Bear 1X Shares
|
0.80%
|
Direxion
Daily CSI China Internet Index Bear 1X Shares
|
0.80%
|
Direxion
Daily MSCI Real Estate Bear 1X Shares
|
0.45%
|
Rafferty
shall not be liable to the Trust or any Fund for anything done or omitted by it, except acts or omissions involving willful misfeasance, bad faith, negligence or reckless disregard of the duties imposed upon it by its agreement with the Trust or for
any losses that may be sustained in the purchase, holding or sale of any security.
Pursuant to Section 17(j) of the 1940
Act and Rule 17j-1 thereunder, the Trust, Rafferty and the Funds' distributor have adopted Codes of Ethics. These codes permit portfolio managers and other access persons of a Fund to invest in securities that may be owned by a Fund, subject to
certain restrictions.
Paul Brigandi and
Tony Ng are jointly and primarily responsible for the day-to-day management of the Funds. An investment trading team of Rafferty employees assists Mr. Brigandi and Mr. Ng in the day-to-day management of the Funds subject to their primary
responsibility and oversight. The Portfolio Managers work with the investment trading team to decide the target allocation of each Fund’s investments and on a day-to-day basis, an individual portfolio trader executes transactions for the Funds
consistent with the target allocation. The members of the investment trading team rotate periodically among the various series of the Trust, including the Funds, so that no single individual is assigned to a specific Fund for extended periods of
time.
In addition to the Funds,
Mr. Brigandi and Mr. Ng manage the following other accounts as of October 31, 2018:
Accounts
|
Total
Number
of Accounts
|
Total
Assets
(In Billions)
|
Total
Number of
Accounts with
Performance
Based Fees
|
Total
Assets
of Accounts
with Performance
Based Fees
|
Registered
Investment Companies
|
80
|
$12.5
|
0
|
$0
|
Other
Pooled Investment Vehicles
|
0
|
$
0
|
0
|
$0
|
Other
Accounts
|
0
|
$
0
|
0
|
$0
|
Rafferty manages
no other accounts with investment objectives similar to those of the Funds. In addition, two or more funds advised by Rafferty may invest in the same securities but the nature of each investment (long or short) may be opposite and in different
proportions. Generally, due to the nature of the various Funds advised by Rafferty, if a Fund with a leveraged investment objective increases in value, the performance of a Fund with an inverse or an inverse leveraged investment objective will
decrease in value and vice versa. Rafferty ordinarily executes transactions for a Fund “market-on-close,” in which funds purchasing or selling the same security receive the same closing price.
Rafferty has not identified any
additional material conflicts between a Fund and other accounts managed by the investment team. However, other actual or apparent conflicts of interest may arise in connection with the day-to-day management of a Fund and other accounts. The
management of a Fund and other accounts may result in unequal time and attention being devoted to a Fund and other accounts. Rafferty’s management fees for the services it provides to other accounts varies and may be higher or lower than the
advisory fees it receives from a Fund. This could create potential conflicts of interest in which the portfolio manager may appear to favor one investment vehicle over another resulting in an account paying higher fees or one investment vehicle out
performing another.
The
investment team’s compensation is paid by Rafferty. Their compensation primarily consists of a fixed base salary and a bonus. The investment team’s salary is reviewed annually and increases are determined by factors such as performance
and seniority. Bonuses are determined by the individual performance of an employee including factors such as attention to detail, process, and efficiency, and are impacted by the overall performance of the firm. The investment team’s salary
and bonus are not based on a Fund’s performance and as a result, no benchmarks are used. Along with all other employees of Rafferty, the investment team may participate in the firm’s 401(k) retirement plan where Rafferty may make
matching contributions up to a defined percentage of their salary.
Mr. Brigandi and Mr.
Ng did not own any shares of the Funds as of October 31, 2018.
Proxy Voting Policies and Procedures
The Board has
adopted policies and procedures with respect to voting proxies (the “Proxy Policy”) related to portfolio securities of the Funds. Pursuant to these policies and procedures the Board of the Trust has delegated responsibility for voting
such proxies to the Adviser, subject to the Board’s continuing oversight.
The Proxy Policy is intended to
protect shareholder interests and comply with applicable state and federal corporate and securities laws. It applies to any voting rights with respect to securities held in accounts of the Funds. To assist the Adviser in its responsibility for
voting proxies and administering the overall proxy voting process, the Adviser has retained Institutional Shareholder Services (“ISS”) as an expert in the proxy voting and corporate governance area. ISS is a subsidiary of Vestar Capital
Partners VI, L.P.; a leading U.S. middle market private equity firm. The services provided by ISS include in-depth research, global issuer analysis, and voting recommendations as well as vote execution, reporting and record keeping. ISS issues
monthly reports which are reviewed by the Adviser to assure proxies are being voted properly. The Adviser and ISS also perform checks on a quarterly basis to match the voting activity with available shareholder meeting information. ISS’
management meets on a regular basis to discuss its approach to new developments and amendments to existing proxy voting guidelines (the “Guidelines”). Information on such developments and amendments are then provided to the
Adviser.
The Guidelines are
maintained and implemented by ISS and are an extensive list of common proxy voting issues with recommended voting actions based on the overall goal of achieving maximum shareholder value and protection of shareholder interests and rights. Generally,
proxies are voted in accordance with the voting recommendations contained in the Guidelines. If necessary, the Adviser will be consulted by ISS on non-routine issues. Proxy issues and factors considered when resolving proxy issues in the Guidelines
include, but are not limited to:
•
|
Election of Directors
–
considering all factors such as director qualifications, term of office and age limits.
|
•
|
Proxy Contests
–
considering factors such as voting nominees in contested elections and reimbursement of expenses.
|
•
|
Election of Auditors
–
considering factors such as independence and reputation of the auditing firm.
|
•
|
Proxy Contest Defenses
–
considering factors such as board structure and cumulative voting.
|
•
|
Tender Offer Defenses
–
considering factors such as poison pills (stock purchase rights plans) and fair price provisions.
|
•
|
Miscellaneous Governance
Issues
–
considering factors such as confidential voting and equal access.
|
•
|
Capital Structure
–
considering factors such as common stock authorization and stock distributions.
|
•
|
Executive and Director
Compensation
–
considering factors such as performance goals and employee stock purchase plans.
|
•
|
State of Incorporation
–
considering factors such as state takeover statutes and voting on reincorporation proposals.
|
•
|
Mergers and Corporate
Restructuring
–
considering factors such as spin-offs and asset sales.
|
•
|
Mutual Fund Proxy Voting
–
considering factors such as election of directors and proxy contests.
|
•
|
Social
and Corporate Responsibility Issues
–
considering factors such as social, environmental, and labor issues.
|
A full description of
the Guidelines and voting policy is maintain by the Adviser, and a complete copy of the Guidelines is available without charge, upon request by calling the Adviser at 866-476-7523.
Conflicts
of Interest
From time
to time, proxy issues may pose a material conflict of interest between the Funds' shareholders and the Adviser, the Distributor or any affiliates thereof. Due to the limited nature of the Adviser’s activities
(
e.g.
, no underwriting business, no publicly-traded affiliates, no investment banking activities, and no research recommendations), conflicts of interest are likely to be infrequent. Nevertheless, it shall be
the duty of the Adviser to monitor potential conflicts of interest. In the event a conflict of interest arises, the Adviser will direct ISS to use its independent judgment to vote affected proxies in accordance with approved guidelines.
Proxy
Voting Recordkeeping
The Adviser, with the assistance of
ISS, maintains for a period of at least five years, a record of each proxy statement received and materials that were considered when the proxy was voted during the calendar year. Information on how the Funds voted proxies relating to portfolio
securities for the 12-month (or shorter) period ended June 30 is available without charge, upon request, by calling the Adviser at 866-476-7523 or on the SEC’s website at
http://www.sec.gov
.
Fund Administrator, Fund Accounting Agent, Transfer
Agent and Custodian
U.S. Bancorp Fund Services, LLC,
615 East Michigan Street, Milwaukee, Wisconsin 53202, serves as the Funds' administrator. The Bank of New York Mellon, 101 Barclay Street, New York, New York 10286, serves as the Funds' transfer agent, and custodian. Rafferty also performs certain
administrative services for the Funds.
Pursuant to a Fund Administration
Servicing Agreement between the Trust and USBFS, USBFS provides the Trust with administrative and management services (other than investment advisory services). As compensation for these services, the Trust pays USBFS a fee based on the
Trust’s total average daily net assets. USBFS also is entitled to certain out-of-pocket expenses. The amount of fees paid by the Trust to USBFS pursuant to the Fund Administration Servicing Agreement for the fiscal years indicated is set forth
in the table below.
|
Fees
paid to the Administrator
|
Year
Ended October 31, 2018
|
$2,046,515
|
Year
Ended October 31, 2017
|
$2,402,024
|
Year
Ended October 31, 2016
|
$2,302,972
|
Pursuant to a Fund Accounting
Agreement between the Trust and BNYM, BNYM provides the Trust with accounting services, including portfolio accounting services, tax accounting services and furnishing financial reports. As compensation for these accounting services, the Trust pays
BNYM a fee based on the Trust’s total average daily net assets and a minimum annual per fund fee, subject to certain negotiated fee waivers. BNYM also is entitled to certain out-of-pocket expenses for the services mentioned above, including
pricing expenses. The amount of fees paid by the Trust pursuant to the Fund Accounting Agreement for the fiscal years indicated is set forth in the table below.
|
Fees
paid to the Fund Accounting Agent
|
Year
Ended October 31, 2018
|
$1,876,840
|
Year
Ended October 31, 2017
|
$1,629,992
|
Year
Ended October 31, 2016
|
$1,651,529
|
Pursuant to a Custody Agreement, BNYM
serves as the custodian of a Fund’s assets. The custodian holds and administers the assets in a Fund’s portfolios. Pursuant to the Custody Agreement, the custodian receives an annual fee based on the Trust’s total average daily net
assets and certain settlement charges. The custodian also is entitled to certain out-of-pocket expenses. The amount of fees paid by the Trust pursuant to the Custody Agreement for the fiscal years indicated is set forth in the table below.
|
Fees
paid to the Custodian
|
Year
Ended October 31, 2018
|
$1,132,612
|
Year
Ended October 31, 2017
|
$1,016,661
|
Year
Ended October 31, 2016
|
$1,057,934
|
Pursuant to a Transfer Agency and
Service Agreement between the Trust and BNYM, BNYM provides the Trust with transfer agency services, which includes Creation and Redemption Unit order processing. As compensation for these transfer agency services, the Trust pays BNYM a fee based on
the Trust’s total average daily net assets and a minimum annual complex fee.
BNYM also is entitled to certain out-of-pocket
expenses for the services mentioned above. The amount of fees paid by the Trust pursuant to the Transfer Agency and Service Agreement for the fiscal years indicated is set forth in the table below.
|
Fees
paid to the Transfer Agent
|
Year
Ended October 31, 2018
|
$1,171,567
|
Year
Ended October 31, 2017
|
$1,116,750
|
Year
Ended October 31, 2016
|
$1,136,219
|
Effective August 25, 2017, each Fund
has entered into a Securities Lending Authorization Agreement with BNYM (the “Securities Lending Agreement”) whereby BNYM will be the Lending Agent for each Fund. Each Fund retains a portion of the securities lending income and remits
the remaining portion to BNYM as compensation for its services as securities lending agent. Securities lending income is generally equal to the net income earned from the reinvestment of cash collateral after payment of cash collateral fees, and any
fees or other payments from borrowers of securities.
BNYM acts as agent to the Trust to
lend available securities with any person on its list of approved borrowers. BNYM determines whether a loan shall be made and negotiates and establishes the terms and conditions of the loan with the borrower. BNYM ensures that all substitute
interest, dividends, and other distributions paid with respect to loan securities is credited to a Fund’s relevant account on the date such amounts are delivered by the borrower to BNYM. BNYM receives and holds, on a Fund’s behalf,
collateral from borrowers to secure obligations of borrowers with respect to any loan of available securities. BNYM marks loaned securities and collateral to their market value each business day based upon the market value of the collateral and
loaned securities at the close of business employing the most recently available pricing information and receives and delivers collateral in order to maintain the value of the collateral at no less than 102% of the market value of the loaned
securities. At the termination of the loan, BNYM returns the collateral to the borrower upon the return of the loaned securities to BNYM. BNYM invests cash collateral in accordance with the Securities Lending Agreement. BNYM maintains such records
as are reasonably necessary to account for loans that are made and the income derived therefrom and makes available to a Fund a monthly statement describing the loans made, and the income derived from the loans, during the period. Each Fund shall
receive the net securities lending revenue based on the securities lent from its holdings. A Fund may also pay custodial fees and other expenses associated with a loan.
As of October 31, 2018, the Funds had no
securities lending transactions.
Foreside Fund
Services, LLC, located at 3 Canal Plaza, Suite 100, Portland, Maine 04101, serves as the distributor (“Distributor”) in connection with the continuous offering of each Fund’s shares. The Distributor is a broker-dealer registered
with the SEC under the Securities Exchange Act of 1934 and a member of the Financial Industry Regulatory Authority. The Trust offers Shares of the Funds for sale through the Distributor in Creation Units, as described below. The Distributor will not
sell or redeem Shares in quantities less than Creation Units. The Distributor will deliver a Prospectus to persons purchasing Creation Units and will maintain records of Creation Unit orders placed and confirmations furnished by it. Pursuant to a
written agreement, the Adviser pays the Distributor for distribution-related services. For the fiscal year ended October 31, 2018, the Distributor received $1,046,468 as compensation from Rafferty for distribution services provided to the Trust,
including the operational Funds. For the fiscal year ended October 31, 2018, Foreside did not receive any underwriting commission or discounts, compensation on redemptions and repurchases, or brokerage commissions from the Funds.
The Adviser may pay certain
broker-dealers, banks and other financial intermediaries for participating in activities that are designed to make registered representatives and other professionals more knowledgeable about exchange traded products, including each Fund, or for
other activities such as participating in marketing activities and presentations, educational training programs, conferences, the development of technology platforms and reporting systems. The Adviser had arrangements to make payments based on an
annual fee for its services, as well as based on the average daily assets held by Schwab customers in certain funds managed by the Adviser, for services other than for the educational programs and marketing activities described above, only to
Charles Schwab & Co., Inc. (“Schwab”). Pursuant to the arrangement with Schwab, Schwab has agreed to promote select funds managed by the Adviser, to Schwab’s customers and not to charge certain of its customers any commissions
when those customers purchase or sell shares of those funds. Payments to a broker-dealer or intermediary may create potential conflicts of interest between the broker-dealer or intermediary and its clients. These amounts, which may be significant,
are paid by the Adviser from its own resources and not from the assets of funds managed by the Adviser. Although a portion of the Adviser’s revenue comes directly or indirectly in part from fees paid by each Fund, other ETFs advised by the
Adviser or other exchange-traded products, these payments do not increase the price paid by investors for the purchase of shares of, or the cost of owning, a Fund or other funds managed by the Adviser.
Rule 12b-1 under the 1940 Act, as
amended, (the “Rule”) provides that an investment company may bear expenses of distributing its shares only pursuant to a plan adopted in accordance with the Rule. The Trustees have adopted a Rule 12b-1 Distribution Plan (“Rule
12b-1 Plan”) pursuant to which each Fund may pay certain expenses incurred in the distribution of its shares and the servicing and maintenance of existing shareholder accounts. The Distributor, as the Funds' principal underwriter, and Rafferty
may have a direct or indirect financial interest in the Rule 12b-1 Plan or any related agreement. Pursuant to the Rule 12b-1 Plan, each Fund may pay a fee of up to 0.25% of the Fund’s average daily net assets. No Rule 12b-1 fee is currently
being charged to the Funds.
The
Rule 12b-1 Plan was approved by the Board, including a majority of the Independent Trustees of the Funds. In approving the Rule 12b-1 Plan, the Trustees determined that there is a reasonable likelihood that the Rule 12b-1 Plan will benefit each Fund
and its shareholders. The Trustees will review quarterly and annually a written report provided by the Treasurer of the amounts expended under the Rule 12b-1 Plan and the purpose for which such expenditures were made.
The Rule 12b-1 Plan permits payments
to be made by each Fund to the Distributor or other third parties for expenditures incurred in connection with the distribution of Fund shares to investors and the provision of certain shareholder services. The Distributor or other third parties are
authorized to engage in advertising, the preparation and distribution of sales literature and other promotional activities on behalf of each Fund. In addition, the Rule 12b-1 Plan authorizes payments by each Fund to the Distributor or other third
parties for the cost related to selling or servicing efforts, preparing, printing and distributing Fund prospectuses, statements of additional information, and shareholder reports to investors.
Independent Registered Public Accounting Firm
Ernst & Young
LLP (“EY”), 220 South Sixth Street, Suite 1400, Minneapolis, Minnesota 55402, is the independent registered public accounting firm for the Trust. The Financial Statements of the Funds for the fiscal year ended October 31, 2018 (that had
commenced operations by that date), audited by EY, have been included in reliance on their report given on their authority as experts in accounting and auditing.
The Trust has selected K&L Gates
LLP, 1601 K Street, N.W., Washington, DC 20006, as its legal counsel.
Determination of Net Asset Value
A fund’s share price is
known as its NAV. Each Fund’s share price (other than the Fixed Income Funds) is calculated as of the close of regular trading on the NYSE, usually 4:00 p.m. Eastern Time (“Valuation Time”), each day the NYSE is open for business
(“Business Day”). The NYSE is open for business Monday through Friday, except in observation of the following holidays: New Year’s Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. In addition to these holidays, the Bond Market is not open on Columbus Day and Veterans’ Day. The NYSE may close early on the business day before each of these holidays and on the day after
Thanksgiving Day. NYSE holiday schedules are subject to change without notice.
Each Fixed Income Fund also
calculates its NAV as of the close of regular trading on the NYSE, usually 4:00 p.m. Eastern Time each Business Day. However, on days that the bond markets close all day, which currently includes the following holidays: New Year's Day, Martin Luther
King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day (a “Bond Market Holiday”), the Fixed Income Funds do not calculate their NAVs, even if
the NYSE is open for business. On such days, orders for purchase or redemption will receive the NAV next calculated on the following Business Day that is not a Bond Market Holiday. Similarly, on days that the bond markets close early but the NYSE
does not (usually at 2 p.m. Eastern Time, and which currently include the Friday before Memorial Day and New Year’s Eve), the Fixed Income Funds treat the portion of the day that the bond markets are closed as a Bond Market Holiday and
calculates their NAVs as of the recommended closing time for the bond markets, which may be before 4:00 p.m. Eastern Time, subject to the discretion of the Adviser. In such instances, orders for purchase or redemption that are received prior to the
close of bond markets will receive the NAV calculated at the time of the bond markets closure, whereas orders for purchase or redemption that are received thereafter will receive the NAV next calculated on the following Business Day that is not a
Bond Market Holiday.
If the
exchange or market on which a Fund’s investments are primarily traded closes early, the NAV may be calculated prior to its normal calculation time. Creation/redemption transaction order time cutoffs would also be accelerated. The value of a
Fund’s assets that trade in markets outside the United States or in currencies other than the U.S. Dollar may fluctuate when foreign markets are open but a Fund is not open for business.
A security listed
or traded on an exchange, domestic or foreign, is valued at its last sales price or settlement price on the principal exchange on which it is traded prior to the time when assets are valued. If no sale is reported at that time, the mean of the last
bid and asked prices is used. Securities primarily traded on the NASDAQ Global Market
®
(“NASDAQ
®
”) for which market quotations are readily available shall be valued using the NASDAQ
®
Official Closing Price (“NOCP”) provided by NASDAQ
®
each Business Day. The NOCP is the most recently reported price as of 4:00:02 p.m. Eastern Time, unless that price is outside the range of the
“inside” bid and asked prices’ in that case, NASDAQ
®
will adjust the price to equal the inside bid or asked price, whichever is
closer. If the NOCP is not available, such securities shall be valued at the last sale price on the day of valuation, or if there has been no sale on such day, at the mean between the bid and asked prices.
For purposes of determining NAV per
share of a Fund, options and futures contracts are valued based on market quotations, the last sales or settlement price of the exchange on which an asset trades. The value of a futures contract equals the unrealized gain or loss on the contract
that is determined by marking the contract to the last sale price for a like contract acquired on the day on which the futures contract is being valued. The value of options on futures contracts is determined based upon the last sale price for a
like option acquired on the day on which the option is being valued. A last sale price may not be used for the foregoing purposes if the market makes a limited move with respect to a particular instrument.
For valuation purposes, quotations of
foreign securities or other assets denominated in foreign currencies are translated to U.S. Dollar equivalents using the net foreign exchange rate in effect at the close of the stock exchange in the country where the security is issued. Short-term
debt instruments having a maturity of 60 days or less are valued at amortized cost, which approximates market value. If the Board determines that the amortized cost method does not represent the fair value of the short-term debt instrument, the
investment will be valued at fair value as determined by procedures as adopted by the Board. U.S. government securities are valued at the mean between the closing bid and asked price provided by an independent third party pricing service
(“Pricing Service”).
OTC securities held by a Fund will be
valued at the last sales price or, if no sales price is reported, the mean of the last bid and asked price is used. The portfolio securities of a Fund that are listed on national exchanges are valued at the last sales price of such securities; if no
sales price is reported, the mean of the last bid and asked price is used.
Swaps are valued based upon prices from
third party vendor models or quotations from market makers to the extent available.
Dividend income and other distributions
are recorded on the ex-distribution date.
Illiquid securities, securities for
which reliable quotations or pricing services are not readily available, all other assets not valued in accordance with the foregoing principles or for which pricing information is deemed unreliable, or to the Adviser’s knowledge, does not
reflect a significant event occurring in the market, the security or asset will be valued at their respective fair value as determined in good faith by, or under procedures established by, the Trustees, which procedures may include the delegation of
certain responsibilities regarding valuation to Rafferty or the officers of the Trust. The officers of the Trust report, as necessary, to the Trustees regarding portfolio valuation determinations. The Trustees, from time to time, will review these
methods of valuation and will recommend changes that may be necessary to assure that the investments of a Fund are valued at fair value.
Additional Information Concerning Shares
Organization and Description of
Shares of Beneficial Interest
The Trust is a Delaware statutory
trust and registered investment company. The Trust was organized on April 23, 2008, and has authorized capital of unlimited Shares of beneficial interest of no par value which may be issued in more than one class or series. Currently, the Trust
consists of multiple separately managed series. The Board may designate additional series of beneficial interest and classify Shares of a particular series into one or more classes of that series.
All Shares of the Trust are freely
transferable. The Shares do not have preemptive rights or cumulative voting rights, and none of the Shares have any preference to conversion, exchange, dividends, retirements, liquidation, redemption, or any other feature. Shares have equal voting
rights, except that, in a matter affecting a particular series or class of Shares, only Shares of that series of class may be entitled to vote on the matter. Trust shareholders are entitled to require the Trust to redeem Creation Units of their
Shares. The Trust Instrument confers upon the Broad of Trustees the power, by resolution, to alter the number of Shares constituting a Creation Unit or to specify that Shares of the Trust may be individually redeemable. The Trust reserves the right
to adjust the stock prices of Shares of the Trust to maintain convenient trading ranges for investors. Any such adjustments would be accomplished through stock splits or reverse stock splits which would have no effect on the net assets of the
applicable Fund.
Under Delaware
law, the Trust is not required to hold an annual shareholders meeting if the 1940 Act does not require such a meeting. Generally, there will not be annual meetings of Trust shareholders. Trust shareholders may remove Trustees from office by votes
cast at a meeting of Trust shareholders or by written consent. If requested by shareholders of at least 10% of the outstanding Shares of the Trust, the Trust will call a meeting of a Fund’s shareholders for the purpose of voting upon the
question of removal of a Trustee of the Trust and will assist in communications with other Trust shareholders.
The Trust Instrument disclaims
liability of the shareholders of the officers of the Trust for acts or obligations of the Trust which are binding only on the assets and property of the Trust. The Trust Instrument provides for indemnification from the Trust’s property for all
loss and expense of any Fund shareholder held personally liable for the obligations of the Trust. The risk of a Trust shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Funds would not
be able to meet the Trust’s obligations and this risk, thus, should be considered remote.
If a Fund does not grow to a size to
permit it to be economically viable, the Fund may cease operations. In such an event, investors may be required to liquidate or transfer their investments at an inopportune time.
Book Entry Only System
The Depository Trust Company
(“DTC”) acts as securities depositary for the Shares. Shares of each Fund are represented by global securities registered in the name of DTC or its nominee and deposited with, or on behalf of, DTC. Except as provided below, certificates
will not be issued for Shares.
DTC has advised the Trust as follows:
it is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing
agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities of its participants (“DTC Participants”) and to facilitate the clearance and settlement of securities transactions
among the DTC Participants in such securities through electronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the NYSE, the AMEX and the
Financial Industry Regulatory Authority. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or
indirectly (“Indirect Participants”). DTC agrees with and represents to DTC Participants that it will administer its book-entry system in accordance with its rules and by-laws and requirements of law. Beneficial ownership of Shares is
limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in Shares (owners of such beneficial interests are referred to herein as
“Beneficial owners”) is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and
Beneficial owners that are not DTC Participants). Beneficial owners will receive from or through the DTC Participant a written confirmation relating to their purchase of Shares. The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such laws may impair the ability of certain investors to acquire beneficial interests in Shares.
Beneficial owners of Shares are not
entitled to have Shares registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive form and are not considered the registered holder thereof. Accordingly, each Beneficial owner must rely on
the procedures of DTC, the DTC Participant and any Indirect Participant through which such Beneficial owner holds its interests, to exercise any rights of a holder of Shares. The Trust understands that under existing industry practice, in the event
the Trust requests any action of holders of Shares, or a Beneficial owner desires to take any action that DTC, as the record owner of all outstanding Shares, is entitled to take, DTC would authorize the DTC Participants to take such action and that
the DTC Participants would authorize the Indirect Participants and Beneficial owners acting through such DTC Participants to take such action and would otherwise act upon the instructions of Beneficial owners owning through them. As described above,
the Trust recognizes DTC or its nominee as the owner of all Shares for all purposes. Conveyance of all notices, statements and other communications to Beneficial owners is effected as follows. Pursuant to the Depositary Agreement between the Trust
and DTC, DTC is required to make available to the Trust upon request and for a fee to be charged to the Trust a listing of Share holdings of each DTC Participant. The Trust shall inquire of each such DTC Participant as to the number of Beneficial
owners holding Shares, directly or indirectly, through such DTC Participant. The Trust shall provide each such DTC Participant with copies of such notice, statement or other communication, in such form, number and at such place as such DTC
Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or indirectly, to such Beneficial owners. In addition, the Trust shall pay to each such DTC Participant a
fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements.
Distributions of Shares shall be
made to DTC or its nominee, Cede & Co., as the registered holder of all Shares. DTC or its nominee, upon receipt of any such distributions, shall credit immediately DTC Participants’ accounts with payments in amounts proportionate to their
respective beneficial interests in Shares as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial owners of Shares held through such DTC Participants will be governed by standing
instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in a “street name,” and will be the responsibility of such DTC Participants. The Trust has no
responsibility or liability for any aspects of the records relating to or notices to Beneficial owners, or payments made on account of beneficial ownership interests in such Shares, or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests or for any other aspect of the relationship between DTC and the DTC Participants
or the relationship between such DTC Participants and
the Indirect Participants and Beneficial owners owning through such DTC Participants.
DTC may determine to discontinue
providing its service with respect to Shares at any time by giving reasonable notice to the Trust and discharging its responsibilities with respect thereto under applicable law. Under such circumstances, the Trust shall take action either to find a
replacement for DTC to perform its functions at a comparable cost or, if such a replacement is unavailable, to issue and deliver printed certificates representing ownership of Shares, unless the Trust makes other arrangements with respect thereto
satisfactory to the Exchange. The Trust will not make the DTC book-entry Dividend Reinvestment Service available for use by Beneficial Owners for reinvestment of their cash proceeds but certain brokers may make a dividend reinvestment service
available to their clients. Brokers offering such services may require investors to adhere to specific procedures and timetables in order to participate. Investors interested in such a service should contact their broker for availability and other
necessary details.
Purchases and Redemptions
The Trust issues and redeems
Shares of each Fund only in aggregations of Creation Units. The number of Shares of a Fund that constitute a Creation Unit for each Fund and the value of such Creation Unit as of each Fund’s inception were 50,000 and $2,000,000, respectively,
for the Funds.
See
“Purchase and Issuance of Shares in Creation Units” and “Redemption of Creation Units” below. The Board reserves the right to declare a split or a consolidation in the number of Shares outstanding of any Fund, and may make a
corresponding change in the number of Shares constituting a Creation Unit, in the event that the per Shares price in the secondary market rises (or declines) to an amount that falls outside the range deemed desirable by the Board for any other
reason.
Purchase and Issuance of
Creation Units
The Trust issues
and sells Shares only in Creation Units on a continuous basis through the Distributor, without a sales load, at their NAV next determined after receipt, on any Business Day (as defined above), of an order in proper form.
Creation Units also will be sold only
for cash in an amount equal to the NAV of the Shares being purchased, as next determined after a receipt of a request in proper form plus the transaction fee described below (“Cash Purchase Amount”).
Creation Units of Shares may be
purchased only by or through an Authorized Participant. Such Authorized Participant will agree pursuant to the terms of such Authorized Participant Agreement on behalf of itself or any investor on whose behalf it will act, as the case may be, to
certain conditions, including that an Authorized Participant will make available an amount of cash sufficient to pay the Cash Purchase Amount. Investors who are not Authorized Participants must make appropriate arrangements with an Authorized
Participant, which may require the investor to enter into an agreement with such Authorized Participant. Investors should be aware that their particular broker may not be a DTC Participant or may not have executed an Authorized Participant
Agreement, and that therefore orders to purchase Creation Units of Shares may have to be placed by the investor’s broker through an Authorized Participant. As a result, purchase orders placed through an Authorized Participant may result in
additional charges to such investor.
A purchase order must be received in
good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent’s automated system, telephone, facsimile or other means permitted under the Authorized Participant Agreement, in order to
receive that day's NAV per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day.
An Authorized Participant may place
an order to purchase (or redeem) Creation Units (i) through the Continuous Net Settlement clearing processes of NSCC as such processes have been enhanced to effect purchases (and redemptions) of Creation Units, such processes being referred to
herein as the “Enhanced Clearing Process,” or (ii) outside the Enhanced Clearing Process, being referred to herein as the “Manual Clearing Process”.
Purchases through the Enhanced Clearing
Process
To purchase or redeem
through the Enhanced Clearing Process, an Authorized Participant must be a member of NSCC that is eligible to use the Continuous Net Settlement system. For purchase orders placed through the Enhanced Clearing Process, in the Authorized Participant
Agreement, the Participant authorizes the transfer agent to transmit to the NSCC, on behalf of an Authorized Participant, such trade instructions as are necessary to effect the Authorized Participant’s purchase order. Pursuant to such trade
instructions to the NSCC, the Authorized Participant agrees to deliver the Cash Purchase Amount and such additional information as may be required by the transfer agent or the Distributor.
Purchases through the Manual Clearing
Process
An Authorized
Participant that wishes to place an order to purchase Creation Units outside the Enhanced Clearing Process must state that it is not using the Enhanced Clearing Process and that the purchase instead will be effected through a transfer of cash either
through the Federal Reserve System or directly through DTC. Purchases (and redemptions) of Creation Units of a Fund settled outside the Enhanced Clearing Process will be subject to a higher Transaction Fee than those settled
through the Enhanced Clearing Process. Purchase
orders effected outside the Enhanced Clearing Process are likely to require transmittal by the Authorized Participant earlier on the Transmittal Date than orders effected using the Enhanced Clearing Process. Those persons placing orders outside the
Enhanced Clearing Process should ascertain the deadlines applicable to DTC and the Federal Reserve System by contacting the operations department of the broker or depository institution effectuating such transfer of the Portfolio Deposit.
Rejection of Purchase Orders
The Trust reserves the absolute
right to reject a purchase order transmitted to it by the Distributor in respect of each Fund if (a) the purchaser or group of purchasers, upon obtaining the shares ordered, would own 80% or more of the currently outstanding Shares of each Fund; (b)
acceptance of the purchase transaction order would have certain adverse tax consequences to a Fund; (c) the acceptance of the purchase transaction order would, in the opinion of counsel, be unlawful; (d) the acceptance of the purchase transaction
order would otherwise, in the discretion of the Trust or Rafferty, have an adverse effect on the Trust or the rights of beneficial owners; (e) the value of a “Cash Purchase Amount”, or the value of the Balancing Amount to accompany an
in-kind deposit exceed a purchase authorization limit extended to an Authorized Participant by the custodian and the Authorized Participant has not deposited an amount in excess of such purchase authorization with the custodian by 4:00 p.m. Eastern
Time on the Transmittal Date; or (f) in the event that circumstances outside the control of the Trust, the Distributor and Rafferty make it impractical to process purchase orders. The Trust shall notify a prospective purchaser of its rejection of
the order. The Trust and the Distributor are under no duty, however, to give notification of any defects or irregularities in the delivery of purchase transaction orders nor shall either of them incur any liability for the failure to give any such
notification.
Redemption of Creation
Units
Shares may be redeemed
only in Creation Units at their NAV next determined after receipt of a redemption request in proper form by the Distributor on any Business Day. The Trust will not redeem Shares in amounts less than Creation Units. Beneficial owners also may sell
Shares in the secondary market, but must accumulate enough Shares to constitute a Creation Unit in order to have such Shares redeemed by the Trust. There can be no assurance, however, that there will be sufficient liquidity in the public trading
market at any time to permit assembly of a Creation Unit of Shares. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of Shares to constitute a redeemable Creation Unit.
Generally, Creation Units of Shares
are redeemed by or through an Authorized Participant. Such Authorized Participant will agree pursuant to the terms of such Authorized Participant Agreement on behalf of itself or any investor on whose behalf it will act, as the case may be, to
certain conditions, including that such Authorized Participant will make available an amount of cash sufficient to pay the Balancing Amount and the Transaction Fee described above. The Authorized Participant may require the investor to enter into an
agreement with such Authorized Participant with respect to certain matters, including payment of the Balancing Amount. Investors who are not Authorized Participants must make appropriate arrangements with an Authorized Participant. Investors should
be aware that their particular broker may not be a DTC Participant or may not have executed an Authorized Participant Agreement, and that therefore orders to purchase Creation Units of Shares may have to be placed by the investor’s broker
through an Authorized Participant. As a result, redemption orders placed through an Authorized Participant may result in additional charges to such investor.
In certain instances, Authorized
Participants may create and redeem Creation Unit aggregations of the same Fund on the same trade date. In this instance, the Trust reserves the right to settle these transactions on a net basis.
The redemption proceeds for a
Creation Unit of a Fund will consist solely of cash in an amount equal to the NAV of the Shares being redeemed, as next determined after a receipt of a request in proper form, less the redemption transaction fee described below (“Cash
Redemption Amount”). You must also pay a Transaction Fee, described in the Prospectus, in cash. The redemption transaction fee is deducted from such redemption proceeds.
A redemption order must be received
in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent's automated system, telephone, facsimile or other means permitted under the Authorized Participant Agreement, in order to receive
that day's NAV per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day. The order must be accompanied or preceded by the requisite number of Shares
of Funds specified in such order, which delivery must be made through DTC or the Federal Reserve System to the Custodian by the third Business Day following such Transmittal Date (“DTC Cut-Off Time”); and (iii) all other procedures set
forth in the Authorized Participant Agreement must be properly followed.
The right of redemption may be
suspended or the date of payment postponed with respect to any Fund (1) for any period during which the NYSE is closed (other than customary weekend and holiday closings); (2) for any period during which trading on the NYSE is suspended or
restricted; (3) for any period during which an emergency exists as a result of which disposal of the shares of the Fund’s portfolio securities or determination of its NAV is not reasonably practicable; or (4) in such other circumstance as is
permitted by the SEC.
An
Authorized Participant may place an order to redeem Creation Units (i) through the Enhanced Clearing Process as such processes have been enhanced to effect redemptions of Creation Units, or (ii) through the Manual Clearing Process.
Placement of Redemption Orders Using
Enhanced Clearing Process
Orders
to redeem Creation Units of each Fund through the Enhanced Clearing Process must be delivered through an Authorized Participant that is a member of NSCC that is eligible to use the Continuous Net Settlement System.
Placement of Redemption Orders outside the
Enhanced Clearing Process
Orders must be delivered through a
DTC Participant that has executed the Authorized Participant Agreement and, for the Fixed Income Funds, has the ability to transact through the Federal Reserve System. A DTC Participant who wishes to place an order for redemption of Creation Units
of a Fund to be effected need not be an Authorized Participant, but such orders must state that the DTC Participant is not using a clearing process and that redemption of Creation Units will instead be effected through transfer of Shares directly
through DTC or the Federal Reserve System (for cash and U.S. government securities).
After the transfer agent has deemed
an order for redemption of a Fund’s shares outside the Enhanced Clearing Process received, the transfer agent will initiate procedures such that the redeeming party will receive the “Cash Redemption Amount” by the third Business
Day following the Transmittal Date on which such redemption order is deemed received by the Transfer Agent. Due to the schedule of holidays in certain countries, however, the receipt of the Cash Redemption Amount may take longer than three Business
Days following the Transmittal Date
Each Fund generally
intends to effect deliveries of Creation Units and portfolio securities on a basis of “T” plus two Business Days (
i.e.
, days on which the national securities exchange is open). A Fund may effect
deliveries of Creation Units and portfolio securities on a basis other than T plus two in order to accommodate local holiday schedules, to account for different treatment among foreign and U.S. markets of dividend record dates and ex-dividend dates
or under certain other circumstances. The ability of the Trust to effect in-kind creations and redemptions within two Business Days of receipt of an order in good form is subject, among other things, to the condition that, within the time period
from the date of the order to the date of delivery of the securities, there are no days that are holidays in the applicable foreign market. For every occurrence of one or more intervening holidays in the applicable foreign market that are not
holidays observed in the U.S. equity market, the redemption settlement cycle will be extended by the number of such intervening holidays. In addition to holidays, other unforeseeable closings in a foreign market due to emergencies may also prevent
the Trust from delivering securities within normal settlement periods. The securities delivery cycles currently practicable for transferring portfolio securities to redeeming Authorized Participants, coupled with foreign market holiday schedules,
will require a delivery process longer than seven calendar days for the international funds, in certain circumstances. The applicable holidays for certain foreign markets are listed in the table below. The proclamation of new holidays, the treatment
by market participants of certain days as “informal holidays” (
e.g.
, days on which no or limited securities transactions occur, as a result of substantially shortened trading hours), the
elimination of existing holidays or changes in local securities delivery practices could affect the information set forth herein at some time in the future.
The dates from January 1, 2019 to
December 31, 2019 in which the regular holidays affecting the relevant securities markets of the below listed countries are as follows:
Australia
|
|
Austria
|
|
Belgium
|
|
Brazil
|
|
Canada
|
|
Chile
|
|
China
|
January
1
January 28
April 19
April 22
April 25
June 10
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
May 1
June 10
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
May 1
May 30
June 10
August 15
November 1
December 24
December 25
December 26
December 31
|
|
January
1
January 25
March 4
March 5
March 6
April 19
May 1
June 20
July 9
November 15
November 20
December 25
|
|
January
1
January 2
February 18
April 19
May 20
June 24
July 1
August 5
September 2
October 14
November 11
December 25
December 26
|
|
January
1
April 19
May 1
May 21
July 16
August 15
September 18
September 19
September 20
October 31
November 1
December 25
December 31
|
|
January
1
January 21
February 4
February 5
February 6
February 7
February 8
February 18
April 5
April 19
April 22
May 1
May 13
May 27
June 7
July 1
July 4
September 2
September 13
October 1
October 2
October 3
October 4
October 7
October 14
November 11
November 28
December 25
December 26
|
Colombia
|
|
Czech
Republic
|
|
Denmark
|
|
Egypt
|
|
Finland
|
|
France
|
|
Germany
|
January
1
January 7
March 25
April 18
April 19
May 1
June 3
June 24
July 1
August 7
August 19
October 14
November 4
November 11
December 25
|
|
January
1
April 19
April 22
May 1
May 8
July 5
October 28
December 24
December 25
December 26
|
|
January
1
April 18
April 19
April 22
May 1
May 17
May 30
May 31
June 5
June 10
December 24
December 25
December 26
December 31
|
|
January
1
January 7
April 25
April 28
April 29
May 1
June 4
June 5
July 1
July 23
August 11
August 12
October 6
|
|
January
1
April 19
April 22
May 1
May 30
June 21
December 6
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
May 1
May 30
June 10
August 15
November 1
November 11
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
May 1
May 30
June 10
June 20
August 15
October 3
October 31
November 1
November 20
December 24
December 25
December 26
December 31
|
Greece
|
|
Hong
Kong
|
|
Hungary
|
|
India
|
|
Indonesia
|
|
Ireland
|
|
Israel
|
January
1
March 11
March 25
April 19
April 22
April 26
April 29
May 1
June 17
August 15
October 28
December 24
December 25
December 26
|
|
January
1
February 4
February 5
February 6
February 7
April 5
April 19
April 22
May 1
May 13
June 7
July 1
October 1
October 7
December 24
December 25
December 26
December 31
|
|
January
1
March 15
April 19
April 22
May 1
June 10
August 10
August 19
August 20
October 23
November 1
December 7
December 14
December 24
December 25
December 26
December 27
December 31
|
|
February
19
March 4
March 21
April 1
April 17
April 19
May 1
June 5
August 12
August 15
September 2
September 10
October 2
October 8
October 28
November 12
December 25
|
|
January
1
February 5
March 7
April 3
April 19
May 1
May 30
June 3
June 4
June 5
June 6
June 7
December 24
December 25
December 31
|
|
January
1
January 21
February 18
March 18
April 19
April 22
May 1
May 6
May 27
June 3
July 4
August 5
August 26
September 2
October 14
October 28
November 11
November 28
December
24
December 25
December 26
December 31
|
|
March
21
April 21
April 22
April 23
April 24
April 25
April 26
May 8
May 9
June 9
August 11
September 29
September 30
October 1
October 8
October 9
October 13
October 14
October
15
October 16
October 17
October 20
October 21
|
Italy
|
|
Japan
|
|
Korea
|
|
Malaysia
|
|
Mexico
|
|
Morocco
|
|
The
Netherlands
|
January
1
April 19
April 22
May 1
August 15
December 24
December 25
December 26
December 31
|
|
January
1
January 2
January 3
January 14
February 11
March 21
April 29
April 30
May 1
May 2
May 3
May 6
July 15
August 12
September 16
September 23
October 14
October 22
November 4
December 31
|
|
January
1
February 4
February 5
February 6
March 1
May 1
May 6
June 6
August 15
September 12
September 13
October 3
October 9
December 25
December 31
|
|
January
1
January 21
February 1
February 4
February 5
February 6
May 1
May 20
May 22
June 4
June 5
June 6
August 12
September 2
September 9
September 16
October 28
December 25
|
|
January
1
February 4
March 18
April 18
April 19
May 1
September 16
November 18
December 12
December 25
|
|
January
1
January 11
May 1
June 4
June 5
July 30
August 12
August 13
August 14
August 20
August 21
September 2
November 6
November 11
November 12
November 18
|
|
January
1
April 19
April 22
May 1
May 30
June 10
November 1
December 24
December 25
December 26
December 31
|
New
Zealand
|
|
Norway
|
|
Peru
|
|
Philippines
|
|
Poland
|
|
Portugal
|
|
Russia
|
January
1
January 2
January 21
January 28
February 6
April 19
April 22
April 25
June 3
October 28
December 25
December 26
|
|
January
1
April 17
April 18
April 19
April 22
May 1
May 17
May 30
June 10
December 24
December 25
December 26
December 31
|
|
January
1
April 18
April 19
May 1
July 29
August 30
October 8
November 1
December 25
|
|
January
1
February 5
February 25
April 9
April 18
April 19
May 1
June 12
August 21
August 26
November 1
December 24
December 25
December 30
December 31
|
|
January
1
April 19
April 22
May 1
May 3
June 20
August 15
November 1
November 11
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
April 25
May 1
June 10
June 13
June 20
August 15
November 1
December 25
December 26
|
|
January
1
January 2
January 3
January 4
January 7
January 8
March 8
May 1
May 2
May 3
May 9
May 10
June 12
November 4
|
Singapore
|
|
South
Africa
|
|
Spain
|
|
Sweden
|
|
Switzerland
|
|
Taiwan
|
|
Thailand
|
January
1
February 4
February 5
February 6
April 19
May 1
May 20
June 5
August 9
August 12
October 28
December 25
|
|
January
1
March 21
April 19
April 22
May 1
June 17
August 9
September 24
December 16
December 25
December 26
|
|
January
1
March 19
April 18
April 19
April 22
May 1
August 15
November 1
December 6
December 25
December 26
|
|
January
1
April 18
April 19
April 22
April 30
May 1
May 29
May 30
November 1
December 24
December 25
December 26
December 31
|
|
January
1
January 2
April 8
April 19
April 22
May 1
May 30
June 10
August 1
September 9
December 24
December 25
December 26
December 31
|
|
January
1
January 31
February 1
February 4
February 5
February 6
February 7
February 8
February 28
March 1
April 4
April 5
May 1
June 7
September 13
October 10
October 11
|
|
January
1
February 19
April 8
April 15
April 16
May 1
May 20
July 16
July 29
August 12
October 14
October 23
December 5
December 10
December 31
|
Turkey
|
|
United
Kingdom
|
January
1
April 23
May 1
June 3
June 4
June 5
June 6
July 15
August 12
August 13
August 14
August 30
October 28
October 29
|
|
January
1
January 21
February 18
April 19
April 22
May 1
May 6
May 27
July 4
August 26
September 2
October 14
November 11
November 28
December 24
December 25
December 26
December 31
|
The longest redemption cycle for a Fund
is a function of the redemption cycles of the countries whose stocks are held by the Fund.
Transaction fees are imposed as
set forth in the table in the Prospectus. Transaction Fees payable to the Trust are imposed to compensate the Trust for the transfer and other transaction costs of a Fund associated with the issuance and redemption of Creation Units of Shares. There
is a fixed and a variable component to the total Transaction Fee. A fixed Transaction Fee is applicable to each creation or redemption transaction, regardless of the number of Creation Units purchased or redeemed. In addition, a variable Transaction
Fee based upon the value of each Creation Unit also is applicable to each redemption transaction. The Transaction Fee applicable to the redemption of Creation Units will not exceed 2% of the value of the redemption proceeds.
The method by which Creation
Units of Shares are created and traded may raise certain issues under applicable securities laws. Because new Creation Units of Shares are issued and sold by the Trust on an ongoing basis, at any point a “distribution,” as such term is
used in the Securities Act, may occur. Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants in a distribution in a manner which could render
them statutory underwriters and subject them to the prospectus delivery and liability provisions of the Securities Act. For example, a broker-dealer firm or its client may be deemed a statutory underwriter if it takes Creation Units after placing an
order with the Distributor, breaks them down into constituent Shares, and sells some or all of the Shares comprising such Creation Units directly to its customers; or if it chooses to couple the creation of a supply of new Shares with an active
selling effort involving solicitation of secondary market demand for Shares. A determination of whether
a person is an underwriter for the purposes of the
Securities Act depends upon all the facts and circumstances pertaining to that person’s activities. Thus, the examples mentioned above should not be considered a complete description of all the activities that could lead to a categorization as
an underwriter. Broker-dealer firms should also note that dealers who are effecting transactions in Shares, whether or not participating in the distribution of Shares, are generally required to deliver a prospectus. This is because the prospectus
delivery exemption in Section 4(3) of the Securities Act is not available in respect of such transactions as a result of Section 24(d) of the 1940 Act. Broker-dealer firms should note that dealers who are not “underwriters” but are
participating in a distribution (as contrasted to ordinary secondary market transaction), and thus dealing with Shares that are part of an “unsold allotment” within the meaning of section 4(3)(C) of the Securities Act, would be unable to
take advantage of the prospectus delivery exemption provided by section 4(3) of the Securities Act. Firms that incur a prospectus-delivery obligation with respect to Shares are reminded that under Securities Act Rule 153 a prospectus delivery
obligation under Section 5(b)(2) of the Securities Act owed to a national securities exchange member in connection with a sale on the national securities exchange is satisfied by the fact that the Fund’s prospectus is available at the national
securities exchange on which the Shares of such Fund trade upon request. The prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions on a national securities exchange and not with respect to
“upstairs” transactions.
Dividends, Other Distributions and Taxes
The Tax Cuts and
Jobs Act (the “Tax Act”) makes significant changes to the U.S. Federal income tax rules for taxation of individuals and corporations, generally effective for taxable years beginning after December 31, 2017. Many of the changes applicable
to individuals are not permanent and only apply to taxable years beginning after December 31, 2017 and before January 1, 2026. While there are minor changes to the RIC rules, the Tax Act makes changes to the tax rules affecting shareholders and each
Fund, including various investments that each Fund may make. Potential investors are urged to consult their own tax advisors for more detailed information.
Dividends and other Distributions
As stated in the Prospectus, each
Fund declares and distributes dividends to its shareholders from its net investment income at least annually; for these purposes, net investment income includes dividends, accrued interest, and accretion of OID and market discount, less amortization
of market premium and estimated expenses, and is calculated immediately prior to the determination of a Fund’s NAV per share. Each Fund also distributes the excess of its net short-term capital gain over net long-term capital loss
(“short-term gain”), if any, annually but may make more frequent distributions thereof if necessary to avoid federal income or excise taxes. Each Fund may realize net capital gain (
i.e.
, the excess
of net long-term capital gain over net short-term capital loss) and thus anticipates making annual distributions thereof. The Trustees may revise this distribution policy, or postpone the payment of distributions, if a Fund has or anticipates any
large unexpected expense, loss or fluctuation in net assets that, in the Trustees’ opinion, might have a significant adverse effect on its shareholders.
Investors should be aware that if
shares are purchased shortly before the record date for any dividend or capital gain distribution, the shareholder will pay full price for the shares and receive some portion of the purchase price back as a taxable distribution (with the tax
consequences described in the Prospectus).
Taxes
Regulated Investment Company Status
. Each Fund is treated as a separate entity for federal tax purposes and intends to qualify, or to continue to qualify, for treatment as a
RIC. If a Fund so qualifies and satisfies the Distribution Requirement (defined below) for a taxable year, it will not be subject to federal income tax on the part of its investment company taxable income (generally consisting of net investment
income, short-term gain, and net gains and losses from certain foreign currency transactions, all determined without regard to any deduction for dividends paid) and net capital gain it distributes to its shareholders for that year.
To qualify for
treatment as a RIC, a Fund must distribute to its shareholders for each taxable year at least the sum of 90% of its investment company taxable income (“Distribution Requirement”) and 90% of its net exempt interest income and must meet
several additional requirements. For each Fund, these requirements include the following: (1) the Fund must derive at least 90% of its gross income each taxable year from the following sources (collectively, “Qualifying Income”): (a)
dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of securities or foreign currencies, or other income (including gains from options, futures, or forward contracts) derived with
respect to its business of investing in securities or those currencies, and (b) net income from an interest in a “qualified publicly traded partnership” (“QPTP”) (“Income Requirement”); and (2) at the close of
each quarter of the Fund’s taxable year, (a) at least 50% of the value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with those other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of the value of the Fund’s total assets and that does not represent more than 10% of the issuer’s outstanding voting securities (equity securities of QPTPs being
considered voting securities for these purposes), and (b) not more than 25% of the value of its total assets may be invested in (i) securities (other than U.S. government securities or
the securities of other RICs) of any one issuer,
(ii) securities (other than securities of other RICs) of two or more issuers the Fund controls that are determined to be engaged in the same, similar or related trades or businesses, or (iii) securities of one or more QPTPs (collectively,
“Diversification Requirements”). The Internal Revenue Service (“Service”) has ruled that income from a derivative contract on a commodity index generally is not Qualifying Income.
Although each Fund intends to
satisfy, or to continue to satisfy, all the foregoing requirements, there is no assurance that a Fund will be able to do so. The investment by a Fund primarily in options and futures positions entails some risk that it might fail to satisfy one or
both of the Diversification Requirements. There is some uncertainty regarding the valuation of such positions for purposes of those requirements; accordingly, it is possible that the method of valuation a Fund uses, pursuant to which each of them
would expect to be treated as satisfying the Diversification Requirements, would not be accepted in an audit by the Service, which might apply a different method resulting in disqualification of one or more funds.
If a Fund failed to qualify for
treatment as a RIC for any taxable year, (1) its taxable income, including net capital gain, would be taxed at corporate income tax rates (up to 21%), (2) it would not receive a deduction for the distributions it makes to its shareholders, and (3)
the shareholders would treat all those distributions, including distributions of net capital gain, as dividends (that is, ordinary income, except for the part of those dividends that is “qualified dividend income” (described in the
Prospectus) (“QDI”)) if certain holding period and other requirements are met) to the extent of the Fund’s earnings and profits; those dividends would be eligible for the dividends-received deduction available to corporations under
certain circumstances. In addition, the Fund would be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying for RIC treatment. However, the Regulated Investment Company
Modernization Act of 2010 (“RIC Mod Act”) provides certain savings provisions that enable a RIC to cure a failure to satisfy any of the Income and Diversification Requirements as long as the failure “is due to reasonable cause and
not due to willful neglect” and the RIC pays a deductible tax calculated in accordance with those provisions and meets certain other requirements.
Excise Tax
. Each Fund will be subject to a nondeductible 4% excise tax (“Excise Tax”) to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net income for the one-year period ending on October 31 of that year, plus certain other amounts.
Income from Foreign Securities
. Dividends and interest a Fund receives, and gains it realizes, on foreign securities may be subject to income, withholding, or other taxes
imposed by foreign countries and U.S. possessions that would reduce the yield and/or total return on its securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by foreign investors.
Gains or losses (1) from the
disposition of foreign currencies, including forward currency contracts, (2) on the disposition of each foreign-currency-denominated debt security that are attributable to fluctuations in the value of the foreign currency between the dates of
acquisition and disposition of the security, and (3) that are attributable to fluctuations in exchange rates that occur between the time a Fund accrues dividends, interest, or other receivables, or expenses or other liabilities, denominated in a
foreign currency and the time the Fund actually collects the receivables or pays the liabilities, generally will be treated as ordinary income or loss. These gains or losses will increase or decrease the amount of a Fund’s investment company
taxable income to be distributed to its shareholders.
Each Fund may invest in the stock of
“passive foreign investment companies” (“PFICs”). A PFIC is any foreign corporation (with certain exceptions) that, in general, meets either of the following tests for a taxable year: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held for the production of, passive income. Under certain circumstances, a Fund will be subject to federal income tax on a portion of any “excess distribution” it
receives on the stock of a PFIC or of any gain on its disposition of the stock (collectively, “PFIC income”), plus interest thereon, even if the Fund distributes the PFIC income as a dividend to its shareholders. The balance of the PFIC
income will be included in the Fund’s investment company taxable income and, accordingly, will not be taxable to it to the extent it distributes that income to its shareholders. Fund distributions thereof will not be eligible for the maximum
federal income tax rates applicable to QDI.
If a Fund invests in a PFIC and
elects to treat the PFIC as a “qualified electing fund” (“QEF”), then, in lieu of the foregoing tax and interest obligation, the Fund would be required to include in income each taxable year its pro rata share of the
QEF’s annual ordinary earnings and net capital gain -- which the Fund probably would have to distribute to satisfy the Distribution Requirement and avoid imposition of the Excise Tax -- even if the Fund did not receive those earnings and gain
from the QEF. In most instances it will be very difficult, if not impossible, to make this election because of certain requirements thereof.
Each Fund may elect to “mark to
market” its stock in any PFIC. “Marking-to-market,” in this context, means including in gross income each taxable year (and treating as ordinary income) the excess, if any, of the fair market value of the PFIC’s stock over a
Fund’s adjusted basis therein as of the end of that year. Pursuant to the election, a Fund also would be allowed to deduct (as an ordinary, not a capital, loss) the excess, if any, of its adjusted basis in PFIC stock over the fair market value
thereof as of the taxable year-end, but only to the extent of any net mark-to-market gains with respect to that stock the
Fund included in income for prior taxable years under
the election. A Fund’s adjusted basis in each PFIC’s stock with respect to which it makes this election would be adjusted to reflect the amounts of income included and deductions taken thereunder.
Derivatives Strategies
. The use of derivatives strategies, such as writing (selling) and purchasing options and futures contracts and entering into forward contracts,
involves complex rules that will determine for income tax purposes the amount, character, and timing of recognition of the gains and losses a Fund realizes in connection therewith. Gains from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and gains from options, futures, and forward contracts a Fund derives with respect to its business of investing in securities or foreign currencies, will be treated as Qualifying Income.
Each Fund will monitor its transactions, make appropriate tax elections, and make appropriate entries in its books and records when it acquires any foreign currency, option, futures contract, forward contract, or hedged investment to mitigate the
effect of these rules, seek to prevent its disqualification as a RIC, and minimize the imposition of federal income and excise taxes.
Some futures contracts, foreign
currency contracts that are traded in the interbank market, and “nonequity” options (
i.e.
, certain listed options, such as those on a “broad-based” securities index)
—
except any “securities futures contract” that is not a “dealer securities futures contract” (both as defined in the Code) and any interest rate
swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement
—
in
which a Fund invests may be subject to Code section 1256 (collectively “section 1256 contracts”). Section 1256 contracts that a Fund holds at the end of its taxable year must be “marked to market” (that is, treated as having
been sold at that time for their fair market value) for federal income tax purposes, with the result that unrealized gains or losses will be treated as though they were realized. Sixty percent of any net gain or loss recognized on these deemed
sales, and 60% of any net realized gain or loss from any actual sales of section 1256 contracts, will be treated as long-term capital gain or loss, and the balance will be treated as short-term capital gain or loss. These rules may operate to
increase the amount that a Fund must distribute to satisfy the Distribution Requirement (
i.e.
, with respect to the portion treated as short-term capital gain), which will be taxable to its shareholders as
ordinary income when distributed to them, and to increase the net capital gain a Fund recognizes, without in either case increasing the cash available to it. A Fund may elect not to have the foregoing rules apply to any “mixed straddle”
(that is, a straddle, which the Fund clearly identifies in accordance with applicable regulations, at least one (but not all) of the positions of which are section 1256 contracts), although doing so may have the effect of increasing the relative
proportion of short-term capital gain (taxable as ordinary income) and thus increasing the amount of dividends it must distribute. Section 1256 contracts also may be marked-to-market for purposes of the Excise Tax.
Code section 1092
(dealing with straddles) also may affect the taxation of options, futures, and forward contracts in which a Fund may invest. That section defines a “straddle” as offsetting positions with respect to actively traded personal property; for
these purposes, options, futures, and forward contracts are positions in personal property. Under that section, any loss from the disposition of a position in a straddle may be deducted only to the extent the loss exceeds the unrecognized gain on
the offsetting position(s) of the straddle. In addition, these rules may postpone the recognition of loss that otherwise would be recognized under the mark-to-market rules discussed above. The regulations under section 1092 also provide certain
“wash sale” rules, which apply to transactions where a position is sold at a loss and a new offsetting position is acquired within a prescribed period, and “short sale” rules applicable to straddles. If a Fund makes certain
elections, the amount, character, and timing of recognition of gains and losses from the affected straddle positions would be determined under rules that vary according to the elections made. Because only a few of the regulations implementing the
straddle rules have been promulgated, the tax consequences to a Fund of straddle transactions are not entirely clear.
If a call option written by a Fund
lapses (
i.e.
, terminates without being exercised), the amount of the premium it received for the option will be short-term capital gain. If a Fund enters into a closing purchase transaction with respect to a
written call option, it will have a short-term capital gain or loss based on the difference between the premium it received for the option it wrote and the premium it pays for the option it buys. If such an option is exercised and a Fund thus sells
the securities or futures contract subject to the option, the premium the Fund received will be added to the exercise price to determine the gain or loss on the sale. If a call option purchased by a Fund lapses, it will realize short-term or
long-term capital loss, depending on its holding period for the option. If a Fund exercises a purchased call option, the premium it paid for the option will be added to the basis in the subject securities or futures contract.
If a Fund has an “appreciated
financial position” - generally, an interest (including an interest through an option, futures, or forward contract or short sale) with respect to any stock, debt instrument (other than “straight debt”), or partnership interest the
fair market value of which exceeds its adjusted basis - and enters into a “constructive sale” of the position, the Fund will be treated as having made an actual sale thereof, with the result that it will recognize gain at that time. A
constructive sale generally consists of a short sale, an offsetting notional principal contract, or a futures or forward contract a Fund or a related person enters into with respect to the same or substantially identical property. In addition, if
the appreciated financial position is itself a short sale or such a contract, acquisition of the underlying property or substantially identical property will be deemed a constructive sale. The foregoing will not apply, however, to a Fund’s
transaction during any taxable year that otherwise would be treated as a constructive sale if the transaction is closed within 30 days after the end of that year and the Fund holds the appreciated financial position unhedged for 60 days after that
closing (
i.e.
, at no time during that 60-day period is the Fund’s risk of loss regarding that position reduced by reason of certain specified transactions
with respect to substantially identical or related
property, such as having an option to sell, being contractually obligated to sell, making a short sale, or granting an option to buy substantially identical stock or securities).
Income from Zero-Coupon and Payment-in-Kind Securities
. A Fund may acquire zero-coupon or other securities (such as strips) issued with OID. As a holder of those securities,
a Fund must include in its gross income the OID that accrues on the securities during the taxable year, even if it receives no corresponding payment on them during the year. Similarly, a Fund must include in its gross income securities it receives
as “interest” on payment-in-kind securities. With respect to “market discount bonds” (
i.e.
, bonds purchased at a price less than their issue price plus the portion of OID previously
accrued thereon), a Fund may elect to accrue and include in income each taxable year a portion of the bonds’ market discount. Because each Fund annually must distribute substantially all of its investment company taxable income, including any
accrued OID and other non-cash income, to satisfy the Distribution Requirement and avoid imposition of the Excise Tax, a Fund may be required in a particular year to distribute as a dividend an amount that is greater than the total amount of cash it
actually receives. Those distributions will be made from a Fund’s cash assets or from the proceeds of sales of portfolio securities, if necessary. A Fund may realize capital gains or losses from those sales, which would increase or decrease
its investment company taxable income and/or net capital gain.
Income from REITs
. A Fund may invest in REITs that (1) hold residual interests in real estate mortgage investment conduits (“REMICs”) or (2) engage in mortgage
securitization transactions that cause the REITs to be taxable mortgage pools (“TMPs”) or have a qualified REIT subsidiary that is a TMP. A portion of the net income allocable to REMIC residual interest holders may be an “excess
inclusion.” The Code authorizes the issuance of regulations dealing with the taxation and reporting of excess inclusion income of REITs and RICs that hold residual REMIC interests and of REITs, or qualified REIT subsidiaries that are TMPs.
Although those regulations have not yet been issued, the U.S. Treasury Department and the Service issued a notice in 2006 (“Notice”) announcing that, pending the issuance of further guidance, the Service would apply the principles in the
following paragraphs to all excess inclusion income, whether from REMIC residual interests or TMPs.
The Notice provides that a REIT must
(1) determine whether it or its qualified REIT subsidiary (or a part of either) is a TMP and, if so, calculate the TMP’s excess inclusion income under a “reasonable method,” (2) allocate its excess inclusion income to its
shareholders generally in proportion to dividends paid, (3) inform shareholders that are not “disqualified organizations” (
i.e.
, governmental units and tax-exempt entities that are not subject to
the unrelated business income tax) of the amount and character of the excess inclusion income allocated thereto, (4) pay tax (at the highest federal income tax rate imposed on corporations) on the excess inclusion income allocable to its
shareholders that are disqualified organizations, and (5) apply the withholding tax provisions with respect to the excess inclusion part of dividends paid to foreign persons without regard to any treaty exception or reduction in tax rate. Excess
inclusion income allocated to certain tax-exempt entities (including qualified retirement plans, individual retirement accounts, and public charities) constitutes unrelated business taxable income to them.
A RIC with excess inclusion income is
subject to rules identical to those in clauses (2) through (5) (substituting “who are nominees” for “that are not ‘disqualified organizations’” in clause (3) and inserting “record” after
“its” in clause (4)). The Notice further provides that a RIC is not required to report the amount and character of the excess inclusion income allocated to its shareholders that are not nominees, except that (1) a RIC with excess
inclusion income from all sources that exceeds 1% of its gross income must do so and (2) any other RIC must do so by taking into account only excess inclusion income allocated to the RIC from a REIT the excess inclusion income of which exceeded 3%
of the REIT’s dividends. A Fund will not invest directly in REMIC residual interests, and does not intend to invest in REITs that, to its knowledge, invest in those interests or are TMPs or have a qualified REIT subsidiary that is a TMP.
Each Fund may
invest in REITs. REIT dividends and capital gain distributions are generally effective for taxable years beginning after December 31, 2017, the Code generally allows individuals and certain other non-corporate entities a deduction for 20% of (1)
qualified REIT dividends and (2) qualified publicly traded partnership income. Recently issued proposed regulations allow a RIC to pass the character of its qualified REIT dividends through to its shareholders provided certain holding period
requirements are met. As a result, an investor who invests directly in REITs will be able to receive the benefit of such deductions, while a shareholder in a Fund that invests in REITs will not.
Taxation
of Shareholders
.
Basis
Election and Reporting
. A shareholder’s basis in Shares of a Fund that he or she acquires after December 31, 2011 (“Covered Shares”), will be determined in accordance with the Fund’s default
method, which is average basis, unless the shareholder affirmatively elects in writing (which may be electronic) to use a different acceptable basis determination method, such as a specific identification method. The basis determination method a
Fund shareholder elects (or the default method) may not be changed with respect to a redemption of Covered Shares after the settlement date of the redemption.
In addition to the requirement to
report the gross proceeds from redemptions of shares, each Fund (or its administrative agent) must report to the Service and furnish to its shareholders the basis information for Covered Shares and indicate whether they had a short-term (one year or
less) or long-term (more than one year) holding period. Fund shareholders should consult with their tax advisers to decide the best Service-accepted basis determination method for their tax situation and to obtain more information about how the
basis reporting law applies to them.
Foreign Account
Tax Compliance Act (“FATCA”)
. As mentioned in the Prospectus, under FATCA “foreign financial institutions” (“FFIs”) or “non-financial foreign entities”
(“NFFEs”) that are Fund shareholders may be subject to a generally nonrefundable 30% withholding tax on income dividends. That withholding tax generally can be avoided, however, as discussed below.
An FFI can avoid FATCA withholding by
becoming a “participating FFI,” which requires the FFI to enter into a tax compliance agreement with the Service. Under such an agreement, a participating FFI agrees to (1) verify and document whether it has U.S. accountholders, (2)
report certain information regarding their accounts to the Service, and (3) meet certain other specified requirements.
The U.S. Treasury has negotiated
intergovernmental agreements (“IGAs”) with certain countries and is in various stages of negotiations with other foreign countries with respect to one or more alternative approaches to implement FATCA; entities in those countries may be
required to comply with the terms of the IGA instead of Treasury regulations. An FFI resident in a country that has entered into a Model I IGA with the United States must report to that country’s government (pursuant to the terms of the
applicable IGA and applicable law), which will, in turn, report to the Service. An FFI resident in a Model II IGA country generally must comply with U.S. regulatory requirements, with certain exceptions, including the treatment of recalcitrant
accountholders. An FFI resident in one of those countries that complies with whichever of the foregoing applies will be exempt from FATCA withholding.
An NFFE that is the beneficial owner
of a payment from a Fund can avoid FATCA withholding generally by certifying its status as such and, in certain circumstances that it does not have any substantial U.S. owners or by providing the name, address, and taxpayer identification number of
each such owner. The NFFE will report to the Fund or other applicable withholding agent, which will, in turn, report information to the Service.
Those non-U.S. shareholders also may
fall into certain exempt, excepted, or deemed compliant categories established by Treasury regulations, IGAs, and other guidance regarding FATCA. An FFI or NFFE that invests in a Fund will need to provide the Fund with documentation properly
certifying the entity’s status under FATCA to avoid FATCA withholding. The requirements imposed by FATCA are different from, and in addition to, the tax certification rules to avoid backup withholding described above. Foreign investors are
urged to consult their tax advisers regarding the application of these requirements to their own situation and the impact thereof on their investment in a Fund.
* * * * *
The foregoing is only a general
summary of some of the important federal tax considerations generally affecting the Funds. No attempt is made to present a complete explanation of the federal tax treatment of the Funds’ activities, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors are urged to consult their own tax advisers for more detailed information and for information regarding any state, local, or foreign taxes applicable to a Fund and to
distributions therefrom.
Capital Loss Carryforwards
. As of October 31, 2018, the following operational Funds had capital loss carryforwards available to offset future capital gains in the respective
amounts, through the year indicated below:
|
Utilized
in Current Year
|
Expiring
October 31, 2019
|
Unlimited
Short-Term
|
Unlimited
Long-Term
|
Funds
|
|
|
|
|
Direxion
Daily CSI 300 China A Share Bear 1X Shares
|
$—
|
$
—
|
$6,956,108
|
$—
|
Direxion
Daily S&P 500
®
Bear 1X Shares
|
$—
|
$
—
|
$9,533,593
|
$—
|
Direxion
Daily Total Bond Market Bear 1X Shares
|
$61,259
|
$
72,234
|
$2,460,234
|
$—
|
Direxion
Daily 7-10 Year Treasury Bear 1X Shares
|
$—
|
$
67,332
|
$723,492
|
$—
|
Direxion
Daily 20+ Year Treasury Bear 1X Shares
|
$—
|
$282,257
|
$3,339,653
|
$—
|
For federal income tax purposes, a
Fund is generally permitted to carry forward a net capital loss in any year to offset net capital gains, if any, during its taxable years following the year of the loss. The carryforward of capital losses realized in taxable years beginning prior to
December 23, 2010, however, is limited to an eight-year period following the year of realization. Thereafter, capital losses carried forward will retain their character as either short-term or long-term capital losses rather than being considered
all short-term as under previous law. A Fund must use losses that do not expire before it uses losses that do expire and a Fund’s ability to utilize capital losses in a given year or in total may be limited. To the extent subsequent net
capital gains are offset by such losses, they would not result in federal income tax liability to a Fund and as noted above, would not be distributed as such to shareholders.
The Funds' financial
statements for the fiscal year ended October 31, 2018, are incorporated herein by reference from the Funds' Annual Report to Shareholders dated October 31, 2018.
To receive a copy of the Prospectus or
Annual or Semi-Annual Report to shareholders, without charge, write to or call the Trust at the contact information listed below:
Write
to:
|
Direxion
Shares ETF Trust
1301 Avenue of the Americas (6th Avenue), 28th Floor
New York, New York 10019
|
Call:
|
866-476-7523
|
By
Internet:
|
www.direxioninvestments.com
|
APPENDIX A
Description of Corporate Bond Ratings
Moody’s
Investors Service and S&P Global Ratings are two prominent independent rating agencies that rate the quality of bonds. Following are expanded explanations of the ratings shown in the Prospectus and this SAI.
Moody’s Investors Service
–
Global Long-Term Ratings
Ratings assigned
on Moody’s global long-term rating scale are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and
public sector entities. Long-term ratings are assigned to issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a default or impairment on contractual financial obligations and the expected
financial loss suffered in the event of default or impairment. Such ratings have been published by Moody’s Investors Service, Inc. and Moody’s Analytics Inc.
Aaa
:
Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
Aa
:
Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A
:
Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
Baa
:
Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.
Ba
:
Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
B
:
Obligations rated B are considered speculative and are subject to high credit risk.
Caa
:
Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
Ca
:
Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C
:
Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody’s appends numerical
modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of that generic rating category. Additionally, a “(hyb)” indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms.*
* By their terms, hybrid securities
allow for the omission of scheduled dividends, interest, or principal payments, which can potentially result in impairment if such an omission occurs. Hybrid securities may also be subject to contractually allowable write-downs of principal that
could result in impairment. Together with the hybrid indicator, the long-term obligation rating assigned to a hybrid security is an expression of the relative credit risk associated with that security.
Moody’s Investors Service
–
National Scale Long-Term Ratings
Moody’ s long-term National
Scale Ratings (NSRs) are opinions of the relative creditworthiness of issuers and financial obligations within a particular country. NSRs are not designed to be compared among countries; rather, they address relative credit risk within a given
country. Moody’s assigns national scale ratings in certain local capital markets in which investors have found the global rating scale provides inadequate differentiation among credits or is inconsistent with a rating scale already in common
use in the country. In each specific country, the last two characters of the rating indicate the country in which the issuer is located (
e.g.
, Aaa.br for Brazil).
Aaa.n
:
Issuers or issues rated Aaa.n demonstrate the strongest creditworthiness relative to other domestic issuers.
Aa.n
:
Issuers or issues rated Aa.n demonstrate very strong creditworthiness relative to other domestic issuers.
A.n
:
Issuers or issues rated A.n present above-average creditworthiness relative to other domestic issuers.
Baa.n
:
Issuers or issues rated Baa.n represent average creditworthiness relative to other domestic issuers.
Ba.n
:
Issuers or issues rated Ba.n demonstrate below-average creditworthiness relative to other domestic issuers.
B.n
:
Issuers or issues rated B.n demonstrate weak creditworthiness relative to other domestic issuers.
Caa.n
:
Issuers or issues rated Caa.n demonstrate very weak creditworthiness relative to other domestic issuers.
Ca.n
:
Issuers or issues rated Ca.n demonstrate extremely weak creditworthiness relative to other domestic issuers.
C.n
:
Issuers or issues rated C.n demonstrate the weakest creditworthiness relative to other domestic issuers.
Note: Moody’s appends numerical
modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of that generic rating category. National scale long-term ratings of D.ar and E.ar may also be applied to Argentine obligations.
S&P Global Ratings
–
Long-Term Issue Credit Ratings*
An S&P Global Ratings issue
credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note
programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The
opinion reflects S&P Global Ratings' view of the obligor's capacity and willingness to meet its financial commitments as they come due, and this opinion may assess terms, such as collateral security and subordination, which could affect ultimate
payment in the event of default. Issue credit ratings can be either long-term or short-term. Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. Short-term ratings are also used to indicate
the creditworthiness of an obligor with respect to put features on long-term obligations. Medium-term notes are assigned long-term ratings.
Issue credit ratings are based, in
varying degrees, on S&P Global Ratings' analysis of the following considerations:
•
|
The likelihood of
payment--the capacity and willingness of the obligor to meet its financial commitments on an obligation in accordance with the terms of the obligation;
|
•
|
The nature and provisions
of the financial obligation, and the promise we impute; and
|
•
|
The
protection afforded by, and relative position of, the financial obligation in the event of a bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
|
Issue ratings are an assessment of
default risk, but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above.
(Such differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)
AAA
: An obligation rated 'AAA' has the highest rating assigned by S&P Global Ratings. The obligor's capacity to meet its financial commitments on the obligation is extremely strong.
AA
: An
obligation rated 'AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitments on the obligation is very strong.
A
: An
obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitments on the
obligation is still strong.
BBB
: An
obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments on the obligation.
BB; B; CCC; CC; and C
: Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposure to adverse conditions.
BB
:
An obligation rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to the obligor's inadequate
capacity to meet its financial commitments on the obligation.
B
: An
obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitments on the obligation. Adverse business, financial, or economic conditions will likely impair
the obligor's capacity or willingness to meet its financial commitments on the obligation.
CCC
:
An obligation rated 'CCC' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation. In the event of adverse business,
financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitments on the obligation.
CC
: An
obligation rated 'CC' is currently highly vulnerable to nonpayment. The 'CC' rating is used when a default has not yet occurred, but S&P Global Ratings expects default to be a virtual certainty, regardless of the anticipated time to
default.
C
: An obligation rated 'C' is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared with obligations that are rated
higher.
D
: An obligation rated 'D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the 'D' rating category is used when payments on an obligation are not made on the date due, unless S&P
Global Ratings believes that such payments will be made within five business days in the absence of a stated grace period or within the earlier of the stated grace period or 30 calendar days. The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligation's rating is lowered to 'D' if it is subject to a distressed exchange
offer.
NR
: This
indicates that no rating has been requested, or that there is insufficient information on which to base a rating, or that S&P Global Ratings does not rate a particular obligation as a matter of policy.
*The ratings from 'AA' to 'CCC' may be
modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
Moody’s Investors Service
–
Short Term Obligation Ratings
The Municipal Investment Grade (MIG)
scale is used to rate US municipal bond anticipation notes of up to three years maturity. Municipal notes rated on the MIG scale may be secured by either pledged revenues or proceeds of a take-out financing received prior to note maturity. MIG
ratings expire at the maturity of the obligation, and the issuer’s long-term rating is only one consideration in assigning the MIG rating. MIG ratings are divided into three levels
—
MIG 1 through MIG 3
—
while speculative grade short-term obligations are designated SG.
MIG 1
:
This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
MIG 2
:
This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
MIG 3
:
This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.
SG
: This
designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
S&P Global Ratings
–
Municipal Short-Term Note Ratings
An S&P Global
Ratings U.S. municipal note rating reflects S&P Global Ratings opinion about the liquidity factors and market access risks unique to the notes. Notes due in three years or less will likely receive a note rating. Notes with an original maturity
of more than three years will most likely receive a long-term debt rating. In determining which type of rating, if any, to assign, S&P Global Ratings analysis will review the following considerations:
•
|
Amortization
schedule--the larger the final maturity relative to other maturities, the more likely it will be treated as a note; and
|
•
|
Source
of payment--the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
|
SP-1
:
Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.
SP-2
:
Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
SP-3
:
Speculative capacity to pay principal and interest.
Moody’s Investors Service
–
Global Short Term Rating Scale
Ratings assigned
on Moody’s global short-term rating scale are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and
public sector entities. Short-term ratings are assigned to obligations with an original maturity of thirteen months or less and reflect both on the likelihood of a default or impairment on contractual financial obligations and the expected financial
loss suffered in the event of default or impairment.
P-1
:
Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
P-2
:
Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
P-3
:
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
NP
:
Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
S&P Global Ratings
–
Short-Term Issue Credit Ratings
A-1
:
A short-term obligation rated 'A-1' is rated in the highest category by S&P Global Ratings. The obligor's capacity to meet its financial commitments on the obligation is strong. Within this category, certain obligations are designated with a
plus sign (+). This indicates that the obligor's capacity to meet its financial commitments on these obligations is extremely strong.
A-2
:
A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial
commitments on the obligation is satisfactory.
A-3
: A
short-term obligation rated 'A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments on the
obligation.
B
: A
short-term obligation rated 'B' is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties that could lead to the
obligor's inadequate capacity to meet its financial commitments.
C
: A
short-term obligation rated 'C' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation.
D
: A
short-term obligation rated 'D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the 'D' rating category is used when payments on an obligation are not made on the date due, unless S&P Global Ratings believes
that such payments will be made within any stated grace period. However, any stated grace period longer than five business days will be treated as five business days. The 'D' rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action and where default on an obligation is a virtual certainty, for example, due to automatic stay provisions. An obligation’s rating is lowered to ‘D’ if it is subject to a distressed exchange
offer.
Dual ratings may
be assigned to debt issues that have a put option or demand feature. The first component of the rating addresses the likelihood of repayment of principal and interest as due, and the second component of the rating addresses only the demand feature.
The first component of the rating can relate to either a short-term or long-term transaction and accordingly use either short-term or long-term rating symbols. The second component of the rating relates to the put option and is assigned a short-term
rating symbol (for example, 'AAA/A-1+' or 'A-1+/A-1'). With U.S. municipal short-term demand debt, the U.S. municipal short-term note rating symbols are used for the first component of the rating (for example, 'SP-1+/A-1+').
Direxion Shares ETF Trust
1301
Avenue of the Americas (6th Avenue), 28th Floor
|
New York,
New York 10019
|
866-476-7523
|
www.direxioninvestments.com
2X
BULL FUNDS
|
2X BEAR FUNDS
|
Direxion
Daily S&P 500
®
Bull 2X Shares (SPUU)
|
|
Direxion
Daily Small Cap Bull 2X Shares (SMLL)
|
|
Direxion
Daily CSI 300 China A Share Bull 2X Shares (CHAU)
|
|
Direxion
Daily MSCI China A Bull 2X Shares
|
|
Direxion
Daily CSI China Internet Index Bull 2X Shares (CWEB)
|
|
|
Direxion
Daily High Yield Bear 2X Shares (HYDD)
|
Direxion
Daily MSCI European Financials Bull 2X Shares (EUFL)
|
Direxion
Daily MSCI European Financials Bear 2X Shares
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares
|
|
Direxion
Daily Preferred Stock Bull 2X Shares
|
|
February 28, 2019
The shares offered in this prospectus (each a “Fund”
and collectively the “Funds”) are, or upon commencement of operations will be, listed and traded on the NYSE Arca, Inc.
The Funds seek
daily
leveraged
investment results and are intended to be used as short-term trading vehicles. The Funds with “Bull” in their names attempt to provide daily investment results that correspond to two times the performance of an
underlying index and are collectively referred to as the “Bull Funds.” The Funds with “Bear” in their names attempt to provide daily investment results that correspond to two times the inverse (or opposite) of the performance
of an underlying index and are collectively referred to as the “Bear Funds.”
The Funds are not intended to be used by, and are not appropriate
for, investors who do not intend to actively monitor and manage their portfolios. The Funds are very different from most mutual funds and exchange-traded funds. Investors should note that:
(1)
|
The Funds pursue
daily leveraged
investment objectives, which means that the Funds are riskier than alternatives that do not use leverage because the Funds magnify the performance of their underlying index.
|
(2)
|
Each Bear Fund pursues a
daily leveraged
investment objective that is
inverse
to the performance of its underlying index, a result opposite of most mutual funds and exchange-traded funds.
|
(3)
|
The
pursuit of daily investment objectives means that the return of a Fund for a period longer than a full trading day will be the product of a series of daily leveraged returns for each trading day during the relevant period. As a consequence,
especially in periods of market volatility, the volatility of the underlying index may affect a Fund’s return as much as, or more than, the return of the underlying index. Further, the return for investors that invest for periods less than a
full trading day will not be the product of the return of a Fund’s stated daily leveraged investment objective and the performance of the underlying index for the full trading day. During periods of high volatility, the Funds may not perform
as expected and the Funds may have losses when an investor may have expected gains if the Funds are held for a period that is different than one trading day.
|
The Funds are not suitable for all investors. The Funds are
designed to be utilized only by sophisticated investors, such as traders and active investors employing dynamic strategies. Investors in the Funds should:
(a)
|
understand the risks
associated with the use of leverage;
|
(b)
|
understand the consequences
of seeking daily leveraged investment results;
|
(c)
|
for a Bear Fund, understand
the risk of shorting; and
|
(d)
|
intend
to actively monitor and manage their investments.
|
Investors who do not understand the Funds, or do not intend to
actively manage their funds and monitor their investments, should not buy the Funds.
There is no assurance that any Fund will achieve its investment
objective and an investment in a Fund could lose money. No single Fund is a complete investment program.
If a Fund’s underlying index moves
more than 50% on a given trading day in a direction adverse to the Fund, the Fund’s investors would lose all of their money. The Funds’ investment adviser, Rafferty Asset Management, LLC, will attempt to position each Fund’s
portfolio to ensure that a Fund does not gain or lose more than 90% of its net asset value on a given trading day. As a consequence, a Fund’s portfolio should not be responsive to underlying index movements beyond 45% on a given trading day,
whether that movement is favorable or adverse to the Fund. For example, if a Bull Fund’s underlying index was to gain 50% on a given trading day, that Fund should be limited to a gain of 90% for that day, which corresponds to 200% of an
underlying index gain of 45%, rather than 200% of an underlying index gain of 50%.
IMPORTANT NOTE: Beginning on January 1, 2021, as permitted
by regulations adopted by the Securities and Exchange Commission, paper copies of each Fund’s annual and semi-annual shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the shareholder reports
from your financial intermediary, such as a broker-dealer or bank. Instead, annual and semi-annual shareholder reports will be available on a website, and you will be notified by mail each time a report is posted and provided with a website link to
access the report.
You may elect to receive all future
annual and semi-annual shareholder reports in paper free of charge. To elect to continue to receive paper copies of shareholder reports through the mail or to otherwise change your delivery method, contact your financial intermediary or follow the
instructions included with this disclosure. Your election to receive shareholder reports in paper will apply to all funds that you hold through the financial intermediary. If you already elected to receive shareholder reports electronically, you
will not be affected by this change and you need not take any action.
These securities have not been approved or disapproved by
the U.S. Securities and Exchange Commission (“SEC”) or the U.S. Commodity Futures Trading Commission (“CFTC”), nor have the SEC or CFTC passed upon the adequacy of this Prospectus. Any representation to the contrary is a
criminal offense.
Direxion Daily
S&P 500
®
Bull 2X Shares
Important Information Regarding the
Fund
The Direxion Daily
S&P 500
®
Bull 2X Shares (the “Fund”) seeks
daily leveraged
investment
results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the S&P 500
®
Index (the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading
day’s compounded return over the period, which will very likely differ from 200% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of
compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest
for periods less than a trading day will not be 200% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (2X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 200% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.50%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.56%
|
Acquired
Fund Fees and Expenses
(1)
|
0.04%
|
Total
Annual Fund Operating Expenses
|
1.10%
|
Expense
Cap/Reimbursement
(2)
|
-0.46%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.64%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.60% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$65
|
$304
|
$562
|
$1,299
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 59% of the average
value of its portfolio. However, this portfolio turnover rate
1
|
Direxion Shares ETF
Trust Prospectus
|
is calculated without regard to cash instruments or
derivative transactions. If the Fund's extensive use of derivatives were reflected, the Fund's portfolio turnover rate would be significantly higher.
Principal Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of
less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
Standard & Poor’s
®
selects the stocks comprising the Index on the basis of market capitalization, financial viability of the company and the public float, liquidity and
price of a company’s shares outstanding. The Index is a float-adjusted, market capitalization-weighted index. As of December 31, 2018, the Index consisted of 505 constituents, which had a median total market capitalization of $18.3 billion,
total market capitalizations ranging from $2.3 billion to $785 billion and were concentrated in the information technology and healthcare sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio
so that its exposure to the Index is consistent with
the Fund’s investment objective. The impact of the Index’s movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund
should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning
strategy typically results in high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next
trading day.
Because of daily
rebalancing and the compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 200% of
the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund
will lose money over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 200% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 200% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
Direxion Shares
ETF Trust Prospectus
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The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 6.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a significant loss of
value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 63.2% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 200% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 200% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
200%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-120%
|
-84.2%
|
-85.0%
|
-87.5%
|
-90.9%
|
-94.1%
|
-50%
|
-100%
|
-75.2%
|
-76.5%
|
-80.5%
|
-85.8%
|
-90.8%
|
-40%
|
-80%
|
-64.4%
|
-66.2%
|
-72.0%
|
-79.5%
|
-86.8%
|
-30%
|
-60%
|
-51.5%
|
-54.0%
|
-61.8%
|
-72.1%
|
-82.0%
|
-20%
|
-40%
|
-36.6%
|
-39.9%
|
-50.2%
|
-63.5%
|
-76.5%
|
-10%
|
-20%
|
-19.8%
|
-23.9%
|
-36.9%
|
-53.8%
|
-70.2%
|
0%
|
0%
|
-1.0%
|
-6.1%
|
-22.1%
|
-43.0%
|
-63.2%
|
10%
|
20%
|
19.8%
|
13.7%
|
-5.8%
|
-31.1%
|
-55.5%
|
20%
|
40%
|
42.6%
|
35.3%
|
12.1%
|
-18.0%
|
-47.0%
|
30%
|
60%
|
67.3%
|
58.8%
|
31.6%
|
-3.7%
|
-37.8%
|
40%
|
80%
|
94.0%
|
84.1%
|
52.6%
|
11.7%
|
-27.9%
|
50%
|
100%
|
122.8%
|
111.4%
|
75.2%
|
28.2%
|
-17.2%
|
60%
|
120%
|
153.5%
|
140.5%
|
99.4%
|
45.9%
|
-5.8%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 13.23%. The Index’s highest volatility rate for any one calendar year during the five-year period was 17.11% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended
December 31, 2018 was 8.49%. Historical Index
volatility and performance are not indications of what the Index volatility and performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the
Index.
For information
regarding the effects of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special
Note Regarding the Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 2% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 50%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced
3
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Direxion Shares ETF
Trust Prospectus
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to sell the security at a loss. Such a situation may
prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the
Fund from achieving its leveraged investment
objective, even if the Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure.
Direxion Shares
ETF Trust Prospectus
|
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Conversely, if the
Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may experience performance that is greater than, or less than, the Fund’s stated
multiple of the Index.
If there
is a significant intra-day market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and
sales of Shares prior to the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as
expected, thus affecting the Fund’s
performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges, their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and
other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the
Fund’s performance.
Healthcare Sector Risk
—
The profitability of companies in the healthcare sector may be affected by extensive, costly and uncertain government
regulation, restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient services, limited number
of products,
industry innovation,
changes in technologies and other market
developments.
Many healthcare companies
are heavily dependent on patent protection. The expiration of patents may adversely
affect
the profitability of these companies.
Many healthcare companies are subject to extensive litigation based on product
liability and similar claims. Healthcare companies are subject to competitive forces that may make it difficult to raise prices and, in fact,
may result in price discounting.
Many new products in the healthcare sector may be subject to regulatory approvals. The process of obtaining such approvals may be long and costly with no guarantee that any product will come to
market.
Information
Technology Sector Risk
—
The value of stocks of information technology companies and companies that rely heavily on
technology is particularly vulnerable
to rapid changes in technology product cycles, rapid product obsolescence, government regulation and competition,
both domestically and internationally, including competition from competitors with lower production costs. Information technology companies and companies that rely heavily on technology, especially
those of smaller,
less-seasoned companies,
tend to be more volatile than the overall market. Information technology companies are
heavily dependent on patent and intellectual property rights, the loss or impairment of which may adversely affect profitability. Additionally, companies in the information technology sector may face dramatic and often unpredictable changes in
growth
rates and competition for the services of qualified personnel.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Mid-Capitalization
Company Risk
-
Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and
financial resources than more established, larger-capitalization
5
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Direxion Shares ETF
Trust Prospectus
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companies. Furthermore, those companies often have
limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well known to the investing public, do not have significant institutional ownership and are
followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions,
whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result, the performance of mid-capitalization companies can be more volatile and they face greater risk of business
failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities
in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained.
Direxion Shares
ETF Trust Prospectus
|
6
|
There may,
however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in
the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To the
extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount
on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 15.09% for the quarter ended September 30, 2018 and its lowest calendar quarter return was -26.72% for the quarter ended December 31, 2018. The year-to-date return
as of December 31, 2018 was -13.56%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(5/28/2014)
|
Return
Before Taxes
|
-13.56%
|
12.96%
|
Return
After Taxes on Distributions
|
-14.86%
|
10.73%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-7.62%
|
9.37%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.28%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the one-year period because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in May 2014
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
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Direxion Shares ETF
Trust Prospectus
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Payments to Broker-Dealers and Other
Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may
create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
Index Information
The “S&P 500
®
Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard &
Poor’s
®
and S&P
®
are registered
trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones
Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones,
S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500
®
Index.
Direxion Shares
ETF Trust Prospectus
|
8
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Direxion
Daily Small Cap Bull 2X Shares
Important Information Regarding the
Fund
The Direxion Daily Small
Cap Bull 2X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier than
alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the Russell 2000
®
Index (the
“Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 200% of the return of the Index
for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index
may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be 200% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (2X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 200% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.50%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
1.36%
|
Acquired
Fund Fees and Expenses
(1)
|
0.19%
|
Total
Annual Fund Operating Expenses
|
2.05%
|
Expense
Cap/Reimbursement
(2)
|
-1.26%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.79%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.60% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$81
|
$521
|
$987
|
$2,278
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 119% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives were
9
|
Direxion Shares ETF
Trust Prospectus
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of
less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index measures the performance of
approximately 2,000 small-capitalization companies in the Russell 3000
®
Index, based on a combination of their market capitalization and current
index membership. As of December 31, 2018, the Index consisted of 2,032 holdings, which had an average market capitalization of $1.1 billion, total market capitalizations ranging from $7.8 million to $6.2 billion and were concentrated in the
financial services and healthcare sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs
to be re-positioned. For example, if the Index has
risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure
will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day
to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 200% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 200% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 200% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a)
Direxion Shares
ETF Trust Prospectus
|
10
|
Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 6.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a significant loss of
value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 63.2% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 200% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 200% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
200%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-120%
|
-84.2%
|
-85.0%
|
-87.5%
|
-90.9%
|
-94.1%
|
-50%
|
-100%
|
-75.2%
|
-76.5%
|
-80.5%
|
-85.8%
|
-90.8%
|
-40%
|
-80%
|
-64.4%
|
-66.2%
|
-72.0%
|
-79.5%
|
-86.8%
|
-30%
|
-60%
|
-51.5%
|
-54.0%
|
-61.8%
|
-72.1%
|
-82.0%
|
-20%
|
-40%
|
-36.6%
|
-39.9%
|
-50.2%
|
-63.5%
|
-76.5%
|
-10%
|
-20%
|
-19.8%
|
-23.9%
|
-36.9%
|
-53.8%
|
-70.2%
|
0%
|
0%
|
-1.0%
|
-6.1%
|
-22.1%
|
-43.0%
|
-63.2%
|
10%
|
20%
|
19.8%
|
13.7%
|
-5.8%
|
-31.1%
|
-55.5%
|
20%
|
40%
|
42.6%
|
35.3%
|
12.1%
|
-18.0%
|
-47.0%
|
30%
|
60%
|
67.3%
|
58.8%
|
31.6%
|
-3.7%
|
-37.8%
|
40%
|
80%
|
94.0%
|
84.1%
|
52.6%
|
11.7%
|
-27.9%
|
50%
|
100%
|
122.8%
|
111.4%
|
75.2%
|
28.2%
|
-17.2%
|
60%
|
120%
|
153.5%
|
140.5%
|
99.4%
|
45.9%
|
-5.8%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 16.43%. The Index’s highest volatility rate for any one calendar year during the five-year period was 18.43% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 4.41%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility
of ETFs or instruments that reflect the value of the
Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 2% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 50%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no
assurance
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|
Direxion Shares ETF
Trust Prospectus
|
that a security that is deemed liquid when purchased
will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience
Direxion Shares
ETF Trust Prospectus
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12
|
performance that is
greater than, or less than, the Fund’s stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their
shares may trade at a discount or a premium.
Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not be able to liquidate its holdings in ETFs at an
optimal price or time, which may adversely affect the Fund’s performance.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Healthcare Sector Risk
—
The profitability of companies in the healthcare sector may be affected by extensive, costly and uncertain government
regulation, restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient services, limited number of products, industry innovation, changes in
technologies and other market developments. Many healthcare companies are heavily dependent on patent protection. The expiration of patents may adversely affect the profitability of these companies. Many healthcare companies are subject to extensive
litigation based on product liability and similar claims. Healthcare companies are subject to competitive forces that may make it difficult to raise prices and, in fact, may result in price discounting. Many new products in the healthcare sector may
be subject to regulatory approvals. The process of obtaining such approvals may be long and costly with no guarantee that any product will come to market.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions,
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whether or not based on fundamental analysis, can
decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt
instruments in which they invest. Depository
accounts may be subject to credit risk with respect to the financial institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and
price. Repurchase agreements may be subject to market and credit risk related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is
no guarantee that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants
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ETF Trust Prospectus
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are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 17.95% for the quarter ended September 30, 2016 and its lowest calendar quarter return was -37.89% for the quarter ended December 31, 2018. The year-to-date return
as of December 31, 2018 was -25.22%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(7/29/2014)
|
Return
Before Taxes
|
-25.22%
|
6.56%
|
Return
After Taxes on Distributions
|
-26.51%
|
5.63%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-14.18%
|
4.82%
|
Russell
2000
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-11.01%
|
5.33%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not
reflect the impact
of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as
401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares" is higher for the one-year period because the calculation recognizes a capital loss upon the redemption of Fund
shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in July 2014
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Index Information
The Russell 2000
®
Index is a trademark of Frank Russell Company (“Russell”) and has been licensed for use by the Trust. The Fund is not sponsored, endorsed,
sold or promoted by Russell. Russell makes no representation regarding the advisability of investing in the Fund.
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ETF Trust Prospectus
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Direxion
Daily CSI 300 China A Share Bull 2X Shares
Important Information Regarding the
Fund
The Direxion Daily CSI
300 China A Share Bull 2X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be
riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the CSI 300 Index (the “Index”). This means that the return of the Fund for a period longer than a trading day
will be the result of each trading day’s compounded return over the period, which will very likely differ from 200% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and
greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further,
the return for investors that invest for periods less than a trading day will not be 200% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (2X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 200% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.18%
|
Acquired
Fund Fees and Expenses
(1)
|
0.20%
|
Total
Annual Fund Operating Expenses
|
1.13%
|
Expense
Cap/Reimbursement
(2,3)
|
0.02%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.15%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
(3)
|
For the fiscal year ended
October 31, 2018, as a result of a portion of the Adviser's management fee and/or a previous reimbursement of Other Expenses, the Adviser recouped fees in the amount of 0.02%.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$117
|
$361
|
$624
|
$1,376
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 339% of the average
value of its portfolio. However, this portfolio turnover rate
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is calculated without regard to cash instruments or
derivative transactions. If the Fund's extensive use of derivatives were reflected, the Fund's portfolio turnover rate would be significantly higher.
Principal Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of
less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is a modified free-float
market capitalization weighted index comprised of the largest and most liquid stocks in the Chinese A-share market. Index constituent stocks must have been listed for more than three months (unless the stock’s average daily A-share market
capitalization since its initial listing ranks among the top 30 of all A-shares) and must not be experiencing obvious abnormal fluctuations or market manipulations. As of December 31, 2018, the Index included 300 securities with an average market
capitalization of $3.4 billion, total market capitalizations ranging from $347.6 million to $61.2 billion and were concentrated in the financials sector.
A-shares are issued by companies
incorporated in the People’s Republic of China (“China” or the “PRC”). A-shares are traded in renminbi (“RMB”) on the Shenzhen Stock Exchange or Shanghai Stock Exchange (“SSE”). The A-share
market in China is made available to domestic PRC investors and certain foreign investors, including those foreign investors that have been approved as Renminbi Qualified Foreign Institutional Investors (“RQFII”) or as Qualified Foreign
Institutional Investors (“QFII”). A RQFII or QFII license may be obtained by submitting an application to the China Securities Regulatory Commission (“CSRC”). After obtaining a RQFII or QFII license, the RQFII or QFII also
applies to China’s State Administration of Foreign Exchange (“SAFE”) for a specific aggregate dollar amount investment quota in which the RQFII or QFII can invest in A-shares. Additionally, an investment in eligible A-shares listed
and traded on the SSE is also permitted through the Shanghai-Hong Kong Stock Connect program (“Stock Connect”), a securities trading and clearing program established by Hong Kong Securities Clearing Company Limited, the SSE and China
Securities Depository and Clearing Corporation Limited.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group
of industries) to approximately the same extent as the
Index is so concentrated.
Because the Fund does not satisfy the
criteria to qualify as a RQFII or QFII itself and does not intend to trade through Stock Connect, the Fund expects to invest a majority of its assets in other investment companies (including ETFs) that track the same Index or a substantially similar
index, swaps, futures contracts and other types of derivative instruments or financial instruments, including swaps on the index or swaps on funds that track the same Index or a substantially similar index to obtain the leveraged exposure necessary
to achieve its investment objective. At times, however, the Fund will utilize other derivatives and investment strategies which may include gaining leveraged exposure to only a representative sample of the securities in the Index that have aggregate
characteristics similar to those of the Index. The Fund may do this by utilizing swaps on ETFs that track a similar index or futures contracts on a similar index.
Derivatives are financial
instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for investing directly in a security in order
to gain leveraged exposure to the Index or its components.
The Fund seeks to
remain fully invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movements or the increase or decrease of the value of the securities in
the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s stated investment objective. The impact of the Index’s movements
during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased.
Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms
“daily,” “day” and “trading day” refer to the period from the close of the U.S. markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 200% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In
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ETF Trust Prospectus
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addition, the Fund
presents risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 200% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 200% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 6.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a significant loss of
value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 63.2% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 200% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the
Fund can be expected to return more than 200% of the
performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the returns shown below as a
result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
200%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-120%
|
-84.2%
|
-85.0%
|
-87.5%
|
-90.9%
|
-94.1%
|
-50%
|
-100%
|
-75.2%
|
-76.5%
|
-80.5%
|
-85.8%
|
-90.8%
|
-40%
|
-80%
|
-64.4%
|
-66.2%
|
-72.0%
|
-79.5%
|
-86.8%
|
-30%
|
-60%
|
-51.5%
|
-54.0%
|
-61.8%
|
-72.1%
|
-82.0%
|
-20%
|
-40%
|
-36.6%
|
-39.9%
|
-50.2%
|
-63.5%
|
-76.5%
|
-10%
|
-20%
|
-19.8%
|
-23.9%
|
-36.9%
|
-53.8%
|
-70.2%
|
0%
|
0%
|
-1.0%
|
-6.1%
|
-22.1%
|
-43.0%
|
-63.2%
|
10%
|
20%
|
19.8%
|
13.7%
|
-5.8%
|
-31.1%
|
-55.5%
|
20%
|
40%
|
42.6%
|
35.3%
|
12.1%
|
-18.0%
|
-47.0%
|
30%
|
60%
|
67.3%
|
58.8%
|
31.6%
|
-3.7%
|
-37.8%
|
40%
|
80%
|
94.0%
|
84.1%
|
52.6%
|
11.7%
|
-27.9%
|
50%
|
100%
|
122.8%
|
111.4%
|
75.2%
|
28.2%
|
-17.2%
|
60%
|
120%
|
153.5%
|
140.5%
|
99.4%
|
45.9%
|
-5.8%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 25.11%. The Index’s highest volatility rate for any one calendar year during the five-year period was 40.24% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 4.67%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 2% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 50%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
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Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index decreases, the Fund may be one of many market participants that are attempting to sell securities of the Index. Under such circumstances, the market for investments of the Index may lack sufficient
liquidity for all market participants' trades. Therefore, the Fund may have more difficulty selling securities or financial instruments and the Fund's transactions could exacerbate the price decline of the securities of the Index. Additionally,
because the Fund is leveraged, a minor decrease in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference
assets and the derivative, which may prevent the
Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
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Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
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Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement.
Because of this, it is unlikely that the Fund will
be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory
restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its
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Direxion Shares ETF
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correlation with
the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges, their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result
in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
China Investing Risk
- Although the Fund will not invest directly in A-shares, it is subject, indirectly, to certain risks applicable to investing in A-shares. Investing in securities of Chinese companies, including
investments that provide exposure to A-shares, involves certain risks and considerations not typically associated with investing in securities of U.S. issuers, including, among others (i) the small size of the market for Chinese securities and low
trading volume, resulting in a lack of liquidity and in price volatility; (ii) currency devaluations and other currency exchange rate fluctuations or blockages; (iii) the nature and extent of intervention by the PRC government in the Chinese
securities markets, whether such intervention will continue and the impact of such intervention or its discontinuation; (iv) the risk of nationalization or expropriation of assets; (v) the risk that the PRC government may decide not to continue to
support economic reform programs; (vi) limitation on the use of brokers; (vii) higher rates of inflation; (viii) greater political, economic and social uncertainty; (ix) market volatility caused by potential regional or territorial conflicts or
natural disasters and; (x) the risk of increased trade tariffs, embargoes and other trade limitations. These factors can directly affect A-shares, and may indirectly affect investments that derive their value from A-shares.
The economy of China differs, often
unfavorably, from the U.S. economy in such respects as structure, general development, government involvement, wealth distribution, rate of inflation, growth rate, interest rates, allocation of resources and capital reinvestment and others. The PRC
central government has historically exercised substantial control over virtually every sector of the Chinese economy through administrative regulation and/or state ownership and actions of the PRC central and local government authorities continue to
have a substantial effect on economic conditions in China. In addition, the PRC government has from time to time taken actions that influence the prices at which certain goods may be sold; encouraged companies to invest or concentrate in particular
industries; induced mergers between companies in certain industries and induced private companies to publicly offer their securities to increase or continue the rate of economic growth; controlled the rate of inflation or otherwise regulated
economic expansion. It may do so in the future as well, potentially having a significant adverse effect on economic conditions in China.
The Chinese securities markets are
emerging markets with limited operating history characterized by relatively low trading volume, resulting in substantially less liquidity and greater price volatility. Liquidity risks may be more pronounced for the A-share market than for Chinese
securities markets in general because the A-share market is subject to greater government restrictions and control, including
trading suspensions. Price fluctuations of A-shares
are currently limited to either 5% or 10% per trading day. In addition, there is less regulation and monitoring of Chinese securities markets and the activities of investors, brokers and other participants than in the United States. Accounting,
auditing and financial reporting standards in China are different from U.S. standards and, therefore, disclosure of certain material information may not be made. In addition, less information may be available than would be the case if investments
were restricted to securities of U.S. issuers. There is also generally less governmental regulation of the securities industry in China, and less enforcement of regulatory provisions relating thereto, than in the United States. Additionally, it may
be more difficult to obtain a judgment in a court outside of the United States.
The PRC government strictly regulates
the payment of foreign currency denominated obligations and sets monetary policy. In addition, the Chinese economy is export-driven and highly reliant on trade. Adverse changes to the economic conditions of its primary trading partners, such as the
United States, Japan and South Korea, would adversely impact the Chinese economy. An economic downturn in China would materially impact the Fund’s performance.
Emerging markets such as China can
experience high rates of inflation, deflation and currency devaluation. The value of the RMB may be subject to a high degree of fluctuation due to, among other things, changes in interest rates, the effects of monetary policies issued by the PRC,
the United States, foreign governments, central banks or supranational entities, the imposition of currency controls of other national or global political or economic developments. The Fund’s exposure to the RMB and changes in value of the RMB
versus the U.S. Dollar may result in reduced returns of the Fund and result in volatility. The RMB is currently not a freely convertible currency. The PRC government places strict regulations on RMB and sets the value of RMB to levels dependent on
the value of the U.S. Dollar, but the PRC government has been under pressure to manage the currency in a less restrictive fashion so that it is less correlated to the U.S. Dollar. The PRC government’s imposition of restrictions on the
repatriation of RMB out of mainland China may limit the depth of the offshore RMB market and may reduce the liquidity of Chinese investments. There may not be sufficient amounts of RMB for funds that invest directly in A-shares because there is
limited availability of the RMB currency. As a result, funds may not be able to be fully invested in A-shares.
Special Risk
Considerations Relating to RQFII and QFII Investments Risk
- The Fund’s ability to achieve its investment objective is dependent on the ability of other ETFs and counterparties to obtain
their QFII or RQFII quota. The Fund also cannot predict what would occur if general QFII or RQFII quotas were reduced or eliminated. Either circumstance would likely have a material adverse impact on the Fund through its indirect investments and
would likely adversely affect the willingness and ability of potential swap counterparties to engage in swaps with the Fund that are linked to the performance of A-shares. Additionally, other ETFs may limit or suspend creation unit activity and
shares could trade at a significant premium or discount to its net asset value and
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ETF Trust Prospectus
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therefore impact the Fund’s ability to obtain
exposure to the Index and the Fund’s ability to achieve its investment objective or obtain a high correlation to the Index.
Presently, there are a limited number
of firms and potential counterparties that have RQFII or QFII status or are willing and able to enter into swap transactions linked to the performance of A-shares. If the Fund is unable to obtain sufficient leveraged exposure to the Index due to the
limited availability of necessary investments or financial instruments, the Fund could, among other things, as a defensive measure, limit or suspend creation units until the Adviser determines that the requisite exposure to the Index is obtainable.
During the period that creation units are suspended, the Fund could trade at a significant premium or discount to its net asset value and could experience substantial redemptions. Alternatively, the Fund could change its investment objective, by
example, seeking leveraged exposure to track an alternative index focused on Chinese-related stocks other than A-shares or other appropriate investments, or decide to liquidate the Fund.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues
that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging
markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital
controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets
in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement procedures in
emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency. Emerging markets
may develop unevenly and may never fully develop.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited
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Direxion Shares ETF
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number of currencies. As a result, an increase or
decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund held a more diversified number of currencies.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to
Direxion Shares
ETF Trust Prospectus
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24
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process creation and/or redemption orders, Shares
may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 17.30% for the quarter ended June 30, 2017 and its lowest calendar quarter return was -28.16% for the quarter ended June 30, 2018. The year-to-date return as of
December 31, 2018 was -51.17%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(4/16/2015)
|
Return
Before Taxes
|
-51.17%
|
-23.89%
|
Return
After Taxes on Distributions
|
-51.30%
|
-23.95%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-30.26%
|
-16.40%
|
CSI
300 Index
(reflects no deduction for fees, expenses or taxes)
|
-27.64%
|
-10.29%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
6.99%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in April 2015
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares.
25
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Direxion Shares ETF
Trust Prospectus
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Retail investors may only purchase and sell Shares
on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset
value (discount).
Tax
Information
The Fund intends
to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred
arrangement, such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most
other ETFs.
Payments to
Broker-Dealers and Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Direxion Shares
ETF Trust Prospectus
|
26
|
Direxion
Daily MSCI China A Bull 2X Shares
Important Information Regarding the
Fund
The Direxion Daily MSCI
China A Bull 2X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier than
alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the MSCI China A International Index (the “Index”). This means that the return of the Fund for a period longer than a trading
day will be the result of each trading day’s compounded return over the period, which will very likely differ from 200% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and
greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further,
the return for investors that invest for periods less than a trading day will not be 200% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (2X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 200% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.11%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically
27
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Direxion Shares ETF
Trust Prospectus
|
leveraged investment results. On a day-to-day basis,
the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles,
including U.S. government securities and repurchase agreements.
The Index is a free-float adjusted
market capitalization weighted index and represents securities of large-capitalization and mid-capitalization Chinese issuers. Free-float market capitalization is calculated by multiplying a security’s price by the number of shares available
in the market, rather than the total number of shares outstanding.
As of December 31,
2018, the Index included 407 constituents which had an average market capitalization of $2 billion, total market capitalizations ranging from $426.2 million to $32.4 billion and were concentrated in the financials sector.
A-shares are issued by companies
incorporated in the People’s Republic of China (“China” or the “PRC”). A-shares are traded in renminbi (“RMB”) on the Shenzhen Stock Exchange or Shanghai Stock Exchange (“SSE”). The A-share
market in China is made available only to domestic PRC investors and certain foreign investors, including those foreign investors that have been approved as Renminbi Qualified Foreign Institutional Investors (“RQFII”) or as Qualified
Foreign Institutional Investors (“QFII”). Additionally, an investment in eligible A-shares is also permitted through the Shenzhen-Hong Kong and Shanghai-Hong Kong Stock Connect programs (“Stock Connect”), securities trading
and clearing programs. A RQFII or QFII license may be obtained by submitting an application to the China Securities Regulatory Commission (“CSRC”). After obtaining a RQFII or QFII license, the RQFII or QFII also applies to China’s
State Administration of Foreign Exchange (“SAFE”) for a specific aggregate dollar amount investment quota in which the RQFII or QFII can invest in A-shares.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
Because the Fund does not satisfy the
criteria to qualify as a RQFII or QFII itself and does not intend to trade through Stock Connect, the Fund expects to invest a majority of its assets in other investment companies (including ETFs) that track the same Index or a substantially similar
index, swaps, futures contracts and other types of derivative instruments or financial instruments, including swaps on the index or swaps on funds that track the same Index or a substantially similar index to obtain the leveraged exposure necessary
to achieve its investment objective. At times, however, the Fund will utilize other derivatives and investment strategies which may include gaining leveraged exposure to only a representative sample of the securities in the Index that have aggregate
characteristics similar to those of the Index. The Fund may do this by utilizing swaps on ETFs that track a similar index or futures contracts on a similar index.
Derivatives are financial
instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for investing directly in a security in order
to gain leveraged exposure to the Index or its components.
The Fund seeks to
remain fully invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movements or the increase or decrease of the value of the securities in
the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s stated investment objective. The impact of the Index’s movements
during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased.
Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms
“daily,” “day” and “trading day” refer to the period from the close of the U.S. markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 200% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 200% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 200% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund
Direxion Shares
ETF Trust Prospectus
|
28
|
is held and the
volatility of the Index during shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a
smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the
dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 6.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a significant loss of
value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 63.2% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 200% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 200% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
200%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-120%
|
-84.2%
|
-85.0%
|
-87.5%
|
-90.9%
|
-94.1%
|
-50%
|
-100%
|
-75.2%
|
-76.5%
|
-80.5%
|
-85.8%
|
-90.8%
|
-40%
|
-80%
|
-64.4%
|
-66.2%
|
-72.0%
|
-79.5%
|
-86.8%
|
-30%
|
-60%
|
-51.5%
|
-54.0%
|
-61.8%
|
-72.1%
|
-82.0%
|
-20%
|
-40%
|
-36.6%
|
-39.9%
|
-50.2%
|
-63.5%
|
-76.5%
|
-10%
|
-20%
|
-19.8%
|
-23.9%
|
-36.9%
|
-53.8%
|
-70.2%
|
0%
|
0%
|
-1.0%
|
-6.1%
|
-22.1%
|
-43.0%
|
-63.2%
|
10%
|
20%
|
19.8%
|
13.7%
|
-5.8%
|
-31.1%
|
-55.5%
|
20%
|
40%
|
42.6%
|
35.3%
|
12.1%
|
-18.0%
|
-47.0%
|
30%
|
60%
|
67.3%
|
58.8%
|
31.6%
|
-3.7%
|
-37.8%
|
40%
|
80%
|
94.0%
|
84.1%
|
52.6%
|
11.7%
|
-27.9%
|
50%
|
100%
|
122.8%
|
111.4%
|
75.2%
|
28.2%
|
-17.2%
|
60%
|
120%
|
153.5%
|
140.5%
|
99.4%
|
45.9%
|
-5.8%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 24.50%. The Index’s highest volatility rate for any one calendar year during the five-year period was 39.32% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 1.31%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 2% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 50%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
29
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Direxion Shares ETF
Trust Prospectus
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because
the Fund is leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on
Direxion Shares
ETF Trust Prospectus
|
30
|
collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the
daily change in the Fund's net asset value per share
to a multiple of the daily performance of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary
from the correlation to the Index due to embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
China Investing Risk
- Although the Fund will not invest directly in A-shares, it is subject, indirectly, to certain risks applicable to investing in A-shares. Investing in securities of Chinese companies, including
investments that provide exposure to A-shares, involves certain risks and considerations not typically associated with investing in securities of U.S. issuers, including, among others (i) the small size of the market for Chinese securities and low
trading volume, resulting in a lack of liquidity and in price volatility; (ii) currency devaluations and other currency exchange rate fluctuations
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Direxion Shares ETF
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or blockages; (iii) the nature and extent of
intervention by the PRC government in the Chinese securities markets, whether such intervention will continue and the impact of such intervention or its discontinuation; (iv) the risk of nationalization or expropriation of assets; (v) the risk that
the PRC government may decide not to continue to support economic reform programs; (vi) limitation on the use of brokers; (vii) higher rates of inflation; (viii) greater political, economic and social uncertainty; (ix) market volatility caused by
potential regional or territorial conflicts or natural disasters and; (x) the risk of increased trade tariffs, embargoes and other trade limitations. These factors can directly affect A-shares, and may indirectly affect investments that derive their
value from A-shares.
The
economy of China differs, often unfavorably, from the U.S. economy in such respects as structure, general development, government involvement, wealth distribution, rate of inflation, growth rate, interest rates, allocation of resources and capital
reinvestment and others. The PRC central government has historically exercised substantial control over virtually every sector of the Chinese economy through administrative regulation and/or state ownership and actions of the PRC central and local
government authorities continue to have a substantial effect on economic conditions in China. In addition, the PRC government has from time to time taken actions that influence the prices at which certain goods may be sold; encouraged companies to
invest or concentrate in particular industries; induced mergers between companies in certain industries and induced private companies to publicly offer their securities to increase or continue the rate of economic growth; controlled the rate of
inflation or otherwise regulated economic expansion. It may do so in the future as well, potentially having a significant adverse effect on economic conditions in China.
The Chinese securities markets are
emerging markets with limited operating history characterized by relatively low trading volume, resulting in substantially less liquidity and greater price volatility. Liquidity risks may be more pronounced for the A-share market than for Chinese
securities markets in general because the A-share market is subject to greater government restrictions and control, including trading suspensions. Price fluctuations of A-shares are currently limited to either 5% or 10% per trading day. In addition,
there is less regulation and monitoring of Chinese securities markets and the activities of investors, brokers and other participants than in the United States. Accounting, auditing and financial reporting standards in China are different from U.S.
standards and, therefore, disclosure of certain material information may not be made. In addition, less information may be available than would be the case if investments were restricted to securities of U.S. issuers. There is also generally less
governmental regulation of the securities industry in China, and less enforcement of regulatory provisions relating thereto, than in the United States. Additionally, it may be more difficult to obtain a judgment in a court outside of the United
States.
The PRC government
strictly regulates the payment of foreign currency denominated obligations and sets monetary policy. In addition, the Chinese economy is export-driven and highly reliant on trade. Adverse changes to the economic conditions
of its primary trading partners, such as the United
States, Japan and South Korea, would adversely impact the Chinese economy. An economic downturn in China would materially impact the Fund’s performance.
Emerging markets such as China can
experience high rates of inflation, deflation and currency devaluation. The value of the RMB may be subject to a high degree of fluctuation due to, among other things, changes in interest rates, the effects of monetary policies issued by the PRC,
the United States, foreign governments, central banks or supranational entities, the imposition of currency controls of other national or global political or economic developments. The Fund’s exposure to the RMB and changes in value of the RMB
versus the U.S. Dollar may result in reduced returns of the Fund and result in volatility. The RMB is currently not a freely convertible currency. The PRC government places strict regulations on RMB and sets the value of RMB to levels dependent on
the value of the U.S. Dollar, but the PRC government has been under pressure to manage the currency in a less restrictive fashion so that it is less correlated to the U.S. Dollar. The PRC government’s imposition of restrictions on the
repatriation of RMB out of mainland China may limit the depth of the offshore RMB market and may reduce the liquidity of Chinese investments. There may not be sufficient amounts of RMB for funds that invest directly in A-shares because there is
limited availability of the RMB currency. As a result, funds may not be able to be fully invested in A-shares.
Special Risk
Considerations Relating to RQFII and QFII Investments Risk
- The Fund’s ability to achieve its investment objective is dependent on the ability of other ETFs and counterparties to obtain
their QFII or RQFII quota. The Fund also cannot predict what would occur if general QFII or RQFII quotas were reduced or eliminated. Either circumstance would likely have a material adverse impact on the Fund through its indirect investments and
would likely adversely affect the willingness and ability of potential swap counterparties to engage in swaps with the Fund that are linked to the performance of A-shares. Additionally, other ETFs may limit or suspend creation unit activity and
shares could trade at a significant premium or discount to its net asset value and therefore impact the Fund’s ability to obtain exposure to the Index and the Fund’s ability to achieve its investment objective or obtain a high
correlation to the Index.
Presently, there are a limited number
of firms and potential counterparties that have RQFII or QFII status or are willing and able to enter into swap transactions linked to the performance of A-shares. If the Fund is unable to obtain sufficient leveraged exposure to the Index due to the
limited availability of necessary investments or financial instruments, the Fund could, among other things, as a defensive measure, limit or suspend creation units until the Adviser determines that the requisite exposure to the Index is obtainable.
During the period that creation units are suspended, the Fund could trade at a significant premium or discount to its net asset value and could experience substantial redemptions. Alternatively, the Fund could change its investment objective, by
example, seeking leveraged exposure to track an alternative index focused on Chinese-related stocks other
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than A-shares or other appropriate investments, or
decide to liquidate the Fund.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues
that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging
markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital
controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets
in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement procedures in
emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency. Emerging markets
may develop unevenly and may never fully develop.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials
sector is also a target for cyber attacks and may
experience technology malfunctions and disruptions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
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International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. When you sell your Shares, they could be worth
less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value
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of the Fund over a
period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active
secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation
Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase and Sale of Fund Shares
The Fund’s shares are not
individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as creation units, each of which is
comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may
trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion Shares ETF
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Direxion
Daily CSI China Internet Index Bull 2X Shares
Important Information Regarding the
Fund
The Direxion Daily CSI
China Internet Index Bull 2X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be
riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the CSI Overseas China Internet Index (the “Index”). This means that the return of the Fund for a period longer
than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 200% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of
the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be 200% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (2X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 200% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.17%
|
Acquired
Fund Fees and Expenses
(1)
|
0.30%
|
Total
Annual Fund Operating Expenses
|
1.22%
|
Expense
Cap/Reimbursement
(2,3)
|
0.03%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.25%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
(3)
|
For the fiscal year ended
October 31, 2018, as a result of a portion of the Adviser's management fee and/or a previous reimbursement of Other Expenses, the Adviser recouped fees in the amount of 0.03%.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$127
|
$390
|
$673
|
$1,480
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 189% of the average
value of its portfolio. However, this portfolio turnover rate
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is calculated without regard to cash instruments or
derivative transactions. If the Fund's extensive use of derivatives were reflected, the Fund's portfolio turnover rate would be significantly higher.
Principal Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of
less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is provided by China
Securities Index Co., LTD (the “Index Provider”). The Index is designed to measure the performance of the investable universe of publicly traded China-based companies whose primary business or businesses are in the Internet and
Internet-related sectors, as defined by the index sponsor, China Securities Index Co., Ltd. (‘‘CSI’’). A China-based company is a company that meets at least one of the following criteria: 1) the company is incorporated in
mainland China; 2) its headquarters are in mainland China; or 3) at least 50% of the revenue from goods produced or sold, or services performed in mainland China. The Index Provider then removes securities that during the past year had a daily
average trading value of less than $500,000 or a daily average market capitalization of less than $500 million. China internet companies include, but are not limited to, companies that develop and market internet software and/or provide internet
services; manufacture home entertainment software and education software for home use; provide retail or commercial services primarily through the internet; and develop and market mobile internet software and/or provide mobile internet services.
Constituents of the Index are ranked by market capitalization in US Dollars and then weighted so that no constituent weighting exceeds 10%. The Index is rebalanced semi-annually.
As of December 31,
2018, the Index consisted of 51 constituents with an average market capitalization of approximately $20.9 billion and market capitalizations ranging from $228.5 million to $381.7 billion and were concentrated in the internet companies industry,
which is included in the information technology and consumer discretionary sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 200% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 200% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact
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on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 200% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 6.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a significant loss of
value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 63.2% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 200% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 200% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
200%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-120%
|
-84.2%
|
-85.0%
|
-87.5%
|
-90.9%
|
-94.1%
|
-50%
|
-100%
|
-75.2%
|
-76.5%
|
-80.5%
|
-85.8%
|
-90.8%
|
-40%
|
-80%
|
-64.4%
|
-66.2%
|
-72.0%
|
-79.5%
|
-86.8%
|
-30%
|
-60%
|
-51.5%
|
-54.0%
|
-61.8%
|
-72.1%
|
-82.0%
|
-20%
|
-40%
|
-36.6%
|
-39.9%
|
-50.2%
|
-63.5%
|
-76.5%
|
-10%
|
-20%
|
-19.8%
|
-23.9%
|
-36.9%
|
-53.8%
|
-70.2%
|
0%
|
0%
|
-1.0%
|
-6.1%
|
-22.1%
|
-43.0%
|
-63.2%
|
10%
|
20%
|
19.8%
|
13.7%
|
-5.8%
|
-31.1%
|
-55.5%
|
20%
|
40%
|
42.6%
|
35.3%
|
12.1%
|
-18.0%
|
-47.0%
|
30%
|
60%
|
67.3%
|
58.8%
|
31.6%
|
-3.7%
|
-37.8%
|
40%
|
80%
|
94.0%
|
84.1%
|
52.6%
|
11.7%
|
-27.9%
|
50%
|
100%
|
122.8%
|
111.4%
|
75.2%
|
28.2%
|
-17.2%
|
60%
|
120%
|
153.5%
|
140.5%
|
99.4%
|
45.9%
|
-5.8%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 26.20%. The Index’s highest volatility rate for any one calendar year during the five-year period was 29.55% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 4.03%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 2% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 50%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because
the Fund is leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index decreases, the Fund may be one of many market participants that are attempting to sell securities of the Index. Under such circumstances, the market for investments of the Index may lack sufficient
liquidity for all market participants' trades. Therefore, the Fund may have more difficulty selling securities or financial instruments and the Fund's transactions could exacerbate the price decline of the securities of the Index. Additionally,
because the Fund is leveraged, a minor decrease in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track
the performance of the same, or a substantially
similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an
ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing,
borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual
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obligations or may
fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is
entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such
collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies
are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal
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price or time, which may adversely affect the
Fund’s performance.
Chinese
Securities Risks
—
The Fund invests in, and/or has exposure to, Chinese securities and the Chinese economy.
Investment in securities of Chinese issuers involves risks that may be greater than if the Fund’s investments were more geographically diverse. The Chinese economy is generally considered an emerging market and can be significantly affected by
economic and political conditions and policy in China and surrounding Asian countries. In addition, the Chinese economy is export-driven and highly reliant on trade. A downturn in the economies of China’s primary trading partners could slow or
eliminate the growth of the Chinese economy. Additionally, the economy of China differs greatly from the U.S. economy in such respects as, structure, general development, government involvement, wealth distribution, rate of inflation, interest
rates, allocation of resources and capital reinvestment. Specifically, issuers in China are subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than issuers in more developed markets, and
therefore, all material information may not be available or reliable.
Chinese Government Risk
The Chinese government has historically exercised
substantial control over virtually every sector of the Chinese economy through administrative regulation and/or state ownership. In the past, the Chinese government has from time to time taken actions that influence the prices at which certain goods
may be sold, encouraged companies to invest or concentrate in particular industries, induced mergers between companies in certain industries and induced inflation or otherwise regulated economic expansion. If such past actions were to continue, they
may have significant adverse effects on the economic conditions in China. The Chinese government also strictly regulates the payment of foreign currency denominated obligations and sets monetary policy, and may introduce new laws and regulation that
may impact the Fund. Although China has begun the process of privatizing certain sectors of its economy, privatized entities may lose money and/or be re-nationalized. Accordingly, an investment in Chinese securities could result in a total loss if
these companies are re-nationalized or other regulatory actions are taken by the Chinese government.
Chinese Markets Risk
The Chinese securities markets have a limited
operating history and are not as developed as those in the U.S. A small number of issuers may represent a large portion of the China market as a whole, and prices for securities of these issuers may be very sensitive to adverse political, economic
and regulatory developments in China and other Asian countries and may experience significant losses in such conditions. The Chinese securities markets are characterized by relatively frequent trading halts and low trading volume, resulting in
substantially less liquidity and greater price volatility than more developed securities markets.
Investments in China may also be
subject to any positive or adverse effects of the varying nature of its economic landscape with respect to expropriation and/or nationalization of assets, strengthened or lessened restrictions on and
government intervention in international trade,
confiscatory taxation, political instability, including authoritarian and/or military involvement in governmental decision making, armed conflict, the impact on the economy as a result of civil war and social instability as a result of religious,
ethnic and/or socioeconomic unrest.
Chinese Currency Risk
The value of the renminbi (“RMB”) may be
subject to a high degree of fluctuation due to, among other things, changes in interest rates, the effects of monetary policies issued by the Chinese government, the United States, foreign governments, central banks or supranational entities, the
imposition of current controls of other national or global political or economic developments. The RMB is currently not a freely convertible currency. The Chinese government places strict regulations on RMB and sets the value of RMB to levels
dependent on the value of the U.S. Dollar, but the PRC government has been under pressure to manage the currency in a less restrictive fashion so that it is less correlated to the U.S. Dollar. The Chinese government’s imposition of
restrictions on the repatriation of RMB out of mainland China may limit the depth of the offshore RMB market and may reduce the liquidity of Chinese investments. The Fund’s exposure to Chinese securities and therefore, the RMB, may result in
volatility.
Consumer
Discretionary Sector Risk
—
Because companies in the consumer discretionary sector manufacture products and provide
discretionary services directly to the consumer, the success of these companies is tied closely to the performance of the overall domestic and international economy, interest rates, competition and consumer confidence. Success depends heavily on
disposable household income and consumer spending. Also, companies in the consumer discretionary sector may be subject to severe competition, which may have an adverse impact on a company’s profitability. Changes in demographics and consumer
tastes also can affect the demand for, and success of, consumer discretionary products in the marketplace.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues
that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging
markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital
controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure
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necessary to attract large amounts of foreign trade
and investment. Local securities markets in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or
impossible at times. Settlement procedures in emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of
securities.
Economic, business,
political, or social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency.
Emerging markets may develop unevenly and may never fully develop.
Information
Technology Sector Risk
—
The value of stocks of information technology companies and companies that rely heavily on
technology is particularly vulnerable
to rapid changes in technology product cycles, rapid product obsolescence, government regulation and competition,
both domestically and internationally, including competition from competitors with lower production costs. Information technology companies and companies that rely heavily on technology, especially
those of smaller,
less-seasoned companies,
tend to be more volatile than the overall market. Information technology companies are
heavily dependent on patent and intellectual property rights, the loss or impairment of which may adversely affect profitability. Additionally, companies in the information technology sector may face dramatic and often unpredictable changes in
growth
rates and competition for the services of qualified personnel.
Internet Company Industry Risk
—
The Fund may invest in, and/or have exposure to, internet
companies. The market prices of internet securities tend to exhibit a greater degree of market risk and sharp price fluctuations than other types of securities. These securities may fall in and out of favor with investors rapidly, which may cause
sudden selling and dramatically lower market prices. These companies are subject to rapid changes in technology, worldwide competition, rapid obsolescence of products and services, loss of patent protections, evolving industry standards and frequent
new product productions. Internet securities also may be affected adversely by changes in consumer and business purchasing patterns and government regulations. These companies may have high market valuations and may appear less attractive to
investors, which may cause sharp decreases in their market prices.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Micro-Capitalization Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition, micro-cap companies
often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or mid-capitalization. As
a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
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International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio
Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs.
Additionally, active market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active
trading may lead to higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders
as ordinary income when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s
extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. When you sell your Shares, they could be worth
less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value
43
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Direxion Shares ETF
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of the Fund over a
period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active
secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation
Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
Total Return
for the Calendar Years Ended December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 46.56% for the quarter ended March 31, 2017 and its lowest calendar quarter return was -40.74% for the quarter ended December 31, 2018. The year-to-date return as
of December 31, 2018 was -62.79%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(11/2/2016)
|
Return
Before Taxes
|
-62.79%
|
-10.69%
|
Return
After Taxes on Distributions
|
-62.91%
|
-11.38%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-37.08%
|
-7.97%
|
CSI
Overseas China Internet Index
(reflects no deduction for fees, expenses or taxes)
|
-32.91%
|
0.43%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
10.46%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in November 2016
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception in November 2016
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may
Direxion Shares
ETF Trust Prospectus
|
44
|
be taxed later upon withdrawal. Distributions by the
Fund may be significantly higher than those of most other ETFs.
Payments to Broker-Dealers and Other
Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may
create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
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Direxion Shares ETF
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Direxion
Daily High Yield Bear 2X Shares
Important Information Regarding the
Fund
The Direxion Daily High
Yield Bear 2X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier
than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the Bloomberg Barclays US High Yield Very Liquid Index (the “Index”). This means that the return of the Fund for
a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -200% of the return of the Index for that period. As a consequence, longer holding periods,
higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more
than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -200% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-2X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 200% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.60%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
1.39%
|
Acquired
Fund Fees and Expenses
(1)
|
0.08%
|
Total
Annual Fund Operating Expenses
|
2.07%
|
Expense
Cap/Reimbursement
(2)
|
-1.19%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.88%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.80% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$90
|
$534
|
$1,004
|
$2,305
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives were
Direxion Shares
ETF Trust Prospectus
|
46
|
reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the
Fund’s net assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that
have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index measures
the performance of publicly issued U.S. Dollar-denominated, non-investment grade or high-yield, fixed-rate, taxable corporate bonds, also known as “junk bonds.” The Index includes bonds that have a remaining maturity of at least one
year, regardless of optionality, are rated high-yield (Ba1/BB+/BB+ or below) using the middle rating of Moody’s, Fitch or Standard & Poor’s, respectively, and have $500 million or more of outstanding face value. To be eligible for
inclusion in the Index, a bond must have been issued within the past five years. The three largest bonds of each issuer, based on amount outstanding, may be included in the Index and the exposure to each eligible issuer will be capped at 2% of the
Index. In addition, securities must be registered, exempt from registration at the time of issuance, or issued under Rule 144A of the Securities Act of 1933, as amended. The Index is updated monthly. As of December 31, 2018 the Index consisted of
807 constituents.
The
components of the Index and the percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
,
hold 25% or more of its total assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the
close of the markets each trading day, Rafferty
positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s movements during the day will affect whether the Fund’s
portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has risen on a given day, net
assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to
the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -200% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -200% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -200% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to
future
47
|
Direxion Shares ETF
Trust Prospectus
|
adverse performance will increase because the
shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95.0% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -200% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -200% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-200%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
120%
|
506.5%
|
418.1%
|
195.2%
|
15.6%
|
-68.9%
|
-50%
|
100%
|
288.2%
|
231.6%
|
88.9%
|
-26.0%
|
-80.1%
|
-40%
|
80%
|
169.6%
|
130.3%
|
31.2%
|
-48.6%
|
-86.2%
|
-30%
|
60%
|
98.1%
|
69.2%
|
-3.6%
|
-62.2%
|
-89.8%
|
-20%
|
40%
|
51.6%
|
29.5%
|
-26.2%
|
-71.1%
|
-92.2%
|
-10%
|
20%
|
19.8%
|
2.3%
|
-41.7%
|
-77.2%
|
-93.9%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
-20%
|
-19.8%
|
-31.5%
|
-61.0%
|
-84.7%
|
-95.9%
|
20%
|
-40%
|
-32.6%
|
-42.4%
|
-67.2%
|
-87.2%
|
-96.5%
|
30%
|
-60%
|
-42.6%
|
-50.9%
|
-72.0%
|
-89.1%
|
-97.1%
|
40%
|
-80%
|
-50.5%
|
-57.7%
|
-75.9%
|
-90.6%
|
-97.5%
|
50%
|
-100%
|
-56.9%
|
-63.2%
|
-79.0%
|
-91.8%
|
-97.8%
|
60%
|
-120%
|
-62.1%
|
-67.6%
|
-81.5%
|
-92.8%
|
-98.1%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 4.46%. The Index’s highest volatility rate for any one calendar year during the
five-year period was 6.29% and volatility for a
shorter period of time may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 3.26%. Historical Index volatility and performance are not indications of what the Index
volatility and performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 2% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 50%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving
Direxion Shares
ETF Trust Prospectus
|
48
|
a high correlation with the Index. There can be no
assurance that a security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar
|
amount invested in a basket of securities representing
a particular index or an ETF that seeks to track an index.
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions,
netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
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Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance
that is greater than, or less than, the Fund’s
stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve
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ETF Trust Prospectus
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50
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the tax efficiency or to comply with various
regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Debt Instrument Risk
—
The value of debt instruments may increase or decrease as a result of the following: market fluctuations; changes in
interest rates; actual or perceived inability of issuers, guarantors, or liquidity providers to make scheduled principal or interest payments; or illiquidity in debt securities markets. Debt instruments are also impacted by political, regulatory,
market and economic developments that impact the market in general and specific economic sectors, industries or segments of the fixed income market. In general, rising interest rates lead to a decline in the value of debt securities and debt
securities with longer durations tend to be more sensitive to interest rate changes usually making their prices more volatile than those of securities with shorter durations. To the extent that interest rates rise, certain underlying obligations may
be paid off substantially slower than originally anticipated and the value of those securities may fall. Declining interest rates may lead to prepayment of obligations and cause reduced rates of return due to reinvestment of interest and principal
payments at lower interest rates.
Lower-Quality Debt Securities Risk
- Securities rated below investment grade, otherwise known as “junk bonds” generally involve significantly greater risks of loss of your money than an investment in investment-grade bonds.
Compared with issuers of investment-grade bonds, junk bonds are more likely to encounter financial difficulties and to be materially affected by these difficulties. As a result, junk bonds may be sensitive to economic changes, political changes, or
adverse developments specific to a company. These securities generally involve greater risk of default or price changes than other types of fixed-income securities and the Fund’s performance may vary significantly as a result.
Credit Risk
—
The Fund could lose money if the issuer or guarantor of a debt security goes bankrupt or is unable or unwilling to
make interest payments and/or repay principal. Changes in an issuer’s financial strength or in an issuer’s or debt security’s credit rating also may affect a security’s value and thus have an impact on Fund net asset value
and performance. Generally, the longer the maturity and the lower the credit quality of a security, the more sensitive it is to credit risk.
Interest Rate Risk
—
When interest rates
increase, fixed income securities or
instruments held
by the Fund will generally decline in value. The historically low interest rate environment,
together with recent
modest rate increases, heightens the risks associated with rising interest rates. A rising interest rate environment may adversely impact the liquidity of fixed-income securities and lead to increased volatility of fixed-income markets. Long-term
fixed income securities or instruments will normally have more price volatility because of this risk than short-term fixed income securities or instruments. The risks associated with changing interest rates may have unpredictable effects on the
markets and the Fund’s investments. Fluctuations in interest rates may also affect the liquidity of fixed income securities and instruments held by the Fund.
Extension Risk
—
During periods of rising interest rates, certain debt obligations may be paid off substantially more slowly than
originally anticipated and the value of those securities may fall sharply, which may adversely impact the value of the Fund’s investments.
Prepayment Risk
—
Many types of debt securities are subject to prepayment risk, which is the
risk that the issuer of the security will repay principal prior to the maturity date. As a result, the Fund may have to reinvest its assets in other debt securities that have lower yields. Securities subject to prepayment can offer less potential
for gains during a declining interest rate environment and potential for loss in a rising interest rate environment. In addition, the potential impact of prepayment features on the price of a debt security can be difficult to predict and result in
greater volatility.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total
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return may fluctuate more or fall greater in times of
weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they
trade, and the listing requirements may be amended from
time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
Total Return
for the Calendar Years Ended December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 10.50% for the quarter ended December 31, 2018 and its lowest calendar quarter return was -5.56% for the quarter ended September 30, 2018. The year-to-date return
as of December 31, 2018 was 8.04%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(6/16/2016)
|
Return
Before Taxes
|
8.04%
|
-8.07%
|
Return
After Taxes on Distributions
|
7.64%
|
-8.20%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
4.75%
|
-6.10%
|
Bloomberg
Barclays US High Yield Very Liquid Index
(reflects no deduction for fees, expenses or taxes)
|
-2.57%
|
4.60%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
9.96%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the since inception
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ETF Trust Prospectus
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period because the calculation recognizes a capital
loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in June 2016
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception in June 2016
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily MSCI European Financials Bull 2X Shares
Important Information Regarding the
Fund
The Direxion Daily
MSCI European Financials Bull 2X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may
be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the MSCI Europe Financials Index (the “Index”). This means that the return of the Fund for a period longer
than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 200% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of
the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be 200% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (2X) investment results, understand the risks associated with the use of leverage and are willing to
monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will lose money if
the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 200% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.60%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.54%
|
Acquired
Fund Fees and Expenses
(1)
|
0.34%
|
Total
Annual Fund Operating Expenses
|
1.48%
|
Expense
Cap/Reimbursement
(2)
|
-0.34%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.14%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.80% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$116
|
$435
|
$776
|
$1,739
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 38% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives were
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ETF Trust Prospectus
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54
|
reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of
less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is provided by MSCI Inc.
(the “Index Provider”). The Index is a free float-adjusted, market capitalization-weighted index and represents securities of large-capitalization and mid-capitalization companies across developed market countries in Europe. All
component securities in the Index are classified in the financials sector per the Global Industry Classification Standard (GICS).
As of December 31,
2018, the Index consisted of securities from the following 15 developed market countries: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. As
of December 31, 2018, the Index consisted of 80 constituents which had an average market capitalization of $18.4 billion, total market capitalizations ranging from $2.3 billion to $164 billion and were concentrated in the financials sector.
The components of the Index
and the percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its
total assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt
to achieve its investment objective without regard
to overall market movement or the increase or decrease of the value of the securities in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the
Fund’s investment objective. The impact of the Index’s movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should
rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy
typically results in high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading
day.
Because of daily
rebalancing and the compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 200% of
the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund
will lose money over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 200% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 200% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a
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shareholder’s investment, the dollar amount
lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 6.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a significant loss of
value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 63.2% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 200% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 200% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
200%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-120%
|
-84.2%
|
-85.0%
|
-87.5%
|
-90.9%
|
-94.1%
|
-50%
|
-100%
|
-75.2%
|
-76.5%
|
-80.5%
|
-85.8%
|
-90.8%
|
-40%
|
-80%
|
-64.4%
|
-66.2%
|
-72.0%
|
-79.5%
|
-86.8%
|
-30%
|
-60%
|
-51.5%
|
-54.0%
|
-61.8%
|
-72.1%
|
-82.0%
|
-20%
|
-40%
|
-36.6%
|
-39.9%
|
-50.2%
|
-63.5%
|
-76.5%
|
-10%
|
-20%
|
-19.8%
|
-23.9%
|
-36.9%
|
-53.8%
|
-70.2%
|
0%
|
0%
|
-1.0%
|
-6.1%
|
-22.1%
|
-43.0%
|
-63.2%
|
10%
|
20%
|
19.8%
|
13.7%
|
-5.8%
|
-31.1%
|
-55.5%
|
20%
|
40%
|
42.6%
|
35.3%
|
12.1%
|
-18.0%
|
-47.0%
|
30%
|
60%
|
67.3%
|
58.8%
|
31.6%
|
-3.7%
|
-37.8%
|
40%
|
80%
|
94.0%
|
84.1%
|
52.6%
|
11.7%
|
-27.9%
|
50%
|
100%
|
122.8%
|
111.4%
|
75.2%
|
28.2%
|
-17.2%
|
60%
|
120%
|
153.5%
|
140.5%
|
99.4%
|
45.9%
|
-5.8%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 19.58%. The Index’s highest volatility rate for any one calendar year during the
five-year period was 30.57% and volatility for a
shorter period of time may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was -3.50%. Historical Index volatility and performance are not indications of what the Index
volatility and performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 2% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 50%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the
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Fund is forced to sell an illiquid security at an
unfavorable time or at a price that is lower than Rafferty’s judgment of the security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains
or achieving a high correlation with the Index. There can be no assurance that a security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index decreases, the Fund may be one of many market participants that are attempting to sell securities of the Index. Under such circumstances, the market for investments of the Index may lack sufficient
liquidity for all market participants' trades. Therefore, the Fund may have more difficulty selling securities or financial instruments and the Fund's transactions could exacerbate the price decline of the securities of the Index. Additionally,
because the Fund is leveraged, a minor decrease in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of
|
return) earned or realized on particular
predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a notional amount or the return on or change in value of a particular dollar amount
invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect
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to any single counterparty. Further, there is a risk
that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
European Economic Risk
- The Economic and Monetary Union of the European Union (the “EU”) requires member countries to comply with restrictions on inflation rates, deficits, interest rates, debt levels and fiscal
and monetary controls, each of which may significantly affect every country in Europe. Changes in imports or exports, changes in governmental or EU regulations on trade, changes in the exchange rate of the euro (the common currency of certain EU
countries), the default or threat of default by an EU member country on its sovereign debt and/or an economic recession in an EU member country may have a significant adverse impact on the economies of EU member countries and their trading partners.
The European financial markets experienced volatility and were adversely affected by concerns about economic downturns, credit rating downgrades, rising government debt levels and possible default on, or restructuring of, government debt in several
European
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countries, including Cyprus, Greece, Ireland, Italy,
Portugal, Spain and Ukraine. A default or debt restructuring by any European country would adversely impact holders of that country’s debt and economy. These concerns have adversely affected the value and exchange rate of the euro and may
continue to significantly affect the economies of every country in Europe, including EU member countries that do not use the euro and non-EU member countries.
Responses to financial problems by
European governments, central banks and others, including austerity measures and reforms, may not produce the desired results, may result in social unrest, may limit future growth and economic recovery or may have other unintended consequences.
Further defaults or restricting by governments and other entities of their debt could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, one or more countries may abandon the euro
and/or withdraw from the EU. In a referendum held on June 23, 2016, the United Kingdom resolved to leave the EU. The referendum may introduce significant uncertainties and instability in the financial markets as the United Kingdom negotiates its
exit from the EU. Secessionist movements, such as the Catalan movement in Spain, as well as government or other responses to such movements, may also create instability and uncertainty in the region.
The occurrence of terrorist incidents
throughout Europe also could impact financial markets. The impact of these events is not clear but could be significant and far-reaching and materially impact a Fund.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the
performance of large-capitalization companies has
trailed the performance of the overall markets.
Mid-Capitalization
Company Risk
- Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than more established,
larger-capitalization companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well known to the
investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the
securities of larger companies. Adverse publicity and investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund.
As a result,
the performance
of mid-capitalization companies can be more volatile
and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Depositary Receipt Risk
—
To the extent the Fund invests in, and/or has exposure to, foreign companies, the Fund’s investment may be in
the form of depositary receipts or other securities convertible into securities of foreign issuers including American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), and Global Depositary Receipts
(“GDRs”). While the investment in ADRs, EDRs and GDRs, which are traded on exchanges and represent ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective
national markets and currencies, investments in them continue to be subject to certain of the risks associated with investing directly in foreign securities, such as political and exchange rate risks.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not
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as strict as they are in the U.S., and there may be
less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase
agreements are contracts in which a seller of
securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit
risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may
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ETF Trust Prospectus
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60
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widen and the Fund’s Shares may possibly be
subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
Total Return
for the Calendar Years Ended December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 21.20% for the quarter ended June 30, 2017 and its lowest calendar quarter return was -29.43% for the quarter ended December 31, 2018. The year-to-date return as of
December 31, 2018 was -45.04%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(7/27/2016)
|
Return
Before Taxes
|
-45.04%
|
6.85%
|
Return
After Taxes on Distributions
|
-45.38%
|
3.40%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-26.31%
|
4.44%
|
MSCI
Europe Financials Index
(reflects no deduction for fees, expenses or taxes)
|
-23.13%
|
7.01%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.30%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax
returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares" is higher for
the one-year period because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in July 2016
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception in July 2016
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion Shares ETF
Trust Prospectus
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Direxion
Daily MSCI European Financials Bear 2X Shares
Important Information Regarding the
Fund
The Direxion Daily
MSCI European Financials Bear 2X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the
Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the MSCI Europe Financials Index (the “Index”). This means that the return of the Fund for a
period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -200% of the return of the Index for that period. As a consequence, longer holding periods, higher
volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the
return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -200% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-2X) investment results, understand the risks associated with the use of leverage and
shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day,
the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment within a
single day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 200% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to
achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.60%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
0.96%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.95%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.80% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the Fund’s net
assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity
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ETF Trust Prospectus
|
62
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of less than 397 days and exhibit high quality
credit profiles, including U.S. government securities and repurchase agreements.
The Index is provided by MSCI Inc.
(the “Index Provider”). The Index is a free float-adjusted, market capitalization-weighted index and represents securities of large-capitalization and mid-capitalization companies across developed market countries in Europe. All
component securities in the Index are classified in the financials sector per the Global Industry Classification Standard (GICS).
As of December 31,
2018, the Index consisted of securities from the following 15 developed market countries: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. As
of December 31, 2018, the Index consisted of 80 constituents which had an average market capitalization of $18.4 billion, total market capitalizations ranging from $2.3 billion to $164 billion and were concentrated in the financials sector.
The components of the Index
and the percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its
total assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on
one trading day to the close of the markets on the next
trading day.
Because of daily
rebalancing and the compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -200% of
the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund
will lose money over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -200% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -200% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year
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|
Direxion Shares ETF
Trust Prospectus
|
period. Performance shown in the chart assumes that:
(i) no dividends were paid with respect to the securities included in the Index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were
reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a significant loss of
value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95.0% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -200% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -200% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-200%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
120%
|
506.5%
|
418.1%
|
195.2%
|
15.6%
|
-68.9%
|
-50%
|
100%
|
288.2%
|
231.6%
|
88.9%
|
-26.0%
|
-80.1%
|
-40%
|
80%
|
169.6%
|
130.3%
|
31.2%
|
-48.6%
|
-86.2%
|
-30%
|
60%
|
98.1%
|
69.2%
|
-3.6%
|
-62.2%
|
-89.8%
|
-20%
|
40%
|
51.6%
|
29.5%
|
-26.2%
|
-71.1%
|
-92.2%
|
-10%
|
20%
|
19.8%
|
2.3%
|
-41.7%
|
-77.2%
|
-93.9%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
-20%
|
-19.8%
|
-31.5%
|
-61.0%
|
-84.7%
|
-95.9%
|
20%
|
-40%
|
-32.6%
|
-42.4%
|
-67.2%
|
-87.2%
|
-96.5%
|
30%
|
-60%
|
-42.6%
|
-50.9%
|
-72.0%
|
-89.1%
|
-97.1%
|
40%
|
-80%
|
-50.5%
|
-57.7%
|
-75.9%
|
-90.6%
|
-97.5%
|
50%
|
-100%
|
-56.9%
|
-63.2%
|
-79.0%
|
-91.8%
|
-97.8%
|
60%
|
-120%
|
-62.1%
|
-67.6%
|
-81.5%
|
-92.8%
|
-98.1%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 19.58%. The Index’s highest volatility rate for any one calendar year during the five-year period was 30.57% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was -3.50%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the
Funds” in the Fund’s Statement of Additional
Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 2% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 50%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value
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ETF Trust Prospectus
|
64
|
of the Index should be expected to have a substantial
adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions,
netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines.
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When the Fund shorts securities, including
securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it has sold short and returning that security to the entity
that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse
leveraged investment objective. The target amount of
portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or
under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to
the required levels.
Due to the
Index including instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open
for business on the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset
value calculation time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the
daily performance of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to
the Index due to embedded costs and other factors.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
European Economic Risk
- The Economic and Monetary Union of the European Union (the “EU”) requires member countries to comply with restrictions on inflation rates, deficits, interest rates, debt levels and fiscal
and monetary controls, each of which may significantly affect every country in Europe. Changes in imports or exports, changes in governmental or EU regulations on trade, changes in the exchange rate of the euro (the common currency of certain EU
countries), the default or threat of default by an EU member country on its sovereign debt and/or an economic recession in an EU member country may have a significant adverse impact
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on the economies of EU member countries and their
trading partners. The European financial markets experienced volatility and were adversely affected by concerns about economic downturns, credit rating downgrades, rising government debt levels and possible default on, or restructuring of,
government debt in several European countries, including Cyprus, Greece, Ireland, Italy, Portugal, Spain and Ukraine. A default or debt restructuring by any European country would adversely impact holders of that country’s debt and economy.
These concerns have adversely affected the value and exchange rate of the euro and may continue to significantly affect the economies of every country in Europe, including EU member countries that do not use the euro and non-EU member
countries.
Responses to
financial problems by European governments, central banks and others, including austerity measures and reforms, may not produce the desired results, may result in social unrest, may limit future growth and economic recovery or may have other
unintended consequences. Further defaults or restricting by governments and other entities of their debt could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, one or more countries
may abandon the euro and/or withdraw from the EU. In a referendum held on June 23, 2016, the United Kingdom resolved to leave the EU. The referendum may introduce significant uncertainties and instability in the financial markets as the United
Kingdom negotiates its exit from the EU. Secessionist movements, such as the Catalan movement in Spain, as well as government or other responses to such movements, may also create instability and uncertainty in the region.
The occurrence of terrorist incidents
throughout Europe also could impact financial markets. The impact of these events is not clear but could be significant and far-reaching and materially impact a Fund.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to
changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Mid-Capitalization
Company Risk
- Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than more established,
larger-capitalization companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well known to the
investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the
securities of larger companies. Adverse publicity and investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund.
As a result,
the performance
of mid-capitalization companies can be more volatile
and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments
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that may be traded in markets that are closed when
the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in
premiums or discounts to net asset value that may be greater than those experienced by other ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock
Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience
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the same
investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers,
Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the
Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase and Sale of Fund Shares
The Fund’s shares are not
individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a
national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset
value (discount).
Tax
Information
The Fund intends
to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred
arrangement, such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most
other ETFs.
Payments to
Broker-Dealers and Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares
Important Information
Regarding the Fund
The
Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other
exchange-traded funds. As a result, the Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the Indxx Global Robotics and Artificial Intelligence Thematic Index
(the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 200% of the return of the
Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the
Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be 200% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (2X) investment results, understand the risks associated with the use of leverage and are willing to
monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will lose money if
the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 200% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.60%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
0.96%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.95%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.80% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other financial
instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
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leveraged investment results. On a day-to-day basis,
the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles,
including U.S. government securities and repurchase agreements.
The Index is designed to provide
exposure to exchange-listed companies in developed markets that are expected to benefit from the adoption and utilization of robotics and/or artificial intelligence, including companies involved in developing industrial robots and production
systems, automated inventory management, unmanned vehicles, voice/image/text recognition, and medical robots or robotic instruments (collectively, “Robotics & Artificial Intelligence Companies”), as defined by Indxx (the “Index
Provider”). Companies must have a minimum market capitalization of $100 million and a minimum average daily turnover for the last 6 months greater than, or equal to, $2 million in order to be eligible for inclusion in the Index. From the
eligible universe, the Index Provider identifies Robotics & Artificial Intelligence Companies that generate revenue from four robotics and artificial intelligence market segments (“Segments”): (1) industrial applications of robots
and robotic products and services, (2) developing and/or producing unmanned vehicles, drones and robots for both military and consumer applications, including hardware and software therefor, (3) developing robots and artificial intelligence for
non-industrial applications, such as agriculture, healthcare consumer applications, and entertainment, and (4) developing applications, technologies, and products that use artificial intelligence for data analysis, predictive analytics, task
automation, and other applications.
For the second step of the process,
companies are grouped into the following three categories based on revenue: (i) ”Pure-Play”-the company generates a majority of its revenue (over 50%) from one of the Segments, (ii) “Quasi-Play”-the Company has a diversified
revenue stream but generates at least 10% (but less than 50%) of its revenue from the Segments, and (iii) “Marginal”-the Company has a diversified revenue stream but generates between 1-10% of its revenue from a distinct business unit in
the Segments.
Finally, the top
100 “pure-play” companies by market capitalization are selected to form the Index. If fewer than 100 “pure-play” companies are eligible for inclusion, the Index will include “quasi-play” companies. If fewer than
30 companies meet the above criteria of “pure-play” and “quasi-play,” “marginal” company securities will be included in the Index so the number of constituents of the Index reaches 30.
The Index is reviewed semi-annually and
is reconstituted and rebalanced annually.
Companies from the following
countries were eligible for inclusion in the Index: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland, South Korea, Taiwan, the United Kingdom, and the United States.
As of December 31, 2018, the Index
consisted of 35 securities, which had an average market capitalization of $10.3 billion, median market capitalization of $1.3 billion, total capitalizations ranging from $63.6 million to $81.4 billion and were concentrated in the industrials and
information technology sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 200% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
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Principal Investment
Risks
An investment in the
Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 200% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 200% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the chart below, the Fund
would be expected to lose 6.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a significant loss of value in the Fund, even
if the Index’s return is flat. For instance, if the Index’s annualized
volatility is 100%, the Fund would be expected to
lose 63.2% of its value, even if the cumulative Index return for the year was 0%. Areas shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 200% of the performance of the Index and those shaded
green (or light gray) represent those scenarios where the Fund can be expected to return more than 200% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s
performance. The Fund’s actual returns may be significantly better or worse than the returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
200%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-120%
|
-84.2%
|
-85.0%
|
-87.5%
|
-90.9%
|
-94.1%
|
-50%
|
-100%
|
-75.2%
|
-76.5%
|
-80.5%
|
-85.8%
|
-90.8%
|
-40%
|
-80%
|
-64.4%
|
-66.2%
|
-72.0%
|
-79.5%
|
-86.8%
|
-30%
|
-60%
|
-51.5%
|
-54.0%
|
-61.8%
|
-72.1%
|
-82.0%
|
-20%
|
-40%
|
-36.6%
|
-39.9%
|
-50.2%
|
-63.5%
|
-76.5%
|
-10%
|
-20%
|
-19.8%
|
-23.9%
|
-36.9%
|
-53.8%
|
-70.2%
|
0%
|
0%
|
-1.0%
|
-6.1%
|
-22.1%
|
-43.0%
|
-63.2%
|
10%
|
20%
|
19.8%
|
13.7%
|
-5.8%
|
-31.1%
|
-55.5%
|
20%
|
40%
|
42.6%
|
35.3%
|
12.1%
|
-18.0%
|
-47.0%
|
30%
|
60%
|
67.3%
|
58.8%
|
31.6%
|
-3.7%
|
-37.8%
|
40%
|
80%
|
94.0%
|
84.1%
|
52.6%
|
11.7%
|
-27.9%
|
50%
|
100%
|
122.8%
|
111.4%
|
75.2%
|
28.2%
|
-17.2%
|
60%
|
120%
|
153.5%
|
140.5%
|
99.4%
|
45.9%
|
-5.8%
|
The
Index’s annualized historical volatility rate for the five year period ended December 31, 2018 was 15.12%. The Index’s highest volatility rate for any one calendar year during the five-year period was 19.65% and volatility for a shorter
period of time may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 5.80%. Historical Index volatility and performance are not indications of what the Index volatility and
performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 2% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline
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of more than 50%. Leverage will also have the effect
of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
|
If the Index has a
dramatic move that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event,
the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even
if the Index later reverses all or a portion of its movement.
|
•
|
Futures
Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an
imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a
closing transaction. Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly
volatile and the use of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts, which will subject the Fund to additional risks that are different from those
associated with ordinary securities transactions. The Fund
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is exposed to the risk that a counterparty may be
unwilling or unable to make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on
its payment obligations to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the
Fund is insufficient or there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of
transactions, netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory
restrictions or extreme volatility will also adversely
affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund.
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Finally, depending on the demand in the market, the
Fund may not be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Robotics & Artificial Intelligence
Company Risk
—
Robotics and artificial intelligence companies may have limited product lines, markets, financial resources or personnel. These companies
typically face intense competition and potentially rapid product obsolescence. These companies are also heavily dependent on intellectual property rights and may be adversely affected by loss or impairment of those rights. There can be no assurance
these companies will be able to successfully protect their intellectual property to prevent the misappropriation of their technology, or that competitors will not develop technology that is substantially similar or superior to such companies’
technology. Robotics and artificial intelligence companies typically engage in significant amounts of spending on research and development, and there is no guarantee that the products or services produced by these companies will be successful.
Robotics and artificial intelligence companies, especially smaller companies, tend to be more volatile than companies that do not rely heavily on technology.
Industrials Sector Risk
—
Stock prices of issuers in the industrials sector are affected by supply and demand both for their specific product or
service and for industrials sector products in general. Government regulation, world events and economic conditions will also affect the performance of investments in such issuers. Aerospace and defense companies, a component of the industrials
sector, can be significantly affected by government spending policies because companies involved in this industry rely to a significant extent on U.S. and other government demand for their products and services. Thus, the financial condition of, and
investor interest in, aerospace and defense companies are heavily influenced by government defense spending policies which are typically under pressure from efforts to control government spending budgets. Transportation companies, another component
of the industrials sector, are subject to cyclical performance and therefore investment in such companies may experience occasional sharp price movements which may result from changes in the economy, fuel prices, labor agreements and insurance
costs.
Information
Technology Sector Risk
—
The value of stocks of information technology companies and companies that rely heavily on
technology is particularly vulnerable to rapid changes in technology product cycles, rapid product obsolescence, government regulation and competition, both domestically and internationally, including competition from competitors with lower
production costs. Information technology companies and companies that rely heavily on technology, especially those of smaller, less-seasoned companies, tend to be more volatile than the overall market. Information technology companies are heavily
dependent on patent and intellectual property rights, the loss or impairment of which may adversely affect profitability. Additionally, companies in the information technology sector may face dramatic and often unpredictable changes in growth rates
and competition for the services of qualified personnel.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or Mid-Capitalization Company
Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial
resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant institutional ownership and
are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure, which could increase
the volatility of the Fund’s portfolio.
Micro-Capitalization Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition, micro-cap companies
often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or mid-capitalization. As
a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes
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before or after the New York Stock Exchange can vary
from the performance of its index.
Cybersecurity Risk
-
Failures or breaches of the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business
operations, potentially resulting in financial losses to the Fund. While the Fund has established business continuity plans and risk management systems seeking to address system breaches or failures, these plans and systems are inherently limited.
Further, cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase
agreements are contracts in which a seller of
securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit
risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will fluctuate in
response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or less than net
asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that large
discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the daily net
asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no
guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or
create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may
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widen and the Fund’s Shares may possibly be
subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants
in exchange for cash or a deposit or delivery of a
basket of assets (securities and/or cash) in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may
incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily Preferred Stock Bull 2X Shares
Important Information
Regarding the Fund
The
Direxion Daily Preferred Stock Bull 2X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the
Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the Indxx US High Yield, Low Volatility Preferred Stock Index (the “Index”). This means that the
return of the Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 200% of the return of the Index for that period. As a consequence, longer
holding periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much
as, or more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be 200% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (2X) investment results, understand the risks associated with the use of leverage and are willing to
monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will lose money if
the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 200% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.60%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
0.96%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.95%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.80% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other financial
instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically
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ETF Trust Prospectus
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leveraged investment results. On a day-to-day basis,
the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles,
including U.S. government securities and repurchase agreements.
The Index is designed to measure the
performance of the preferred stocks listed on United States stock exchanges that have the highest yielding dividends and lowest volatility as determined by Indxx (the “Index Provider”). The Index ranks each security in the Indxx US
Preferred Stock Index based on the security’s dividend and volatility. The 50 securities with the highest dividend rankings and the lowest volatility are included in the Index. As of the date of this Prospectus, the Index had not commenced
operations.
The components of
the Index and the percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more
of its total assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s
returns compounded over the period, which will very
likely differ from 200% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is
even possible that the Fund will lose money over time while the Index's performance increases.
Principal Investment Risks
An investment in the Fund entails
risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not traditionally
associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 200% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 200% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses
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and/or actual borrowing/lending rates were reflected,
the estimated returns would be different than those shown.
As shown in the chart below, the Fund
would be expected to lose 6.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a significant loss of value in the Fund, even
if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 63.2% of its value, even if the cumulative Index return for the year was 0%. Areas shaded red (or dark gray)
represent those scenarios where the Fund can be expected to return less than 200% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return more than 200% of the
performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the returns shown below as a
result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
200%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-120%
|
-84.2%
|
-85.0%
|
-87.5%
|
-90.9%
|
-94.1%
|
-50%
|
-100%
|
-75.2%
|
-76.5%
|
-80.5%
|
-85.8%
|
-90.8%
|
-40%
|
-80%
|
-64.4%
|
-66.2%
|
-72.0%
|
-79.5%
|
-86.8%
|
-30%
|
-60%
|
-51.5%
|
-54.0%
|
-61.8%
|
-72.1%
|
-82.0%
|
-20%
|
-40%
|
-36.6%
|
-39.9%
|
-50.2%
|
-63.5%
|
-76.5%
|
-10%
|
-20%
|
-19.8%
|
-23.9%
|
-36.9%
|
-53.8%
|
-70.2%
|
0%
|
0%
|
-1.0%
|
-6.1%
|
-22.1%
|
-43.0%
|
-63.2%
|
10%
|
20%
|
19.8%
|
13.7%
|
-5.8%
|
-31.1%
|
-55.5%
|
20%
|
40%
|
42.6%
|
35.3%
|
12.1%
|
-18.0%
|
-47.0%
|
30%
|
60%
|
67.3%
|
58.8%
|
31.6%
|
-3.7%
|
-37.8%
|
40%
|
80%
|
94.0%
|
84.1%
|
52.6%
|
11.7%
|
-27.9%
|
50%
|
100%
|
122.8%
|
111.4%
|
75.2%
|
28.2%
|
-17.2%
|
60%
|
120%
|
153.5%
|
140.5%
|
99.4%
|
45.9%
|
-5.8%
|
The Index
had not commenced operations as of the date of this Prospectus and therefore historical Index volatility and performance are not yet available. In the future, historical Index volatility and performance will be presented in this section. Historical
Index volatility and performance are not indications of what the Index volatility and performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index such as swaps, may differ from the volatility of the
Index.
For information regarding
the effects of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note
Regarding the Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will
be magnified. This means that an investment in the
Fund will be reduced by an amount equal to 2% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose an amount
greater than its net assets in the event of an Index decline of more than 50%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference
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assets and the derivative, which may prevent the
Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
|
If the Index has a
dramatic move that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event,
the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even
if the Index later reverses all or a portion of its movement.
|
•
|
Futures
Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an
imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a
closing transaction. Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly
volatile and the use of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts, which will subject the Fund to additional risks that are different from those
associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the
agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment
held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its
leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions
adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement.
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Because of this, it is unlikely that the Fund will
be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory
restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Preferred Stock Risk
—
A preferred stock has characteristics of a bond and a common stock. It may offer the higher yield of a bond and has
priority over common stock in the receipt of dividends or in any residual assets after payment to creditors should the issuer be dissolved. However, it does not have the same seniority as a bond and, unlike common stock, its participation in the
issuer’s growth may be limited. Preferred stock is subject to many of the risks associated with debt instruments, including interest rate risk. As interest rates rise, the value of preferred stocks is likely to decline.
In addition, preferred stocks may not pay a
dividend; an issuer may suspend payment of dividends on preferred stocks, may call or redeem its preferred stock, or convert it to common stock at any time.
Small- and/or Mid-Capitalization Company
Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial
resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant institutional ownership and
are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure, which could increase
the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches of the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business
operations, potentially resulting in financial losses to the Fund. While the Fund has established business continuity plans and risk management systems seeking to address system breaches or failures, these plans and systems are inherently limited.
Further, cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary
income
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when distributed to them). The Fund calculates
portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of derivative instruments were reflected, the
calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will fluctuate in
response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the
secondary market may trade Shares at a price greater
than net asset value (a premium) or less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in
creation units, the Adviser believes that large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s
investment results are measured based upon the daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating
and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are
unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading
halts and/or delisting.
Trading
Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market
volatility or other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of
the exchange on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a
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national securities exchange through a broker-dealer
and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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The Direxion Shares ETF Trust
(the “Trust”) is a registered investment company offering a number of separate exchange-traded funds (“ETFs”). This Prospectus describes the ETFs noted in the table below (each a “Fund” and collectively the
“Funds”). Rafferty Asset Management, LLC serves as the investment advisor to each Fund ("Rafferty" or the "Adviser").
The Direxion Daily
High Yield Bear 2X Shares is referred to as the "Fixed Income Fund."
The Direxion Daily CSI 300 China A Share
Bull 2X Shares, Direxion Daily MSCI China A Bull 2X Shares and the Direxion Daily CSI China Internet Index Bull 2X Shares are collectively referred to as the "China Funds."
The Funds with the word
“Bull” in their name (collectively, the “Bull Funds”), attempt to provide investment results that correlate positively to the return of an underlying index, meaning the Bull Funds attempt to move in the same direction as the
underlying index. The Funds with the word “Bear” in their name (collectively, the “Bear Funds”), attempt to provide investment results that correlate negatively to the return of an underlying index, meaning that the Bear
Funds attempt to move in the opposite or inverse direction of the underlying index. As used in this Prospectus, the terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one
trading day to the close of the markets on the next trading day.
The Bull Funds
seek daily leveraged investment results, before fees and expenses, of 200% of the performance of an underlying index. The Bear Funds seek daily inverse leveraged investment results, before fees and expenses, of 200% of the inverse of the performance
of an underlying index. If, on a given day, the underlying index gains 1%, the Bull Funds are designed to gain approximately 2% (which is equal to 200% of 1%), while the Bear Funds are designed to lose approximately 2%. Conversely, if the the
underlying index loses 1% on a given day, the Bull Funds are designed to lose approximately 2%, while the Bear Funds are designed to gain approximately 2% (which is equal to -200% of the 1% index loss). The Funds seek leveraged investment results on
a daily basis
—
from the close of regular trading on one trading day to the close on the next trading day
—
which should not be equated with seeking a leveraged investment objective for any other period.
The Funds are designed as short-term trading vehicles. The Funds are intended to be used
by investors who intend to actively monitor and manage their portfolios.
Each Fund tracks an underlying index as
noted below:
Fund
|
Underlying
Index
|
Daily
Leveraged
Investment
Objective
|
Direxion
Daily S&P 500
®
Bull 2X Shares
|
S&P
500
®
Index
|
200%
|
Direxion
Daily Small Cap Bull 2X Shares
|
Russell
2000
®
Index
|
200%
|
Direxion
Daily CSI 300 China A Share Bull 2X Shares
|
CSI
300 Index
|
200%
|
Direxion
Daily MSCI China A Bull 2X Shares
|
MSCI
China A International Index
|
200%
|
Direxion
Daily CSI China Internet Index Bull 2X Shares
|
CSI
Overseas China Internet Index
|
200%
|
Direxion
Daily High Yield Bear 2X Shares
|
Bloomberg
Barclays US High Yield Very Liquid Index
|
-200%
|
Direxion
Daily MSCI European Financials Bull 2X Shares
|
MSCI
Europe Financials Index
|
200%
|
Direxion
Daily MSCI European Financials Bear 2X Shares
|
-200%
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares
|
Indxx
Global Robotics and Artificial Intelligence Thematic Index
|
200%
|
Direxion
Daily Preferred Stock Bull 2X Shares
|
Indxx
US High Yield, Low Volatility Preferred Stock Index
|
200%
|
Shares of the Funds
(“Shares”) are, or upon commencement of operations will be, listed and traded on the NYSE Arca, Inc. (the “Exchange”), where the market prices for the Shares may be different from the intra-day value of the Shares
disseminated by the Exchange and from their net asset value (“NAV”). Unlike conventional mutual funds, Shares are not individually redeemable directly with a Fund. Rather, each Fund issues and redeems Shares on a continuous basis at NAV
only in large blocks of Shares called “Creation Units.” A Creation Unit consists of 50,000 Shares. Creation Units of the Bull Funds are issued and redeemed in cash and/or in-kind for securities included in the relevant underlying index.
Creation Units of the Bear Funds are issued and redeemed for cash. As a result, retail investors generally will not be able to purchase or redeem Shares directly from, or with, each Fund. Most retail investors will purchase or sell Shares in the
secondary market through a broker.
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In order to
provide additional information regarding the value of Shares of a Fund, the Exchange, a market data vendor or other information provider, disseminates an Intraday Optimized Portfolio Value (“IOPV”) for each Fund. Each Fund’s IOPV
is expected to be disseminated every 15 seconds during the regular trading hours of the Exchange. The IOPV is based on the current market value of the securities and cash required to be deposited in exchange for a Creation Unit. The IOPV does not
necessarily reflect the precise composition of the current portfolio holdings of a Fund as of a particular point in time, or an accurate valuation of the current portfolio. The quotations of certain Fund holdings may not be updated during U.S.
trading hours if such holdings do not trade in the U.S. The Funds is not involved in, nor responsible for, the calculation or dissemination of the IOPV and make no representations or warranty as to its accuracy.
There is no assurance that the Funds
will achieve their investment objective and an investment in a Fund could lose money. No single Fund is a complete investment program.
Changes in Investment Objective.
Each Fund’s investment objective is not a fundamental policy and may be changed by the Funds' Board of Trustees without shareholder approval.
Additional Information Regarding Investment
Techniques and Policies
Rafferty uses a number of investment
techniques in an effort to achieve the stated investment objective for each Fund. Each Fund seeks 200% or -200% of the return of its underlying index on a given day.
For the Bull Funds, Rafferty attempts
to provide two times the returns of its underlying index for a one-day period. Each Bear Fund is managed to provide two times the inverse (or opposite) of the return of its underlying index for a one-day period. To do this, Rafferty creates net
“long” positions for the Bull Funds and net “short” positions for the Bear Funds. (Rafferty may create short positions in the Bull Funds and long positions in the Bear Funds even though the net exposure in the Bull Funds will
be long and the net exposure in the Bear Funds will be short.) Long positions move in the same direction as its underlying index, advancing when the underlying index advances and declining when the underlying index declines. Short positions move in
the opposite direction of the underlying index, advancing when the underlying index declines and declining when the underlying index advances. Additionally, none of the Funds seek income that is exempt from federal, state or local income
taxes.
In seeking to
achieve each Fund’s investment objective, Rafferty uses statistical and quantitative analysis to determine the investments each Fund makes and the techniques it employs. Rafferty relies upon a pre-determined model to generate orders that
result in repositioning each Fund’s investments in accordance with its daily leveraged investment objective. Using this approach, Rafferty determines the type, quantity and mix of investment positions that it believes in combination should
produce daily returns consistent with a Fund’s investment objective. In general, if a Fund is performing as designed, the return of the underlying index will dictate the return for that Fund. Rafferty does not invest the assets of a Fund in
securities, derivatives or other investments based on Rafferty’s view of the investment merit of a particular security, instrument or company, nor does it conduct conventional investment research or analysis or forecast market movements or
trends. Each Fund generally pursues its investment objective regardless of the market conditions and does not take defensive positions.
Each Fund has a clearly articulated
daily leveraged investment objective which requires the Fund to seek economic exposure in excess of its net assets (
i.e.
, economic leverage). To meet its objectives, each Fund invests in some combination of
financial instruments so that it generates economic exposure consistent with the Fund’s investment objective.
Each Fund offered in this Prospectus
may invest significantly in: futures contracts; options on securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; ETFs; and other financial
instruments to obtain economic “leverage.” Leveraging allows Rafferty to generate a greater positive or negative return for the Funds than what would be generated on the invested capital without leverage, thus changing small market
movements into larger changes in the value of the investments of a Fund.
The Bull Funds generally may hold a
representative sample of the securities in the underlying index. The sampling of securities that is held by a Bull Fund is intended to maintain high correlation with, and similar aggregate characteristics
(
e.g.
, market capitalization and industry weightings) to, the underlying index. A Bull Fund also may invest in securities that are not included in its underlying index or may overweight or underweight certain
components of the underlying index. Certain Funds’ assets may be concentrated in an industry or group of industries to the extent that a Fund's underlying index concentrates in a particular industry or group of industries. In addition, each
Fund offered in this Prospectus is non-diversified, which means that it may invest in the securities of a limited number of issuers.
At the close of the markets each
trading day, each Fund will position its portfolio to ensure that the Fund’s exposure to its underlying index is consistent with the Fund’s stated investment objective. The impact of market movements during the day determines whether a
portfolio needs to be repositioned. If the underlying index has risen on a given day, a Bull Fund’s net assets should rise, meaning its exposure will typically need to be increased. Conversely, if the underlying index has fallen on a given
day, a Bull Fund’s net assets should fall, meaning its exposure will typically need to be reduced. If the underlying index has risen on a given day, a Bear Fund’s net assets should fall, meaning its exposure will typically need to be
reduced. If the underlying index has fallen on a given day, a Bear Fund’s net assets should rise, meaning its exposure
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will typically need
to be increased. Any of the Funds’ portfolios may also need to be changed to reflect changes in the composition of its underlying index.
A Fund may have difficulty in achieving its daily
leveraged investment objective due to fees, expenses, transaction costs, income items, accounting standards, significant purchase and redemption activity by Fund shareholders and/or disruptions or a temporary lack of liquidity in the markets for the
securities held by the Fund. Additionally, if a Fund's underlying index includes foreign securities or tracks a foreign market index where the foreign market closes before or after the New York Stock Exchange (“NYSE”) closes (generally
at 4 p.m. Eastern Time), the performance of the underlying index may differ from the expected daily leveraged performance. As such, correlation to an underlying index for Funds that track an underlying index that includes foreign securities will
generally be measured by comparing the daily change in a Fund’s NAV per share to the performance of one or more U.S. ETFs that tracks the same underlying index.
An exchange or market may close or
issue trading halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in a Fund being unable to buy or sell certain securities or financial instruments. In such
circumstances, a Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
If a Fund is unable to obtain
sufficient leveraged or leveraged inverse exposure to its underlying index due to the limited availability of necessary investments or financial instruments, a Fund could, among other things, limit or suspend creation units until the Adviser
determines that the requisite exposure to its underlying index is obtainable. During the period that creation units are suspended, a Fund could trade at a significant premium or discount to its NAV and could experience substantial redemptions.
A Cautionary Note to Investors
Regarding Dramatic Index Movement
. A Bull Fund seeks daily exposure to its underlying index equal to 200% of its net assets while a Bear Fund seeks daily exposure to its underlying index equal to -200% of its net
assets. As a consequence, a Fund could lose an amount greater than its net assets in the event of a movement of its underlying index in excess of 50% in a direction adverse to the Fund (meaning a decline in the value of the underlying index of a
Bull Fund and a gain in the value of the underlying index for a Bear Fund). Rafferty will attempt to position each Fund’s portfolio to ensure that a Fund does not gain or lose more than 90% of its NAV on a given day. If Rafferty successfully
positions a Fund’s portfolio to provide such limits, a Fund’s portfolio and NAV will not be responsive to movements in its underlying index beyond 50% in a given day, whether that movement is favorable or adverse to the Fund. For
example, if a Bull Fund’s underlying index were to gain 50%, the Bull Fund would be limited to a daily gain of 90%, which corresponds to 200% of an underlying index gain of 45%, rather than 100%, which is 200% of the underlying index gain of
50%. It may not be possible to limit a Fund’s losses, and shareholders should not expect such protection. The risk of total loss exists.
If the underlying index of a Fund has
a dramatic adverse move that causes a material decline in a Fund’s net assets, the terms of a Fund’s swap agreements may permit the counterparty to immediately close out the swap transaction. In that event, a Fund may be unable to enter
into another swap agreement or invest in other derivatives to achieve exposure consistent with a Fund’s investment objective. This may prevent a Fund from achieving its leveraged or inverse leveraged investment objective, even if the
underlying index later reverses all or a portion the move.
Examples of the Impact of Daily
Compounding.
Seeking daily leveraged investment results provides potential for greater gains and losses for the Funds relative to its underlying index’s performance. For a period longer than one day, the
pursuit of a daily investment objective will result in daily leveraged compounding for the Funds. This means that the return of an underlying index over a period of time greater than one day multiplied by a Fund’s daily leveraged investment
objective (
e.g.
, 200% or -200%) generally will not equal a Fund’s performance over that same period. As a consequence, investors should not
plan to hold the Funds unmonitored for periods longer than a single trading day. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the
return of a Fund’s stated daily leveraged investment objective and the performance of the underlying index for the full trading day. The Funds are not suitable for all investors.
Consider the following examples:
Mary is considering
investments in two Funds, Funds A and B. Fund A is a traditional index ETF which seeks (before fees and expenses) to match the performance of the XYZ index. Fund B is a leveraged ETF and seeks daily leveraged investment results (before fees and
expenses) that correspond to 200% of the daily performance of the XYZ index.
On Day 1, the XYZ index increases in
value from $100 to $105, a gain of 5%. On Day 2, the XYZ index declines from $105 back to $100, a loss of 4.76%. In the aggregate, the XYZ index has not moved.
An investment in Fund A would be
expected to gain 5% on Day 1 and lose 4.76% on Day 2 to return to its original value. The following example assumes a $100 investment in Fund A when the index is also valued at $100:
Day
|
Index
Value
|
Index
Performance
|
Value
of Investment
|
|
$100.00
|
|
$100.00
|
1
|
$105.00
|
5.00%
|
$105.00
|
2
|
$100.00
|
-4.76%
|
$100.00
|
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The same $100 investment in Fund B,
however, would be expected to gain in value on Day 1 but decline in value on Day 2.
The $100 investment in Fund B would be
expected to gain 10% on Day 1 (200% of 5%) but decline 9.52% on Day 2.
Day
|
Index
Performance
|
200%
of Index Performance
|
Value
of Investment
|
|
|
|
$100.00
|
1
|
5.00%
|
10.0%
|
$110.00
|
2
|
-4.76%
|
-9.52%
|
$99.52
|
Although
the percentage decline in Fund B is smaller on Day 2 than the percentage gain on Day 1, the loss is applied to a higher principal amount, so the investment in Fund B experiences a loss even when the aggregate index value for the two-day period has
not declined. (These calculations do not include the charges for expense ratio and financing charges.)
As you can see, an investment in Fund B
has additional risks due to the effects of leverage and compounding.
The Funds are very
different from most mutual funds and ETFs. Each Fund pursues a daily leveraged or daily inverse leveraged investment objective, which means that the Funds are riskier than alternatives that do not use leverage because the Funds magnify the
performance or the inverse of the performance of the underlying index. Additionally, each Bear Fund seeks to provide returns that are a multiple of the inverse of the performance of its underlying index (-200%), a result opposite of most mutual
funds and ETFs. An investor who purchases shares of a Fund intra-day will generally receive more, or less, than 200% exposure to the underlying index from that point until the end of the trading day. The actual exposure will be largely a function of
the performance of the underlying index from the end of the prior trading day. If a Fund’s shares are held for a period longer than a single trading day, the Fund’s performance is likely to deviate from 200% or -200% of the return of the
underlying index’s performance for the longer period. This deviation will increase with higher underlying index volatility and longer holding periods.
For periods longer than a trading
day, volatility in the performance of the underlying index from day to day is the primary cause of any disparity between a Fund’s actual returns and the returns of the underlying index for such period. Volatility causes such disparity because
it exacerbates the effects of compounding on a Fund’s returns. In addition, the effects of volatility are magnified in the Funds due to leverage. For example, consider the following three examples that demonstrate the effect of volatility on a
hypothetical fund:
Example 1
–
Underlying Index
Experiences Low Volatility
Mary invests $10.00 in a hypothetical
Bull Fund at the close of trading on Day 1. During Day 2, the Fund’s underlying index rises from 100 to 102, a 2% gain. Mary’s investment rises 4% to $10.40. Mary holds her investment through the close of trading on Day 3, during which
the Fund’s underlying index rises from 102 to 104, a gain of 1.96%. Mary’s investment rises to $10.81, a gain during Day 3 of 3.92%. For the two day period since Mary invested in the Fund, the underlying index gained 4% although
Mary’s investment increased by 8.1%. Because the underlying index continued to trend upwards with low volatility, Mary’s return closely correlates to the 200% return of the return of the underlying index for the period.
John invests $10.00 in a hypothetical
Bear Fund at the close of trading on Day 1. During Day 2, the Fund’s underlying index gains 2%, and John’s investment falls by 4% to $9.60. On Day 3, the underlying index rises by 1.96%, and John’s Fund falls by 3.92% to $9.22. For
the two day period the underlying index returned 4% while the Fund lost 7.8%. John’s return still correlates to -200% return of the underlying index, but not as closely as Mary’s investment in the Bull Fund.
Example
2
–
Underlying Index Experiences High Volatility
Mary invests $10.00 in a hypothetical
Bull Fund after the close of trading on Day 1. During Day 2, the Fund’s underlying index rises from 100 to 102, a 2% gain, and Mary’s investment rises 4% to $10.40. Mary continues to hold her investment through the end of Day 3, during
which the Fund’s underlying index declines from 102 to 98, a loss of 3.92%. Mary’s investment declines by 7.84%, from $10.40 to $9.58. For the two day period since Mary invested in the Fund, the Fund’s underlying index lost 2%
while Mary’s investment decreased from $10 to $9.58, a 4.2% loss. The volatility of the underlying index affected the correlation between the underlying index’s return for the two day period and Mary’s return. In this situation,
Mary lost more than two times the return of the underlying index.
Conversely, John invests $10.00 in a
hypothetical Bear Fund after the close of trading on Day 1. During Day 2, the Fund’s underlying index rises from 100 to 102, a 2% gain, and John’s investment falls 4% to $9.60. John continues to hold his investment through the end of Day
3, during which the Fund’s underlying index declines from 102 to 98, a loss of 3.92%. John’s investment rises by 7.84%, from $9.60 to $10.35. For the two day period since John invested in the Fund, the Fund’s underlying index lost
2% while John’s investment increased from $10 to $10.35, a 3.5% gain. The volatility of the underlying index affected the correlation between the underlying index’s return for the two day period and John’s return. In this
situation, John gained less than two times the return of the underlying index.
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Example
3
–
Intra-day Investment with Volatility
The examples above assumed that Mary
purchased the hypothetical Bull Fund at the close of trading on Day 1 and sold her investment at the close of trading on a subsequent day. However, if she made an investment intra-day, she would have received a beta determined by the performance of
the underlying index from the end of the prior trading day until her time of purchase on the next trading day. Consider the following example.
Mary invests $10.00 in a hypothetical
Bull Fund at 11 a.m. on Day 2. From the close of trading on Day 1 until 11 a.m. on Day 2, the underlying index moved from 100 to 102, a 2% gain. In light of that gain, the Fund beta at the point at which Mary invests is 196%. During the remainder of
Day 2, the Fund’s underlying index rises from 102 to 110, a gain of 7.84%, and Mary’s investment rises 15.4% (which is the underlying index gain of 7.84% multiplied by the 196% beta that she received) to $11.54. Mary continues to hold
her investment through the close of trading on Day 3, during which the Fund’s underlying index declines from 110 to 90, a loss of 18.18%. Mary’s investment declines by 36.4%, from $11.54 to $7.34. For the period of Mary’s
investment, the Fund’s underlying index declined from 102 to 90, a loss of 11.76%, while Mary’s investment decreased from $10.00 to $7.34, a 27% loss. The volatility of the underlying index affected the correlation between the underlying
index’s return for period and Mary’s return. In this situation, Mary lost more than two times the return of the underlying index. Mary was also hurt because she missed the first 2% move of the underlying index and had a beta of 196% for
the remainder of Day 2.
The
Funds are designed to be utilized only by sophisticated investors, such as traders and active investors employing dynamic strategies. Such investors are expected to monitor and manage their portfolios frequently. Investors in the Funds should: (a)
understand the risks associated with the use of leverage, (b) understand the consequences of seeking daily leveraged investment results, (c) for each Bear Fund, understand the risk of shorting, and (d) intend to actively monitor and manage their
investments. Investors who do not understand the Funds or do not intend to actively manage their funds and monitor their investments should not buy the Funds. There is no assurance that any of the Funds offered in this Prospectus will achieve their
investment objectives and an investment in any Fund could lose money. No single Fund is a complete investment program.
Market Volatility.
Each Fund seeks to provide a return which is a multiple of the daily performance of its underlying index. No Fund attempts to, and no Fund should be expected to, provide returns which are a multiple of the return of the
underlying index for periods other than a single day. Each Fund rebalances its portfolio on a daily basis, increasing exposure in response to that day’s gains or reducing exposure in response to that day’s losses.
Daily rebalancing will impair a
Fund’s performance if the underlying index experiences volatility. For instance, a Bull Fund would be expected to lose 4% (as shown in Table 1 below) if its underlying index provided no return over a one year period and experienced annualized
volatility of 20%. A Bear Fund would be expected to lose 12% (as shown in Table 1 below) if its underlying index provided no return over a one year period and had annualized volatility of 20%. If the underlying index’s annualized volatility
were to rise to 40%, the hypothetical loss for a one year period for a Bull Fund widens to approximately 15% while the loss for a Bear Fund rises to 45%.
At higher volatility
levels, there is a chance of a complete loss of Fund assets even if the underlying index is flat
. For instance, if annualized volatility of an underlying index were 90%, both Bull and Bear Funds based on that
underlying index would be expected to lose more than 90% of their value, even if the underlying index returned 0% for the year. An index’s volatility rate is a statistical measure of the magnitude of fluctuations in the returns of an
index.
Table 1
Volatility
Range
|
2X
Bull Fund
Loss
|
2X
Bear Fund
Loss
|
10%
|
-1%
|
-3%
|
20%
|
-4%
|
-12%
|
30%
|
-9%
|
-26%
|
40%
|
-15%
|
-45%
|
50%
|
-23%
|
-65%
|
60%
|
-33%
|
-92%
|
70%
|
-47%
|
-99%
|
80%
|
-55%
|
-99%
|
90%
|
-76%
|
-99%
|
100%
|
-84%
|
-99%
|
Table 2 shows the
average volatility rate for the Funds’ underlying indices over the five year period ended December 31, 2018. If an index has been in existence for less than 5 years, its inception date is noted next to its name in Table 2. The underlying
indices have annualized historical volatility rates over that period ranging from 4.46% to 26.20%. Since market volatility has negative implications for Funds which rebalance daily, investors should be sure to monitor and manage their investments in
the Funds particularly in volatile markets. The negative implications of volatility in Table 1 can be combined with the recent volatility ranges of various indices in Table 2 to give investors some sense of the risks of holding the Funds for
longer
89
|
Direxion Shares ETF
Trust Prospectus
|
periods over the past
five years. Given the historically low levels of volatility during the past five years, historical index volatility and performance are not likely indicative of future volatility and performance.
Table 2
–
Historic Volatility of each Fund’s Benchmark Index
Index
|
5-Year
Historical
Volatility
Rate
|
Bloomberg
Barclays US High Yield Very Liquid Index
|
4.46%
|
CSI
300 Index
|
25.11%
|
CSI
Overseas China Internet Index
|
26.20%
|
Indxx
Global Robotics and Artificial Intelligence Thematic Index
|
15.12%
|
Indxx
US High Yield, Low Volatility Preferred Stock Index
(Has not Commenced Operations)
|
|
MSCI
China A International Index
(Inception Date: October 14, 2014)
|
24.50%
|
MSCI
Europe Financials Index
|
19.58%
|
Russell
2000
®
Index
|
16.43%
|
S&P
500
®
Index
|
13.23%
|
The
Projected Return of a Bull Fund for a Single Trading Day
. Each Bull Fund seeks to provide a daily return that is 200% of the daily return of an underlying index. Doing so requires the use of leveraged investment
techniques, which necessarily incur financing charges. In light of the financing charges and each Bull Fund’s operating expenses, the expected return of a Bull Fund over one trading day is equal to the gross expected return, which is the daily
underlying index return multiplied by a Bull Fund’s daily leveraged investment objective, minus (i) financing charges incurred by the portfolio and (ii) daily operating expenses. For instance, if the MSCI Europe Financials Index returns 2% on
a given day, the gross expected return of the Direxion Daily MSCI European Financials Bull 2X Shares would be 4%, but the net expected return, which factors in the cost of financing the portfolio and the impact of operating expenses, would be lower.
Each Bull Fund will reposition its portfolio at the end of every trading day. Therefore, if an investor purchases Fund shares at close of the markets on a given trading day, the investor’s exposure to the underlying index of a Bull Fund would
reflect 200% of the performance of the underlying index during the following trading day, subject to the charges and expenses noted above.
The Projected Return of a Bear Fund for
a Single Trading Day.
Each Bear Fund seeks to provide a daily return which is 200% of the inverse (or opposite) of the daily return of an underlying index. To create the necessary exposure, a Bear Fund engages in
short selling
—
borrowing and selling securities it does not own. The money that a Bear
Fund receives from short sales
—
the short sale
proceeds
—
is an asset of the Bear Fund that can generate income to help offset the Bear Fund’s operating expenses. However, the costs of creating short exposure,
which may require the Bear Fund’s counterparties to borrow and sell certain securities, may offset or outweigh such income. As the holder of a short position, a Bear Fund also is responsible for paying the dividends and interest accruing on
the short position, which is an expense to the Bear Fund that could cause the Fund to lose money on the short sale and may adversely affect its performance. Each Bear Fund will reposition its portfolio at the end of every trading day. Therefore, if
an investor purchases Bear Fund shares at close of the markets on a given trading day, the investor’s exposure to the underlying index of a Bear Fund would reflect 200% of the inverse performance of the underlying index during the following
trading day, subject to the charges and expenses noted above.
The Projected Returns of Funds for
Intra-Day Purchases.
Because the Funds rebalance their portfolios once daily, an investor who purchases shares during a day will likely have more, or less, than 200% leveraged investment exposure to the underlying
index. The exposure to the underlying index received by an investor who purchases a Fund intra-day will differ from the Fund’s stated daily leveraged investment objective (
e.g.
, 200% or -200%) by an amount determined by the movement of the underlying index from its value at the end of the prior day. If the underlying index moves in a direction favorable to the Fund between the close of the
market on one trading day through the time on the next trading day when the investor purchases Fund shares, the investor will receive less exposure to the underlying index than the stated fund daily leveraged investment objective (
e.g.
, 200% or -200%). Conversely, if the underlying index moves in a direction adverse to the Fund, the investor will receive more exposure to the underlying
index than the stated fund daily leveraged investment objective (
e.g.
, 200% or -200%).
Table 3 below indicates the exposure
to the underlying index that an intra-day purchase of a Bull Fund would be expected to provide based upon the movement in the value of a Bull Fund’s underlying index from the close of the market on the prior trading day. Such exposure holds
until a subsequent sale on that same trading day or until the close of the market on that trading day. For instance, if the underlying index of a Bull Fund has moved 5% in a direction favorable to a Bull Fund, the investor would receive exposure to
the performance of the underlying index from that point until the investor sells later that day or the end of the day equal to approximately 191% of the investor’s investment.
Conversely, if the underlying index
has moved 5% in a direction unfavorable to a Bull Fund, an investor at that point would receive exposure to the performance of the underlying index from that point until the investor sells later that day or the end of the day equal to approximately
211% of the investor’s investment.
Direxion Shares
ETF Trust Prospectus
|
90
|
The table includes a range of underlying
index moves from 20% to -20% for a Bull Fund. Movement of the underlying index beyond the range noted below will result in exposure further from the Bull Fund’s daily leveraged investment objective.
Table 3
Index
Move
|
Resulting
Exposure for Bull Fund
|
-20%
|
267%
|
-15%
|
243%
|
-10%
|
225%
|
-5%
|
211%
|
0%
|
200%
|
5%
|
191%
|
10%
|
183%
|
15%
|
177%
|
20%
|
171%
|
Table 4
below indicates the exposure to the underlying index that an intra-day purchase of a Bear Fund would be expected to provide based upon the movement in the value of a Bear Fund’s underlying index from the close of the market on the prior
trading day. Such exposure holds until a subsequent sale on that same trading day or until the close of the market on that trading day. Table 4 indicates that, if a Bear Fund’s underlying index has moved 5% in a direction favorable to a Bear
Fund, the investor would receive exposure to the performance of the underlying index from that point until the investor sells later that day or the end of the day equal to approximately -173% of the investor’s investment. Conversely, if the
underlying index has moved 5% in a direction unfavorable to a Bear Fund, an investor would receive exposure to the performance of the Bear Fund’s underlying index from that point until the investor sells later that day or the end of the day
equal to approximately 233% of the investor’s investment.
The table includes a range of
underlying index moves from 20% to -20% for a Bear Fund. Movement of the underlying index beyond the range noted below will result in exposure further from the Bear Fund’s daily inverse leveraged investment objective.
Table 4
Index
Move
|
Resulting
Exposure for Bear Fund
|
-20%
|
114%
|
-15%
|
131%
|
-10%
|
150%
|
-5%
|
173%
|
0%
|
200%
|
5%
|
233%
|
10%
|
275%
|
15%
|
329%
|
20%
|
400%
|
The Projected
Returns of the Funds for Periods Other Than a Single Trading Day
. The Funds seek leveraged investment results on a daily
basis
—
from the close of regular trading on one trading day to the close on the next
trading day
— which should not be equated with seeking a leveraged investment objective for any other period. For instance, if the MSCI Europe Financials Index gains
10% for a week, the Direxion Daily MSCI European Financials Bull 2X Shares should not be expected to provide a return of 20% for the week even if it meets its daily leveraged investment objective throughout the week. This is true because of the
financing charges noted above but also because the pursuit of daily goals may result in daily leveraged compounding, which means that the return of an underlying index over a period of time greater than one day multiplied by a Fund’s daily
leveraged investment objective or inverse daily leveraged investment objective (
e.g.
, 200% or -200%) will not generally equal a Fund’s
performance over that same period. In addition, the effects of compounding become greater the longer Shares are held beyond a single trading day.
The following charts set out a range
of hypothetical daily performances during a given 10 trading days of a hypothetical underlying index and demonstrate how changes in the hypothetical underlying index impact the hypothetical Funds’ performance for a trading day and cumulatively
up to, and including, the entire 10 trading day period. The charts are based on a hypothetical $100 investment in hypothetical Funds over a 10 trading day period and do not reflect expenses of any kind.
91
|
Direxion Shares ETF
Trust Prospectus
|
Table 5
–
The Index Lacks a Clear Trend
Index
|
Bull
Fund
|
Bear
Fund
|
|
Value
|
Daily
Performance
|
Cumulative
Performance
|
NAV
|
Daily
Performance
|
Cumulative
Performance
|
NAV
|
DailyPerformance
|
Cumulative
Performance
|
|
100
|
|
|
$100.00
|
|
|
$100.00
|
|
|
Day
1
|
105
|
5.00%
|
5.00%
|
$110.00
|
10.00%
|
10.00%
|
$
90.00
|
-10.00%
|
-10.00%
|
Day
2
|
110
|
4.76%
|
10.00%
|
$120.48
|
9.52%
|
20.47%
|
$
81.43
|
-9.52%
|
-18.57%
|
Day
3
|
100
|
-9.09%
|
0.00%
|
$
98.57
|
-18.18%
|
-1.43%
|
$
96.23
|
18.18%
|
-3.76%
|
Day
4
|
90
|
-10.00%
|
-10.00%
|
$
78.86
|
-20.00%
|
-21.14%
|
$115.48
|
20.00%
|
15.48%
|
Day
5
|
85
|
-5.56%
|
-15.00%
|
$
70.10
|
-11.12%
|
-29.91%
|
$128.31
|
11.12%
|
28.33%
|
Day
6
|
100
|
17.65%
|
0.00%
|
$
94.83
|
35.30%
|
-5.17%
|
$
83.03
|
-35.30%
|
-16.97%
|
Day
7
|
95
|
-5.00%
|
-5.00%
|
$
85.35
|
-10.00%
|
-14.65%
|
$
91.33
|
10.00%
|
-8.67%
|
Day
8
|
100
|
5.26%
|
0.00%
|
$
94.34
|
10.52%
|
-5.68%
|
$
81.71
|
-10.52%
|
-18.28%
|
Day
9
|
105
|
5.00%
|
5.00%
|
$103.77
|
10.00%
|
3.76%
|
$
73.54
|
-10.00%
|
-26.45%
|
Day
10
|
100
|
-4.76%
|
0.00%
|
$
93.89
|
-9.52%
|
-6.12%
|
$
80.55
|
9.52%
|
-19.45%
|
The
cumulative performance of the hypothetical underlying index in Table 5 is 0% for 10 trading days. The return of the hypothetical Bull Fund for the 10 trading day period is -6.12%, while the return of the hypothetical Bear Fund is -19.45%. The
volatility of the hypothetical underlying index’s performance and lack of a clear trend results in performance for each hypothetical Fund for the period which bears little relationship to the performance of the hypothetical underlying index
for the 10 trading day period.
Table 6
–
The Index Rises in a Clear Trend
Index
|
Bull
Fund
|
Bear
Fund
|
|
Value
|
Daily
Performance
|
Cumulative
Performance
|
NAV
|
Daily
Performance
|
Cumulative
Performance
|
NAV
|
Daily
Performance
|
Cumulative
Performance
|
|
100
|
|
|
$100.00
|
|
|
$100.00
|
|
|
Day
1
|
102
|
2.00%
|
2.00%
|
$104.00
|
4.00%
|
4.00%
|
$
96.00
|
-4.00%
|
-4.00%
|
Day
2
|
104
|
1.96%
|
4.00%
|
$108.08
|
3.92%
|
8.08%
|
$
92.24
|
-3.92%
|
-7.76%
|
Day
3
|
106
|
1.92%
|
6.00%
|
$112.24
|
3.84%
|
12.23%
|
$
88.69
|
-3.84%
|
-11.31%
|
Day
4
|
108
|
1.89%
|
8.00%
|
$116.47
|
3.78%
|
16.47%
|
$
85.34
|
-3.78%
|
-14.66%
|
Day
5
|
110
|
1.85%
|
10.00%
|
$120.78
|
3.70%
|
20.78%
|
$
82.18
|
-3.70%
|
-17.82%
|
Day
6
|
112
|
1.82%
|
12.00%
|
$125.18
|
3.64%
|
25.17%
|
$
79.19
|
-3.64%
|
-20.81%
|
Day
7
|
114
|
1.79%
|
14.00%
|
$129.65
|
3.58%
|
29.66%
|
$
76.36
|
-3.58%
|
-23.64%
|
Day
8
|
116
|
1.75%
|
16.00%
|
$134.20
|
3.50%
|
34.19%
|
$
73.68
|
-3.50%
|
-26.31%
|
Day
9
|
118
|
1.72%
|
18.00%
|
$138.82
|
3.44%
|
38.81%
|
$
71.14
|
-3.44%
|
-28.85%
|
Day
10
|
120
|
1.69%
|
20.00%
|
$143.53
|
3.38%
|
43.50%
|
$
68.73
|
-3.38%
|
-31.25%
|
The
cumulative performance of the hypothetical underlying index in Table 6 is 20% for 10 trading days. The return of the hypothetical Bull Fund for the 10 trading day period is 43.50%, while the return of the hypothetical Bear Fund is -31.25%. In this
case, because of the positive hypothetical underlying index trend, the hypothetical Bull Fund’s gain is greater than 200% of the hypothetical underlying index gain and the hypothetical Bear Fund’s decline is less than -200% of the
hypothetical underlying index gain for the 10 trading day period.
Direxion Shares
ETF Trust Prospectus
|
92
|
Table 7
–
The Index Declines in a Clear Trend
Index
|
Bull
Fund
|
Bear
Fund
|
|
Value
|
Daily
Performance
|
Cumulative
Performance
|
NAV
|
Daily
Performance
|
Cumulative
Performance
|
NAV
|
Daily
Performance
|
Cumulative
Performance
|
|
100
|
|
|
$100.00
|
|
|
$100.00
|
|
|
Day
1
|
98
|
-2.00%
|
-2.00%
|
$
96.00
|
-4.00%
|
-4.00%
|
$104.00
|
4.00%
|
4.00%
|
Day
2
|
96
|
-2.04%
|
-4.00%
|
$
92.08
|
-4.08%
|
-7.92%
|
$108.24
|
4.08%
|
8.24%
|
Day
3
|
94
|
-2.08%
|
-6.00%
|
$
88.24
|
-4.16%
|
-11.75%
|
$112.76
|
4.16%
|
12.75%
|
Day
4
|
92
|
-2.13%
|
-8.00%
|
$
84.49
|
-4.26%
|
-15.51%
|
$117.55
|
4.26%
|
17.55%
|
Day
5
|
90
|
-2.17%
|
-10.00%
|
$
80.82
|
-4.34%
|
-19.17%
|
$122.66
|
4.34%
|
22.65%
|
Day
6
|
88
|
-2.22%
|
-12.00%
|
$
77.22
|
-4.44%
|
-22.76%
|
$128.12
|
4.44%
|
28.10%
|
Day
7
|
86
|
-2.27%
|
-14.00%
|
$
73.71
|
-4.54%
|
-26.27%
|
$133.94
|
4.54%
|
33.91%
|
Day
8
|
84
|
-2.33%
|
-16.00%
|
$
70.29
|
-4.66%
|
-29.71%
|
$140.17
|
4.66%
|
40.15%
|
Day
9
|
82
|
-2.38%
|
-18.00%
|
$
66.94
|
-4.76%
|
-33.05%
|
$146.84
|
4.76%
|
46.82%
|
Day
10
|
80
|
-2.44%
|
-20.00%
|
$
63.67
|
-4.88%
|
-36.32%
|
$154.01
|
4.88%
|
53.99%
|
The
cumulative performance of the hypothetical underlying index in Table 7 is -20% for 10 trading days. The return of the hypothetical Bull Fund for the 10 trading day period is 36.32%, while the return of the hypothetical Bear Fund is 53.99%. In this
case, because of the negative hypothetical underlying index trend, the hypothetical Bull Fund’s decline is less than 200% of the hypothetical underlying index decline and the hypothetical Bear Fund’s gain is greater than 200% of the
hypothetical underlying index decline for the 10 trading day period.
93
|
Direxion Shares ETF
Trust Prospectus
|
Additional Information Regarding Principal
Risks
An investment in a
Fund entails risks. A Fund may not achieve its investment objective and may decline in value. The Funds present risks not traditionally associated with other mutual funds and ETFs. For example, due to the Funds' daily leveraged or inverse leveraged
investment objectives, a small adverse move in a Fund's underlying index will result in larger and potentially substantial declines in that Fund. It is important that investors closely review and understand all of a Fund’s risks before making
an investment. A Fund is not a complete investment program. The table below provides the risks of investing in the Funds. Following the table, each risk is explained.
|
|
|
|
|
|
|
|
|
|
|
|
Direxion
Daily S&P 500
®
Bull 2X Shares
|
Direxion
Daily Small Cap Bull 2X Shares
|
Direxion
Daily CSI 300 China A Share Bull 2X Shares
|
Direxion
Daily MSCI China A Bull 2X Shares
|
Direxion
Daily CSI China Internet Index Bull 2X Shares
|
Direxion
Daily High Yield Bear 2X Shares
|
Direxion
Daily MSCI European Financials Bull 2X Shares
|
Direxion
Daily MSCI European Financials Bear 2X Shares
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares
|
Direxion
Daily Preferred Stock Bull 2X Shares
|
Effects
of Compounding and Market Volatility Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Leverage
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Market
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Aggressive
Investment Techniques Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Liquidity
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Derivatives
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Counterparty
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Shorting
Risk
|
|
|
|
|
|
X
|
|
X
|
|
|
Cash
Transaction Risk
|
|
|
|
|
|
X
|
|
X
|
|
|
Intra-Day
Investment Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Daily
Index Correlation/Tracking Risk
|
X
|
X
|
X
|
X
|
X
|
|
X
|
|
X
|
X
|
Daily
Inverse Index Correlation Risk
|
|
|
|
|
|
X
|
|
X
|
|
|
Other
Investment Companies (including ETFs) Risk
|
X
|
X
|
X
|
X
|
X
|
|
X
|
|
X
|
X
|
China
Investing Risk
|
|
|
X
|
X
|
|
|
|
|
|
|
Chinese
Securities Risk
|
|
|
|
|
X
|
|
|
|
|
|
Consumer
Discretionary Sector Risk
|
|
|
|
|
X
|
|
|
|
|
|
Credit
Risk
|
|
|
|
|
|
X
|
|
|
|
|
Debt
Instrument Risk
|
|
|
|
|
|
X
|
|
|
|
|
Emerging
Markets Risk
|
|
|
X
|
X
|
X
|
|
|
|
|
|
European
Economic Risk
|
|
|
|
|
|
|
X
|
X
|
|
|
Extension
Risk
|
|
|
|
|
|
X
|
|
|
|
|
Financials
Sector Risk
|
|
X
|
X
|
X
|
|
|
X
|
X
|
|
|
Healthcare
Sector Risk
|
X
|
X
|
|
|
|
|
|
|
|
|
Industrials
Sector Risk
|
|
|
|
|
|
|
|
|
X
|
|
Information
Technology Sector Risk
|
X
|
|
|
|
X
|
|
|
|
X
|
|
Interest
Rate Risk
|
|
|
|
|
|
X
|
|
|
|
|
Internet
Company Industry Risk
|
|
|
|
|
X
|
|
|
|
|
|
Lower-Quality
Debt Securities Risk
|
|
|
|
|
|
X
|
|
|
|
|
Direxion Shares
ETF Trust Prospectus
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion
Daily S&P 500
®
Bull 2X Shares
|
Direxion
Daily Small Cap Bull 2X Shares
|
Direxion
Daily CSI 300 China A Share Bull 2X Shares
|
Direxion
Daily MSCI China A Bull 2X Shares
|
Direxion
Daily CSI China Internet Index Bull 2X Shares
|
Direxion
Daily High Yield Bear 2X Shares
|
Direxion
Daily MSCI European Financials Bull 2X Shares
|
Direxion
Daily MSCI European Financials Bear 2X Shares
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares
|
Direxion
Daily Preferred Stock Bull 2X Shares
|
Preferred
Stock Risk
|
|
|
|
|
|
|
|
|
|
X
|
Prepayment
Risk
|
|
|
|
|
|
X
|
|
|
|
|
Robotics
& Artificial Intelligence Company Risk
|
|
|
|
|
|
|
|
|
X
|
|
Large-Capitalization
Company Risk
|
X
|
|
X
|
X
|
X
|
|
X
|
X
|
X
|
|
Micro-Capitalization
Company Risk
|
|
|
|
|
X
|
|
|
|
X
|
|
Mid-Capitalization
Company Risk
|
X
|
|
|
|
|
|
X
|
X
|
|
|
Small-
and/or Mid-Capitalization Company Risk
|
|
X
|
X
|
X
|
X
|
|
|
|
X
|
X
|
Currency
Exchange Rate Risk
|
|
|
X
|
X
|
X
|
|
X
|
X
|
|
|
Depositary
Receipt Risk
|
|
|
|
|
|
|
X
|
|
|
|
Foreign
Securities Risk
|
|
|
X
|
X
|
X
|
|
X
|
X
|
X
|
|
Geographic
Concentration Risk
|
|
|
X
|
X
|
X
|
|
X
|
X
|
|
|
International
Closed-Market Trading Risk
|
|
|
X
|
X
|
X
|
|
X
|
X
|
X
|
|
Cybersecurity
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Early
Close/ Trading Halt Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Equity
Securities Risk
|
X
|
X
|
X
|
X
|
X
|
|
X
|
X
|
X
|
X
|
High
Portfolio Turnover Risk
|
X
|
X
|
X
|
X
|
X
|
|
|
X
|
X
|
X
|
Investment
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Money
Market Instrument Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Non-Diversification
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Securities
Lending Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Special
Risks of Exchange-Traded Funds
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Special
Risk Considerations Relating to
RQFII and QFII Investments Risk
|
|
|
X
|
X
|
X
|
|
|
|
|
|
Effects of Compounding and Market Volatility Risk
Each Fund
has a daily leveraged investment objective and a Fund’s performance for periods greater than a trading day will be the result of each day's returns compounded over the period, which is very likely to differ from underlying index’s
performance times the stated multiple in a Fund’s investment objective, before fees and expenses. Compounding affects all investments, but has a more significant impact
on leveraged funds, particularly during periods of
higher index volatility. A Fund does not attempt to, and should not be expected to, provide returns, before fees and expenses, which are 200% or -200% of the performance of its underlying index for periods other than one trading day. The impact of
compounding will affect each shareholder differently depending on the period of time an investment in a Fund is held and the volatility of its underlying index during the
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Trust Prospectus
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period an
investment in a Fund is held. The effect of compounding becomes more pronounced as volatility and a shareholder’s holding period increase.
Over time, the cumulative percentage
increase or decrease in the value of a Fund’s portfolio may diverge significantly from the cumulative percentage increase or decrease in 200% or -200% of the return of a Fund's underlying index due to the compounding effect of losses and gains
on the returns of a Fund. It also is expected that a Fund's use of leverage will cause the Fund to underperform the return of 200% or -200% of its underlying index in a trendless or flat market.
The chart below provides examples of
how index volatility could affect a Fund’s performance. An index’s volatility rate is a statistical measure of the magnitude of fluctuations in the returns of the index. Fund performance for periods greater than one single day can be
estimated given any set of assumptions for the following factors: a) index volatility; b) index performance; c) period of time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with
respect to securities in its underlying index. The chart below illustrates the impact of two principal factors
–
index volatility and index performance
–
on Fund performance. The chart shows estimated Fund returns for a number of combinations of index volatility and index performance over a one-year period. Performance
shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in its underlying index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure for the Bull Funds and
inverse leveraged exposure for the Bear Funds) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be worse than those shown.
As shown below, a Bull Fund would be
expected to lose 6.1% and a Bear Fund would be expected to lose 17.1% if its underlying index provided no return over a one year period during which the underlying index experienced annualized volatility of 25%. If the underlying index’s
annualized volatility were to rise to 75%, the hypothetical loss for a one year period widens to approximately 43% for the Bull Fund and 81.5% for the Bear Fund.
At higher ranges of volatility, there
is a chance of a significant loss of value even if the underlying index is flat. For instance, if the underlying index’s annualized volatility is 100%, it is likely that the Bull Fund would lose 60% of its value, and the Bear Fund would lose
approximately 95% of its value, even if the cumulative underlying index return for the year was only 0%. The volatility of ETFs or instruments that reflect the value of the underlying index such as swaps, may differ from the volatility of a Fund's
underlying index.
Bull Fund
One
Year
Index
|
200%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-120%
|
-84.2%
|
-85.0%
|
-87.5%
|
-90.9%
|
-94.1%
|
-50%
|
-100%
|
-75.2%
|
-76.5%
|
-80.5%
|
-85.8%
|
-90.8%
|
-40%
|
-80%
|
-64.4%
|
-66.2%
|
-72.0%
|
-79.5%
|
-86.8%
|
-30%
|
-60%
|
-51.5%
|
-54.0%
|
-61.8%
|
-72.1%
|
-82.0%
|
-20%
|
-40%
|
-36.6%
|
-39.9%
|
-50.2%
|
-63.5%
|
-76.5%
|
-10%
|
-20%
|
-19.8%
|
-23.9%
|
-36.9%
|
-53.8%
|
-70.2%
|
0%
|
0%
|
-1.0%
|
-6.1%
|
-22.1%
|
-43.0%
|
-63.2%
|
10%
|
20%
|
19.8%
|
13.7%
|
-5.8%
|
-31.1%
|
-55.5%
|
20%
|
40%
|
42.6%
|
35.3%
|
12.1%
|
-18.0%
|
-47.0%
|
30%
|
60%
|
67.3%
|
58.8%
|
31.6%
|
-3.7%
|
-37.8%
|
40%
|
80%
|
94.0%
|
84.1%
|
52.6%
|
11.7%
|
-27.9%
|
50%
|
100%
|
122.8%
|
111.4%
|
75.2%
|
28.2%
|
-17.2%
|
60%
|
120%
|
153.5%
|
140.5%
|
99.4%
|
45.9%
|
-5.8%
|
Bear Fund
One
Year
Index
|
-200%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
120%
|
506.5%
|
418.1%
|
195.2%
|
15.6%
|
-68.9%
|
-50%
|
100%
|
288.2%
|
231.6%
|
88.9%
|
-26.0%
|
-80.1%
|
-40%
|
80%
|
169.6%
|
130.3%
|
31.2%
|
-48.6%
|
-86.2%
|
-30%
|
60%
|
98.1%
|
69.2%
|
-3.6%
|
-62.2%
|
-89.8%
|
-20%
|
40%
|
51.6%
|
29.5%
|
-26.2%
|
-71.1%
|
-92.2%
|
-10%
|
20%
|
19.8%
|
2.3%
|
-41.7%
|
-77.2%
|
-93.9%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
-20%
|
-19.8%
|
-31.5%
|
-61.0%
|
-84.7%
|
-95.9%
|
20%
|
-40%
|
-32.6%
|
-42.4%
|
-67.2%
|
-87.2%
|
-96.5%
|
30%
|
-60%
|
-42.6%
|
-50.9%
|
-72.0%
|
-89.1%
|
-97.1%
|
40%
|
-80%
|
-50.5%
|
-57.7%
|
-75.9%
|
-90.6%
|
-97.5%
|
50%
|
-100%
|
-56.9%
|
-63.2%
|
-79.0%
|
-91.8%
|
-97.8%
|
60%
|
-120%
|
-62.1%
|
-67.6%
|
-81.5%
|
-92.8%
|
-98.1%
|
Holding an
unmanaged position opens the investor to the risk of market volatility adversely affecting the performance of the investment. A Fund is not appropriate for investors who do not intend to actively monitor and manage their portfolios. Each table is
intended to underscore the fact that a Fund is designed as a short-term trading vehicle for investors who intend to actively monitor and manage their portfolios.
For additional information and examples
demonstrating the effects of volatility and index performance on the long-term performance of the Funds, see the “Additional Information Regarding Investment Techniques and Policies” section, and “Special Note Regarding the
Correlation Risks of the Funds” in the Funds' Statement of Additional Information.
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Leverage Risk
To achieve its daily investment objective, each Fund
employs leverage and is exposed to the risk that adverse daily performance of a Fund's underlying index will be magnified. This means that, if a Fund's underlying index experiences an adverse daily performance, an investment in the Fund will be
reduced by an amount equal to 2% for every 1% of adverse performance, not including the costs of financing leverage and other operating expenses, which would further reduce its value.
A Fund could theoretically lose an
amount greater than its net assets if its underlying index moves more than 50% in a direction adverse to the Fund (meaning a decline in the value of the underlying index of a Bull Fund and a gain in the value of the underlying index for a Bear
Fund). Leverage will also have the effect of magnifying any differences in a Fund’s correlation with the underlying index.
To fully understand the risks of
using leverage in a Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
Market risks include political, regulatory, market
and economic developments, including developments that impact specific economic sectors, industries or segments of the market. A Bull Fund typically would lose value on a day when its underlying index declines. A Bear Fund typically would lose value
on a day when its underlying index increases.
Turbulence in the financial markets
and reduced liquidity may negatively affect issuers, which could have an adverse effect on each Fund. A Fund’s NAV could decline over short periods due to short-term market movements and over longer periods during market downturns.
Aggressive Investment Techniques
Risk
Using investment techniques that may be
considered aggressive, such as futures contracts, forward contracts, options and swap agreements, includes the risk of potentially dramatic changes (losses) in the value of the instruments, imperfect correlations between the price of the instrument
and the underlying security or index, and volatility of a Fund.
Liquidity Risk
Some securities held by a Fund, including
derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including, but not limited to, an economic crisis, natural
disasters, new legislation or regulatory changes inside or outside the United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If a Fund is forced to sell an illiquid security at an unfavorable time
or price, a Fund may incur a loss. Certain market conditions may prevent a Fund from limiting losses, realizing gains or achieving a high correlation with its underlying index. There is no assurance that a security that is deemed liquid when
purchased will continue to be liquid.
Market illiquidity may cause losses
for certain Funds. For these Funds, to the extent that a Fund's underlying index moves adversely, a Fund may be one of many market participants that are attempting to transact in the securities
of an underlying index or correlated instruments.
Under such circumstances, the market for investments of the underlying index may lack sufficient liquidity for all market participants' trades. Therefore, a Fund may have more difficulty transacting in securities of the underlying index or
correlated investments such as financial instruments and a Fund's transactions could exacerbate the price change of the securities of the underlying index. Additionally, because a Fund is leveraged, a minor adverse change in the value of underlying
index should be expected to have a substantial adverse impact on a Fund.
Derivatives Risk
A Fund uses investment techniques, including
investments in derivatives, such as swaps, futures and forward contracts, and options that may be considered aggressive. The use of derivatives may result in larger losses or smaller gains than investing in the underlying securities directly, or in
the case of the Bear Funds, directly shorting the underlying securities. Investments in these derivatives may generally be subject to market risks that cause their prices to fluctuate more than an investment directly in a security and may increase
the volatility of a Fund. The use of derivatives may expose a Fund to additional risks such as counterparty risk, liquidity risk and increased daily correlation risk. When a Fund uses derivatives, there may be imperfect correlation between the value
of the underlying reference assets and the derivative, which may prevent a Fund from achieving its investment objective.
A Fund may use
swaps on the underlying index. If the underlying index has a dramatic intraday move in value that causes a material decline in a Fund’s NAV, the terms of the swap agreement between a Fund and its counterparty may allow the counterparty to
immediately close out of the transaction with a Fund. In such circumstances, a Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with a Fund’s daily leveraged
investment objective. This may prevent a Fund from achieving its daily leveraged investment objective particularly if the underlying index reverses all or a portion of its intraday move by the end of the day. The value of an investment in the Fund
may change quickly and without warning. Any financing, borrowing or other costs associated with using derivatives may also have the effect of lowering a Fund’s return.
In addition, a Fund’s investments
in derivatives are subject to the following risks:
•
|
Swap Agreements
. Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to
exchange the return (or differentials in rates of return) earned or realized on particular predetermined reference or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a reference asset.
|
•
|
Futures Contracts
. A futures contact is a contract to purchase or sell a particular security, or the cash value of an index,
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at a specified future
date at a price agreed upon when the contract is made. Under such contracts, no delivery of the actual securities is required. Rather, upon the expiration of the contract, settlement is made by exchanging cash in an amount equal to the difference
between the contract price and the closing price of a security or index at expiration, net of the variation margin that was previously paid.
|
•
|
Forward Contracts
. Forward contracts are two-party contracts pursuant to which one party agrees to pay the counterparty a fixed price for an agreed upon amount of commodities, securities, or the cash value of the commodities, securities
or the securities index, at an agreed upon date. A forward currency contract is an obligation to buy or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract.
|
•
|
Options
. An option is a contract that gives the purchaser (holder) of the option, in return for a premium, the right to buy from (call) or sell to (put) the seller (writer) of the option the security or currency underlying the
option at a specified exercise price at any time during the term of the option (normally not exceeding nine months). The writer of an option has the obligation upon exercise of the option to deliver the underlying security or currency upon payment
of the exercise price or to pay the exercise price upon delivery of the underlying security or currency.
|
•
|
Options
on Futures Contracts
. An option on a futures contract provides the holder with the right to enter into a “long” position in the underlying futures contract, in the case of a call option, or a
“short” position in the underlying futures contract in the case of a put option, at a fixed exercise price to a stated expiration date. Upon exercise of the option by the holder, the contract market clearing house establishes a
corresponding short position for the writer of the option, in the case of a call option, or a corresponding long position, in the case of a put option.
|
Counterparty Risk
Counterparty risk
is the risk that a counterparty is unwilling or unable to make timely payments to meet its contractual obligations with respect to the amount a Fund expects to receive from a counterparty to a financial instrument entered into by a Fund. Each Fund
generally enters into derivatives transactions, such as the swap agreements, with counterparties such that either party can terminate the contract without penalty prior to the termination date. A Fund may be negatively impacted if a counterparty
becomes bankrupt or otherwise fails to perform its obligations under such a contract, or if any collateral posted by the counterparty for the benefit of a Fund is insufficient or there are delays in a Fund’s ability to access such collateral.
If the counterparty becomes bankrupt or defaults on its payment obligations to a Fund, it may experience significant delays in obtaining any recovery, may obtain only a limited recovery or obtain no recovery and the value of an investment held by a
Fund may decline. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral, if such remedies
are stayed or eliminated under special resolutions
adopted in the United States, the European Union and various other jurisdictions. European Union rules and regulations intervene when a financial institution is experiencing financial difficulties and could reduce, eliminate, or convert to equity a
counterparty’s obligations to a Fund (sometimes referred to as a “bail in”).
A Fund typically enters into
transactions with counterparties that present minimal risks based on the Adviser’s assessment of the counterparty’s creditworthiness, or its capacity to meet its financial obligations during the term of the derivative agreement or
contract. The Adviser considers factors such as counterparty credit rating among other factors when determining whether a counterparty is creditworthy. The Adviser regularly monitors the creditworthiness of each counterparty with which a Fund
transacts. Each Fund generally enters into swap agreements or other financial instruments with major, global financial institutions and seeks to mitigate risks by generally requiring that the counterparties for each Fund to post collateral, marked
to market daily, in an amount approximately equal to what the counterparty owes a Fund, subject to certain minimum thresholds. To the extent any such collateral is insufficient or there are delays in accessing the collateral, the Funds will be
exposed to the risks described above. If a counterparty’s credit ratings decline, a Fund may be subject to a bail-in, as described above.
In addition, a Fund may enter into
swap agreements with a limited number of counterparties, which may increase a Fund’s exposure to counterparty credit risk. A Fund does not specifically limit its counterparty risk with respect to any single counterparty. There is a risk that
no suitable counterparties are willing to enter into, or continue to enter into, transactions with a Fund and, as a result, a Fund may not be able to achieve its investment objective. Additionally, although a counterparty to a centrally cleared swap
agreement and/or an exchange-traded futures contract is often backed by a futures commission merchant (“FCM”) or a clearing organization that is further backed by a group of financial institutions, there may be instances in which a FCM
or a clearing organization would fail to perform its obligations, causing significant losses to a Fund.
Shorting Risk
Shareholders should lose money when the Index rises,
which is a result that is the opposite from traditional index tracking funds. A Bear Fund may engage in short sales designed to earn the Bear Fund a profit from the decline in the price of particular securities, baskets of securities or indices.
Short sales are transactions in which a Bear Fund borrows securities from a broker and sells the borrowed securities. A Bear Fund is obligated to replace the security borrowed by purchasing the security at the market price at the time of
replacement. If the market price of the underlying security goes down between the time a Bear Fund sells the security and buys it back, a Bear Fund will realize a gain on the transaction. Conversely, if the underlying security goes up in price
during the period, a Bear Fund will realize a loss on the transaction. Any such loss is increased by the amount of premium or interest a Bear Fund must pay to the lender of the security. Likewise, any gain will be decreased by the amount of
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premium or interest a Bear Fund must pay to the
lender of the security. A Bear Fund’s investment performance may also suffer if the Bear Fund is required to close out a short position earlier than it had intended. This would occur if the securities lender required a Bear Fund to deliver the
securities the Bear Fund borrowed at the commencement of the short sale and the Bear Fund was unable to borrow the securities from another securities lender or otherwise obtain the security by other means. In addition, a Bear Fund may be subject to
expenses related to short sales that are not typically associated with investing in securities directly, such as costs of borrowing and margin account maintenance costs associated with the Bear Fund’s open short positions. As the holder of a
short position, a Bear Fund also is responsible for paying the dividends and interest accruing on the short position, which is an expense to the Bear Fund that could cause the Bear Fund to lose money on the short sale and may adversely affect its
performance.
A Bear Fund may
also seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose a Bear Fund to certain risks such as an increase in volatility or decrease in the liquidity of the
securities of the underlying short position. If a Bear Fund were to experience this volatility or decreased liquidity, a Bear Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be
limited or a Bear Fund may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited
market due to various factors, including regulatory action, a Bear Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. A Bear Fund may not be able to issue additional Creation Units during
period when it cannot meet its investment objective due to these factors. Any income, dividends or payments by the assets underlying a Bear Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
Unlike most ETFs, each Bear Fund currently intends
to effect creation and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial instruments held by each Bear Fund. As such, investment in each Bear Fund may be less tax efficient than
investment in a conventional ETF. ETFs generally are able to make in-kind redemptions and avoid being taxed on gains on the distributed portfolio securities at the fund level. Because each Bear Fund currently intends to effect redemptions
principally for cash, each Bear Fund may be required to sell portfolio securities in order to obtain the cash needed to distribute redemption proceeds. Each Bear Fund may recognize a capital gain on these sales that might not have been incurred if
such Bear Fund had made a redemption in-kind and this may decrease the tax efficiency of the Bear Fund compared to ETFs that utilize an in-kind redemption process.
Intra-Day Investment Risk
Each Fund seeks daily leveraged investment results,
which should not be equated with seeking an investment objective
for shorter than a
day. Thus, an investor who purchases Fund shares after the close of the markets on one trading day and before the close of the markets on the next trading day will likely have more, or less, than 200% or -200% leveraged investment exposure to the
underlying index, depending upon the movement of the underlying index from the end of one trading day until the time of purchase. If the underlying index moves in a direction favorable to a Fund, the investor will receive less than 200% or -200%
exposure to the underlying index. Conversely, if the underlying index moves in a direction adverse to a Fund, the investor will receive exposure to the underlying index greater than 200% or -200%. Thus, an investor that purchases shares intra-day
may experience performance that is greater than, or less than, a Fund’s stated multiple of its underlying index.
If there is a significant intra-day
market event and/or the securities of the underlying index experience a significant change in value, a Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, a Fund may close to purchases and sales of
Shares prior to the close of regular trading on the Exchange and incur significant losses.
Daily Index Correlation/Tracking
Risk
For each Bull
Fund, there is no guarantee that each Bull Fund will achieve a high degree of correlation to its underlying index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with its underlying index, each
Bull Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the underlying index is impacted dynamically by the underlying
index’s movement. Because of this, it is unlikely that each Bull Fund will be perfectly exposed to the underlying index at the end of each day. The possibility of each Bull Fund being materially over- or under-exposed to the underlying index
increases on days when the underlying index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect each Bull Fund’s ability to adjust exposure to the required
levels.
Because an underlying
index may include instruments that trade on a different market than a Bull, the Fund's return may vary from a multiple of the performance of the underlying index because different markets may close before the Exchange opens or may not be open for
business on the same calendar days as a Bull Fund. Additionally, due to differences in trading hours between different markets, and because the level of the underlying index may be determined using prices obtained at times other than a Bull Fund's
NAV calculation time, correlation to the underlying index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the underlying index or by comparing the daily change in the Fund's NAV per share to a multiple
of the daily performance of one or more U.S. ETFs that reflect the values of the securities underlying the underlying index as of a Bull Fund's NAV calculation time. It is important to note that the correlation to these ETFs may vary from the
correlation to the underlying index due to embedded costs and other factors.
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Each Bull Fund may
have difficulty achieving its daily leveraged investment objective due to fees, expenses, transactions costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity
in the markets for the securities or derivatives held by each Bull Fund. Each Bull Fund may not have investment exposure to all securities in the underlying index, or its weighting of investment exposure to such stocks or industries may be different
from that of the underlying index. In addition, each Bull Fund may invest in securities or financial instruments not included in the underlying index. Each Bull Fund may be subject to large movements of assets into and out of each Bull Fund,
potentially resulting in a Fund being over- or under-exposed to the underlying index. Activities surrounding periodic index reconstitutions and other index rebalancing events may hinder each Bull Fund’s ability to meet its daily leveraged
investment objective. Each Bull Fund may take or refrain from taking positions to improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact each Bull Fund’s correlation to the
underlying index.
Daily
Inverse Index Correlation/Tracking Risk
Investors will
lose money when the underlying index of a Bear rises, which is a result that is the opposite from traditional index funds. There is no guarantee that a Bear Fund will achieve a high degree of inverse correlation to its underlying index and therefore
achieve its daily inverse leveraged investment objective. To achieve a high degree of inverse correlation with the underlying index, a Bear Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily inverse leveraged
investment objective. A Bear Fund may have difficulty achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology,
accounting standards and disruptions or illiquidity in the markets for the securities or derivatives held by a Bear Fund. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect a Bear Fund’s ability to
adjust exposure to the required levels.
Because an underlying index may
include instruments that trade on a different market than a Bear Fund, a Bear Fund's return may vary from a multiple of the performance of an underlying index because different markets may close before the Exchange opens or may not be open for
business on the same calendar days as a Bear Fund. Additionally, due to differences in trading hours between different markets, and because the level of the underlying index may be determined using prices obtained at times other than a Fund's NAV
calculation time, correlation to the underlying index may be measured by comparing a Fund's daily return to a multiple of the daily performance of the underlying index or by comparing the daily change in a Fund's NAV per share to a multiple of the
daily performance of one or more U.S. ETFs that reflect the values of the securities underlying the underlying index as of a Fund's NAV calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to a
Fund’s underlying index due to embedded costs and other factors.
A Bear Fund may not have investment
exposure to all securities in its underlying index, or its weighting of investment exposure to such stocks or industries may be different from that of the underlying index. In addition, a Bear Fund may invest in securities or financial instruments
not included in the underlying index. A Bear Fund may be subject to large movements of assets into and out of the Bear Fund, potentially resulting in the Bear Fund being over- or under-exposed to its underlying index. In addition, the target amount
of portfolio exposure to the underlying index is impacted dynamically by the underlying index’s movement. Because of this, it is unlikely that a Bear Fund will be perfectly exposed to its underlying index at the end of each day. The
possibility of a Bear Fund being materially over- or under-exposed to its underlying index increases on days when the underlying index is volatile near the close of the trading day. Activities surrounding periodic underlying index reconstitutions
and other underlying index rebalancing or reconstitution events may hinder a Bear Fund’s ability to meet its daily inverse leveraged investment objective.
Other Investment Companies (including
ETFs) Risk
By investing in
another investment company, including an ETF, a Fund becomes a shareholder of that investment company and as a result, Fund shareholders indirectly bear a Fund’s proportionate share of the fees and expenses of the other investment company, in
addition to the fees and expenses Fund shareholders of a Fund’s own operations. As a shareholder, a fund must rely on the other investment company to achieve its investment objective. A Fund’s performance may be magnified positively or
negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment objective, the value of a Fund’s investment will not perform as expected, thus affecting a Fund’s
performance and its correlation with its underlying index. In addition, because shares of ETFs are listed and traded on national stock exchanges, their shares potentially may trade at a discount or a premium, which may impact the price at which a
Fund purchases, sells or values the other investment company shares which may impact a Fund’s ability to achieve its investment objective. Investments in such shares may be subject to brokerage and other trading costs, which could result in
greater expenses to a Fund. Finally, depending on the demand in the market, a Fund may not be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect a Fund’s performance.
China Investing Risk
Exposure to investments in China and A-shares involve
certain risks and other special considerations, including the following:
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Political and Economic
Risk
. The economy of China, which has been in a state of transition from a planned economy to a more market oriented economy, differs from economies of most developed countries in many respects, including the level
of government involvement, its state of development, its growth rate, control of foreign exchange, and allocation of resources. Although the majority of productive assets in China are still owned by the People’s Republic of China
(“China” or the “PRC”) government
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at various levels, in
recent years, the PRC government has implemented economic reform measures emphasizing utilization of market forces in the development of the economy of China and a high level of management autonomy. The economy of China has experienced significant
growth in the past 30 years, but growth has been uneven both geographically and among various sectors of the economy. Economic growth has also been accompanied by periods of high inflation. The PRC government has implemented various measures from
time to time to control inflation and restrain the rate of economic growth.
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The PRC government has
carried out economic reforms to achieve decentralization and utilization of market forces to develop the economy of the PRC over the last 30 years. There can be no assurance that the PRC government will continue to pursue such economic policies or,
if it does, that those policies will continue to be successful. Any adjustment or modification of those economic policies may have an adverse impact on the China securities market. Further, the PRC government may from time to time adopt corrective
measures to control the growth of the PRC economy which may also have an adverse impact on the capital growth and performance of the Chinese securities.
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Political changes,
social instability and adverse diplomatic developments in the PRC could result in the imposition of additional government restrictions including expropriation of assets, confiscatory taxes or nationalization of some of all of the property held by
the issuers of A-shares securities.
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The laws, regulations,
including the investment regulations allowing Stock Connect investing and Renminbi Qualified Foreign Institutional Investors (“RQFII”) (and Qualified Foreign Institutional Investors (“QFII”)) to invest in A-shares, government
policies and political and economic climate in China may change with little or no advance notice. Any such change could adversely affect market conditions and the performance of the Chinese economy and, thus, the value of the exposure to A-shares in
a Fund’s portfolio.
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Since 1949, the PRC
has been a socialist state controlled by the Communist party. China has only recently opened up to foreign investment and has only begun to permit private economic activity. There is no guarantee that the Chinese government will not revert from its
current open-market economy to the economic policy of central planning that it implemented prior to 1978.
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The PRC government
continues to be an active participant in many economic sectors through ownership positions and regulation. The allocation of resources in China is subject to a high level of government control. The PRC government strictly regulates the payment of
foreign currency denominated obligations and sets monetary policy. Through its policies, the PRC government may provide preferential treatment to particular industries or companies. The policies set by the government could have a substantial effect
on the Chinese economy.
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The
Chinese economy is export-driven and highly reliant on trade, and much of China’s growth in recent years has been the result of focused investments in economic sectors
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intended to produce goods and services for export
purposes. The performance of the Chinese economy may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, currency depreciation, capital reinvestment, resource
self-sufficiency and balance of payments position. Adverse changes to the economic conditions of its primary trading partners, such as the United States, Japan and South Korea, would adversely impact the Chinese economy and the Fund’s
investments. International trade tensions involving China and its trading counterparties may arise from time to time which can result in trade tariffs, embargoes, trade limitations, trade wars and other negative consequences. Such actions and
consequences may ultimately result in a significant reduction in international trade, an oversupply of certain manufactured goods, devaluations of existing inventories and potentially the failure of individual companies and/or large segments of
China’s export industry with a potentially severe impact to the Fund.
China has been transitioning to a
market economy since the late seventies, reaffirming its economic policy reforms through five-year programs, the latest of which (for 2011 through 2015) was approved in March 2011. Under the economic reforms implemented by the PRC government, the
Chinese economy has experienced tremendous growth, developing into one of the largest economies in the world. There is no assurance, however, that such growth will be sustained in the future.
Moreover, the current slowdown or
any future recessions in other significant economies of the world, such as the United States, the European Union and certain Asian countries, may adversely affect economic growth in China. An economic downturn in China would likely adversely impact
the value of A-shares.
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Inflation
. Economic growth in China has also historically been accompanied by periods of high inflation. Beginning in 2004, the PRC government commenced the implementation of various measures to control inflation, which included
the tightening of the money supply, the raising of interest rates and more stringent control over certain industries. If these measures are not successful, and if inflation were to steadily increase, the performance of the Chinese economy and
A-share securities could be negatively impacted.
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Tax Changes
. The Chinese taxation system is not as well settled as that of the United States. Changes in the Chinese tax system could have retroactive effects that may impact the Chinese securities market.
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Nationalization and
Expropriation
. After the formation of the Chinese socialist state in 1949, the PRC government renounced various debt obligations and nationalized private assets without providing any form of compensation. There can
be no assurance that the PRC government will not take similar actions in the future. Accordingly, investments in A-share securities or other Chinese investments involve a risk of total loss.
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Chinese
Securities Markets
. The securities markets in China have a limited operating history and are not as developed
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as those in the United
States. These markets tend to be smaller in size, have less liquidity and historically have had greater volatility than markets in the United States and some other countries. In addition, there is less regulation and monitoring of Chinese securities
markets and the activities of investors, brokers and other participants than in the United States. Accordingly, issuers of securities in China are not subject to the same degree of regulation as are the United States issuers with respects to such
matters as insider trading rules, tender offer regulation, stockholder proxy requirements and the requirements mandating timely disclosure of information. Stock markets in China are in the process of change and further development. This may lead to
trading volatility, unpredictable trading suspensions, difficulty in the settlement and recording of transactions and difficulty in interpreting and applying the relevant regulations.
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Available Disclosure
about Chinese Companies
. Disclosure and regulatory standards in emerging countries, such as China, are in many respects less stringent then U.S. standards. There is substantially less publicly available information
about Chinese issuers than there is about U.S. issuers. Therefore, disclosure of certain material information may not be made, and less information may be available to investors than would be the case if the investments were made in the U.S.
issuers. Chinese issuers are subject to accounting, auditing and financial standards and requirements that differ, in some cases significantly, from those applicable to U.S. issuers. In particular, the assets and profits appearing on the financial
statements of a Chinese issuer may not reflect its financial position or results of operations in the way they would be reflected had such financial statements been prepared in accordance with U.S. Generally Accepted Accounting Principles.
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Chinese Corporate and
Securities Law
. The regulations on investments and repatriation of capital by QFIIs and RQFIIs are relatively new. As a result, the application and interpretation of such investment regulations are therefore
relatively untested. In addition, PRC authorities have broad discretion in this regard. China operates under a civil law system, in which court precedent is not binding. Because there is no binding precedent to interpret existing statues, there is
uncertainty regarding the implementation of existing law.
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Legal
principles relating to corporate affairs and the validity of corporate procedures, directors’ fiduciary duties and liabilities and stockholders’ rights often differ from those that may apply in the United States and other countries.
Chinese laws providing protection to investors, such as laws regarding the fiduciary duties of officers and directors, are undeveloped and will not provide investors with protection would be provided by comparable law in the United States. China
lacks a national set of laws that address all issues that may arise with regard to a foreign investor. It may therefore be more difficult for an investor to enforce their rights under Chinese corporate and securities laws, and it may be difficult or
impossible to obtain a judgment in court. Moreover, as Chinese corporate and securities laws continue to develop, these developments may adversely affect foreign investors.
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Investment and
Repatriation Restrictions
. Investments in A-shares and other Chinese financial instruments are regulated by the CSRC, including warrants and open- and closed-end investment companies, are subject to governmental
pre-approval limitations on the quantity that a foreign investor may purchase and limits the classes of securities in which a foreign investor may invest. The PRC government limits foreign investment in securities of certain Chinese issuers entirely
if foreign investment is banned in respect of the industry in which the relevant Chinese issuers are conducting their business. Currently licensed RQFII entities are allowed to repatriate RMB daily and are not subject to RMB repatriation
restrictions or prior approval. However, there is no assurance that PRC rules and regulations will not change or that repatriation restrictions will not be imposed in the future.
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Chinese Securities Risks
Investment in, and/or exposure to, the securities of
Chinese issuers involves risks that may be greater than if a Fund’s investments were more geographically diverse. The Chinese economy is generally considered an emerging market and can be significantly affected by economic and political
conditions and policy in China and surrounding Asian countries. In addition, the Chinese economy is export-driven and highly reliant on trade. A downturn in the economies of China’s primary trading partners could slow or eliminate the growth
of the Chinese economy. Additionally, the economy of China differs greatly from the U.S. economy in such respects as, structure, general development, government involvement, wealth distribution, rate of inflation, interest rates, allocation of
resources and capital reinvestment. Specifically, issuers in China are subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than issuers in more developed markets, and therefore, all material
information may not be available or reliable.
Chinese Government Risk
The Chinese government has historically exercised
substantial control over virtually every sector of the Chinese economy through administrative regulation and/or state ownership. In the past, the Chinese government has from time to time taken actions that influence the prices at which certain goods
may be sold, encouraged companies to invest or concentrate in particular industries, induced mergers between companies in certain industries and induced inflation or otherwise regulated economic expansion. If such past actions were to continue, they
may have significant adverse effects on the economic conditions in China. The Chinese government also strictly regulates the payment of foreign currency-denominated obligations and sets monetary policy, and may introduce new laws and regulations
that may impact a Fund. Although China has begun the process of privatizing certain sectors of its economy, privatized entities may lose money and/or be re-nationalized. Accordingly, an investment in Chinese securities could result in a total loss
if these companies are re-nationalized or other regulatory actions are taken by the Chinese government. The Chinese securities markets have a limited operating history and are not as developed as those in the U.S. A small number of issuers may
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a large portion of the China market as a whole, and
prices for securities of these issuers may be very sensitive to adverse political, economic and regulatory developments in China and other Asian countries and may experience significant losses in such conditions. The Chinese securities markets are
characterized by relatively frequent trading halts and low trading volume, resulting in substantially less liquidity and greater price volatility than more developed securities markets.
Chinese Markets Risk
The Chinese securities markets have a limited
operating history and are not as developed as those in the United States. A small number of issuers may represent a large portion of the China market as a whole, and prices for securities of these issuers may be very sensitive to adverse political,
economic and regulatory developments in China and other Asian countries and may experience significant losses in such conditions. The Chinese securities markets are characterized by relatively frequent trading halts and low trading volume, resulting
in substantially less liquidity and greater price volatility than more developed securities markets.
Investments in China may also be
subject to any positive or adverse effects of the varying nature of its economic landscape with respect to expropriation and/or nationalization of assets, strengthened or lessened restrictions on and government intervention in international trade,
confiscatory taxation, political instability, including authoritarian and/or military involvement in governmental decision making, armed conflict, the impact on the economy as a result of civil war and social instability as a result of religious,
ethnic and/or socioeconomic unrest.
Chinese Currency Risk
The value of the renminbi (“RMB”) may be
subject to a high degree of fluctuation due to, among other things, changes in interest rates, the effects of monetary policies issued by the Chinese government, the United States, foreign governments, central banks or supranational entities, the
imposition of current controls of other national or global political or economic developments. The RMB is currently not a freely convertible currency. The Chinese government places strict regulations on RMB and sets the value of RMB to levels
dependent on the value of the U.S. Dollar, but the Chinese government has been under pressure to manage the currency in a less restrictive fashion so that it is less correlated to the U.S. Dollar. The Chinese government’s imposition of
restrictions on the repatriation of RMB out of mainland China may limit the depth of the offshore RMB market and may reduce the liquidity of Chinese investments. A Fund’s exposure to Chinese securities and therefore, the RMB, may result in
volatility.
Special Risk
Considerations Relating to RQFII and QFII Investments Risk
The China Funds’ ability to achieve their
investment objective is dependent on the ability of other ETFs and counterparties to obtain their QFII or RQFII quota. The China Funds also cannot predict what would occur if general QFII or RQFII quotas were reduced or eliminated. Either
circumstance would likely have a material adverse impact on the China Funds through its indirect investments and would likely adversely
affect the willingness and ability of potential swap
counterparties to engage in swaps with the China Funds that are linked to the performance of A-shares. Additionally, other ETFs may limit or suspend creation unit activity and shares could trade at a significant premium or discount to its NAV and
therefore impact the China Funds’ ability to obtain exposure to their underlying indices and the China Funds' ability to achieve their investment objectives or obtain a high correlation to their underlying indices.
Presently, there are a limited number
of firms and potential counterparties that have RQFII or QFII status or are willing and able to enter into swap transactions linked to the performance of A-shares. If the China Funds is unable to obtain sufficient leveraged exposure to their
underlying indices due to the limited availability of necessary investments or financial instruments, the China Funds could, among other things, as a defensive measure, limit or suspend creation units until the Adviser determines that the requisite
exposure to their underlying indices is obtainable. During the period that creation units are suspended, the China Funds could trade at a significant premium or discount to their NAV and could experience substantial redemptions. Alternatively, the
China Funds could change their investment objectives, for example, seeking leveraged exposure to track an alternative index focused on Chinese-related stocks other than A-shares or other appropriate investments, or decide to liquidate the China
Funds.
Consumer
Discretionary Sector Risk
Because companies in
the consumer discretionary sector manufacture products and provide discretionary services directly to the consumer, the success of these companies is tied closely to the performance of the overall domestic and international economy, interest rates,
competition and consumer confidence. Success depends heavily on disposable household income and consumer spending. Also, companies in the consumer discretionary sector may be subject to severe competition, which may have an adverse impact on a
company’s profitability. Changes in demographics and consumer tastes also can affect the demand for, and success of, consumer discretionary products in the marketplace.
Credit Risk
A Fund could lose
money if the issuer or guarantor of a debt security goes bankrupt or is unable or unwilling to make interest payments and/or repay principal. Changes in an issuer’s financial strength or in an issuer’s or debt security’s credit
rating also may affect a security’s value and thus have an impact on Fund performance. The degree of credit risk for a particular security may be reflected in its credit rating. Lower rated debt securities involve greater credit risk,
including the possibility of default or bankruptcy. Generally, the longer the maturity and the lower the credit quality of a security, the more sensitive it is to credit risk.
Debt Instrument Risk
The value of debt instruments may increase or
decrease as a result of the following: market fluctuations; changes in interest rates; actual or perceived inability of issuers, guarantors, or liquidity providers to make scheduled principal or interest payments; or illiquidity in debt securities
markets.
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Debt instruments
are also impacted by political, regulatory, market and economic developments that impact the market in general and specific economic sectors, industries or segments of the fixed income market. In general, rising interest rates lead to a decline in
the value of debt securities and debt securities with longer durations tend to be more sensitive to interest rate changes usually making their prices more volatile than those of securities with shorter durations. To the extent that interest rates
rise, certain underlying obligations may be paid off substantially slower than originally anticipated and the value of those securities may fall. Declining interest rates may lead to prepayment of obligations and cause reduced rates of return due to
reinvestment of interest and principal payments at lower interest rates.
Emerging Markets Risk
Investments in, and/or exposure to, emerging markets
instruments involves greater risks than investing in issuers located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation,
political and economic instability, greater risk of market shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies
that concentrate in only a few industries, security issues that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign
nationals who have inside information. Additionally, emerging markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed
markets. Emerging markets often have greater risk of capital controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large
amounts of foreign trade and investment. Local securities markets in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of
holdings difficult or impossible at times. Settlement procedures in emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in
registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency. Emerging markets
may develop unevenly and may never fully develop.
European Economic Risk
The Economic and Monetary Union of the European
Union (the “EU”) requires member countries to comply with restrictions on inflation rates, deficits, interest rates, debt levels and fiscal and monetary controls, each of which may significantly affect every country in Europe. Changes in
imports or exports, changes in governmental or EU regulations on
trade, changes in the exchange rate of the euro (the
common currency of certain EU countries), the default or threat of default by an EU member country on its sovereign debt and/or an economic recession in an EU member country may have a significant adverse impact on the economies of EU member
countries and their trading partners. The European financial markets experienced volatility and were adversely affected by concerns about economic downturns, credit rating downgrades, rising government debt levels and possible default on, or
restructuring of, government debt in several European countries, including: Cyprus, Greece, Ireland, Italy, Portugal, Spain and Ukraine. A default or debt restructuring by any European country would adversely impact holders of that country’s
debt and economy. These concerns have adversely affected the value and exchange rate of the euro and may continue to significantly affect the economies of every country in Europe, including EU member countries that do not use the euro and non-EU
member countries.
Responses to
financial problems by European governments, central banks and others, including austerity measures and reforms, may not produce the desired results, may result in social unrest, may limit future growth and economic recovery or may have other
unintended consequences. Further defaults or restricting by governments and other entities of their debt could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, one or more countries
may abandon the euro and/or withdraw from the EU. In a referendum held on June 23, 2016, the United Kingdom resolved to leave the EU. The referendum may introduce significant uncertainties and instability in the financial markets as the United
Kingdom negotiates its exit from the EU. Secessionist movements, such as the Catalan movement in Spain, as well as government or other responses to such movements, may also create instability and uncertainty in the region.
The occurrence of terrorist incidents
throughout Europe also could impact financial markets. The impact of these events is not clear but could be significant and far-reaching and materially impact a Fund.
Extension Risk
During periods of rising interest rates, certain
debt obligations may be paid off substantially more slowly than originally anticipated and the value of those securities may fall sharply, which may adversely impact the value of a Fund’s investments.
Financials Sector Risk
Performance of companies in the financials sector
may be materially impacted by many factors, including but not limited to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is
largely dependent on the availability and cost of capital and can fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also
subject to substantial government regulation and intervention, which may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government
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regulation may change frequently and may have
significant adverse consequences for financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial
company or of the financials sector as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Healthcare Sector Risk
The profitability of companies in the healthcare
sector may be affected by extensive, costly and uncertain government regulation, restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient
services, limited number of products, industry innovation, changes in technologies and other market developments. Many healthcare companies are heavily dependent on patent protection. The expiration of patents may adversely affect the profitability
of these companies. Many healthcare companies are subject to extensive litigation based on product liability and similar claims. Healthcare companies are subject to competitive forces that may make it difficult to raise prices and, in fact, may
result in price discounting. Many new products in the healthcare sector may be subject to regulatory approvals. The process of obtaining such approvals may be long and costly.
Industrials Sector Risk
Stock prices of issuers in the industrials sector
are affected by supply and demand both for their specific product or service and for industrials sector products in general. Government regulation, world events and economic conditions will also affect the performance of investment in such issuers.
Aerospace and defense companies, a component of the industrials sector, can be significantly affected by government spending policies because companies involved in this industry rely to a significant extent on U.S. and other government demand for
their products and services. Thus, the financial condition of, and investor interest in, aerospace and defense companies are heavily influenced by government defense spending policies which are typically under pressure from efforts to control
government spending budgets. Transportation companies, another component of the industrials sector, are subject to cyclical performance and therefore investment in such companies may experience occasional sharp price movements which may result from
changes in the economy, fuel prices, labor agreements and insurance costs.
Information Technology Sector Risk
The value
of stocks of information technology companies and companies that rely heavily on technology is particularly vulnerable to rapid changes in technology product cycles, rapid product obsolescence, government regulation and competition, both
domestically and internationally, including competition from competitors with lower production costs. Information technology companies and companies that rely heavily on technology, especially those of smaller, less-seasoned companies, tend to be
more volatile than the overall market. Information technology companies are heavily
dependent on patent and intellectual property
rights, the loss or impairment of which may adversely affect profitability. Additionally, companies in the information technology sector may face dramatic and often unpredictable changes in growth rates and competition for the services of qualified
personnel.
Interest Rate
Risk
Debt securities,
and securities that provide exposure to debt securities, have varying levels of sensitivity to changes in interest rates. In addition, a Fund is subject to the risk that interest rates may change and exhibit increased volatility, thus affecting the
performance of a Fund. Interest rates across the U.S. economy have recently increased and may continue to increase, which may expose a Fund to heightened interest rate risk and volatility. Securities with longer maturities can be more sensitive to
interest rate changes. To the extent a Fund’s Index includes a substantial portion of its assets in fixed-income securities with longer-term durations, rising interest rates may cause the value of the Index to decline significantly. An
increase in interest rates may lead to heightened volatility in the fixed-income markets and adversely affect the liquidity of certain fixed-income investments. A decrease in fixed-income market maker capacity may act to decrease liquidity in the
fixed-income markets and act to further increase volatility, affecting a Fund’s return.
In addition, short-term and long-term
interest rates do not necessarily move in the same amount or the same direction. Short-term securities tend to react to changes in short-term interest rates, and long-term securities tend to react to changes in long-term interest rates. The impact
of an interest rate change may be significant for other asset classes as well, whether because of the impact of interest rates on economic activity or because of changes in the relative attractiveness of asset classes due to changes in interest
rates. For instance, higher interest rates may make investments in debt securities more attractive, thus reducing investments in equities. The link between interest rates and debt security prices tends to be weaker with lower-rated debt securities
than with investment-grade debt securities.
The historically low interest rate
environment was created in part by the U.S. Board of Governors of the Federal Reserve System (the “Fed”) and certain foreign banks keeping the federal funds and equivalent foreign rates at or near zero percent. The Fed recently raised
its benchmark interest rate several times as the U.S. labor market strengthened and economic activity accelerated. The Fed indicated that it expects its accommodative monetary policy stance to support strong labor market conditions and a sustained
return to target inflation, which increases the likelihood of rising interest rates in the future. Fed policy going forward is less clear given recent changes in Fed leadership.
Internet Company Industry Risk
A Fund may invest in, and/or have exposure to,
internet companies. The market prices of internet securities tend to exhibit a greater degree of market risk and sharp price fluctuations than other types of securities. These securities may fall in and out of favor with investors rapidly, which may
cause sudden selling and dramatically lower market
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prices. These companies are subject to rapid changes
in technology, worldwide competition, rapid obsolescence of products and services, loss of patent protections, evolving industry standards and frequent new product productions. Internet securities also may be affected adversely by changes in
consumer and business purchasing patterns and government regulations. These companies may have high market valuations and may appear less attractive to investors, which may cause sharp decreases in their market prices.
Lower-Quality Debt Securities Risk
Investment in, and/or exposure to, a significant
portion of assets in securities rated below investment grade, otherwise known as “junk bonds” generally involves significantly greater risk of loss of your money than an investment in investment-grade bonds. Compared with issuers of
investment-grade bonds, junk bonds are more likely to encounter financial difficulties and to be materially affected by these difficulties. Rising interest rates may compound these difficulties and reduce an issuer’s ability to repay principal
and interest obligations. Issuers of lower-rated securities also have a greater risk of default or bankruptcy. High-yield securities may be less liquid than higher quality investments. A security whose credit rating has been lowered may be
particularly difficult to sell.
Preferred Stock
Risk
A preferred stock has characteristics of
a bond and a common stock. It may offer the higher yield of a bond and has priority over common stock in the receipt of dividends or in any residual assets after payment to creditors should the issuer be dissolved. However, it does not have the same
seniority as a bond and, unlike common stock, its participation in the issuer’s growth may be limited. Although the dividend on a preferred stock may be set at a fixed annual rate, in some circumstances it may be changed or passed by the
issuer. Unlike interest payments on debt securities, dividend payments on preferred stock must be declared by the issuer’s board of directors. An issuer’s board of directors is generally not under any obligation to pay a dividend (even
if such dividend has been accrued) and may suspend payment of dividends on preferred stock at any time. In the event an issuer of preferred stock experiences economic difficulties, the issuer’s preferred stock may lose substantial value due to
the reduced likelihood that the issuer’s board of directors will declare a dividend and the fact that preferred stock may be subordinated to other securities of the same issuer.
Additionally, because many preferred
stocks pay dividends at a fixed rate, their market price can be sensitive to changes in interest rates in a manner similar to bonds
–
that is, as interest rates rise,
the value of the preferred stocks is likely to decline. Also because many preferred stocks allow holders to convert the preferred stock into common stock of the issuer, their market price can be sensitive to changes in the value of the
issuer’s common stock. Preferred stocks are subject to market volatility and the prices of preferred stocks will fluctuate based on market demand.
Prepayment Risk
Many types of debt securities, including mortgage
securities, are subject to prepayment risk, which is the risk that the
issuer of the security will repay principal prior to
the maturity date. Securities subject to prepayment can offer less potential for gains during a declining interest rate environment and similar or greater potential for loss in a rising interest rate environment. In addition, the potential impact of
prepayment features on the price of a debt security can be difficult to predict and result in greater volatility. As a result, a Fund may have to reinvest its assets in mortgage securities or other debt securities that have lower yields.
Robotics &
Artificial Intelligence Company Risk
Robotics
and artificial intelligence companies may have limited product lines, markets, financial resources or personnel. These companies typically face intense competition and potentially rapid product obsolescence. These companies are also heavily
dependent on intellectual property rights and may be adversely affected by loss or impairment of those rights. There can be no assurance these companies will be able to successfully protect their intellectual property to prevent the misappropriation
of their technology, or that competitors will not develop technology that is substantially similar or superior to such companies’ technology. Robotics and artificial intelligence companies typically engage in significant amounts of spending on
research and development, and there is no guarantee that the products or services produced by these companies will be successful. Robotics and artificial intelligence companies, especially smaller companies, tend to be more volatile than companies
that do not rely heavily on technology.
Large-Capitalization Company Risk
Large-capitalization companies may be less able to
adapt to changing market conditions or to respond quickly to competitive challenges or to changes in business, product, financial, or market conditions. Larger companies may not be able to maintain growth at rates that may be achieved by
well-managed smaller and mid-size companies, which may affect the companies’ returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Micro-Capitalization Company Risk
Stock prices of micro-capitalization companies are
significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition, micro-capitalization companies often have limited product lines, narrower markets for their goods and/or
services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or mid-capitalization. In addition, because these stocks are not well known to the investing
public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of
larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity of securities held by a Fund. As a result, their performance can be more volatile and they face greater risk of
business failure, which could increase the volatility of a Fund’s portfolio.
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Mid-Capitalization Company Risk
Mid-capitalization companies often have narrower
markets for their goods and/or services and more limited managerial and financial resources than larger, more-established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are
dependent on a small management group. In addition, because these stocks are not well known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less
publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and
liquidity of securities held by a Fund. As a result, the performance of mid-capitalization companies can be more volatile and they face greater risk of business failure, which could increase the volatility of a Fund’s portfolio.
Small- and/or Mid-Capitalization Company
Risk
Small- and/or mid-capitalization companies often
have narrower markets for their goods and/or services and more limited managerial and financial resources. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management
group. Because these stocks are not well-known to the investing public, there will normally be less publicly available information concerning these securities. Adverse publicity and investor perceptions, whether or not based on fundamental analysis,
can decrease the value and liquidity of securities held by a Fund, resulting in more volatile performance. They also face greater risk of business failure, which could increase the volatility of a Fund’s portfolio.
Currency Exchange Rate Risk
Changes in foreign currency exchange rates will
affect the value of what a Fund owns and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities
markets.
Depositary Receipt
Risk
To the extent a Fund invests in, or has
exposure to, foreign companies, investment may be in the form of depositary receipts or other securities convertible into securities of foreign issuers. American Depositary Receipts (“ADRs”) are receipts typically issued by an American
bank or trust company that evidence ownership of underlying securities issued by a foreign corporation. European Depositary Receipts (“EDRs”) are receipts issued in Europe that evidence a similar ownership arrangement. Global Depositary
Receipts (“GDRs”) are receipts issued throughout the world that evidence a similar arrangement. Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are designed for use in
European securities markets. GDRs are tradable both in the United States and in Europe and are designed for use throughout the world.
Depositary receipts will not necessarily be denominated
in the same currency as their underlying securities.
Depositary receipts may be purchased
through “sponsored” or “unsponsored” facilities. A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a depositary may establish an unsponsored facility without
participation by the issuer of the depositary security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of an unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts of the deposited securities.
Fund investments in depositary
receipts, which include ADRs, GDRs and EDRs, are deemed to be investments in foreign securities for purposes of a Fund’s investment strategy.
Foreign Securities Risk
Foreign instruments may involve greater risks than
domestic instruments. As a result, a Fund’s returns and NAV may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in other
countries. The laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the United States, and there may be less public information available about foreign companies.
Foreign securities may involve
additional risk, including, greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability. Certain
foreign markets may rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or countries, organizations, entities and/or
individuals, changes in international trade patterns, trade barriers, and other protectionists or retaliatory measures.
Geographic Concentration Risk
Investments in a particular country or geographic
region may be particularly susceptible to political, diplomatic or economic conditions and regulatory requirements. As a result, a Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
Because a Fund’s investments may be
traded in markets that are closed when the Exchange is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed
foreign market), resulting in premiums or discounts to NAV that may be greater than those experienced by other ETFs.
Adverse Market Conditions Risk
The
investment objective of each Fund is to provide performance that correlates to the leveraged performance or the leveraged inverse performance of an underlying index. A Fund’s performance will suffer when market conditions
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are adverse to the Fund’s investment
objective. For example, if a Bear Fund’s underlying index rises on a given day, then a Bear Fund’s performance should decline. Conversely, if a Bear Fund’s underlying index falls on a given day, then a Bear Fund’s performance
should rise. If a Bull Fund's underlying index rises on a given day, then a Bull Fund's performance should rise. Conversely, if a Bull Fund's underlying index falls on a given day, then a Bull Fund's performance should also fall.
In addition, because each Fund is
leveraged to provide returns equal to 200% or -200%, respectively, of its underlying index, a minor adverse index move should be expected to have a substantial adverse effect on the Fund.
Adviser’s Investment Strategy
Risk
The Adviser utilizes a quantitative
methodology to select investments for each Fund. Although this methodology is designed to correlate each Bull Fund's daily performance with 200% of the daily performance of its underlying index and each Bear Fund's daily performance with -200% of
the daily performance of its underlying index, there is no assurance that such methodology will be successful and will enable a Fund to achieve its investment objective.
Commodity Pool Registration Risk
Under
amended regulations promulgated by the U.S. Commodities Futures Trading Commission (“CFTC”), the Funds are considered commodity pools, and therefore each is subject to regulation under the Commodity Exchange Act and CFTC rules. The
Adviser is registered as a commodity pool operator and will manage the Funds in accordance with CFTC rules as well as the rules that apply to registered investment companies, which includes registering the Funds as commodity pools. Registration as a
commodity pool subjects the registrant to additional laws, regulations and enforcement policies, all of which may potentially increase compliance costs and may affect the operations and financial performance of the Funds.
Cybersecurity Risk
The increased use of technologies, such as the
internet, to conduct business increases the operational, information security and related “cyber” risks both directly to a Fund and through its service providers. Similar types of cyber security risks are also present for issuers of
securities in which a Fund may invest, which could result in material adverse consequences for such issuers. Unlike many other types of risks faced by a Fund, these risks typically are not covered by insurance. Cyber incidents can result from
deliberate attacks or unintentional events. Cyber incidents may include, but are not limited to, gaining unauthorized access to digital systems (
e.g.
, through “hacking” or malicious software
coding) for purposes of misappropriating assets or sensitive information, corrupting data, causing physical damage to computer or network systems, or causing operational disruption. Cyber attacks may also be carried out in a manner that does not
require gaining unauthorized access, such as causing denial-of-service attacks on websites (
i.e
., efforts to make network services unavailable to intended users).
Failures or breaches of the
electronic systems of a Fund, a Fund’s advisor, distributor, other service providers,
counterparties, securities trading venues, or the
issuers of securities in which a Fund invests have the ability to cause disruptions and negatively impact a Fund’s business operations, potentially resulting in financial losses to a Fund and its shareholders. Cyber attacks may also interfere
with the Fund’s calculation of its NAV, result in the submission of erroneous trades or erroneous creation or redemption orders, and could lead to violations of applicable privacy and other laws, regulatory fines, penalties, reputational
damage, reimbursement or other compensation costs and/or additional compliance costs. While a Fund has established business continuity plans, there are inherent limitations in such plans, including the possibility that certain risks have not been
identified and that prevention and remediation efforts will not be successful. Furthermore, a Fund cannot control the cyber security plans and systems of a Fund’s service providers or issuers of securities in which a Fund invests.
Early Close/Trading Halt
Risk
An exchange or market may close or issue
trading halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in a Fund being unable to buy or sell certain securities or financial instruments. For example, there
is a risk that sharp price declines in securities owned by the Fund may trigger trading halts, which may result in the Fund’s shares trading at an increasingly large discount to NAV during part of, or all of, the trading day. In such
circumstances, a Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
Equity Securities Risk
Publicly-issued equity securities, including common
stocks, are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which a Fund invests will cause the NAV of the Fund to fluctuate.
Gain Limitation Risk
Rafferty will
attempt to position each Fund’s portfolio to ensure that a Fund does not gain or lose more than 90% of its NAV on a given day. As a consequence, a Fund’s portfolio should not be responsive to underlying index movements of more than 45%
in a given day. For example, for a Bull Fund, if its underlying index were to gain 50%, its gains should be limited to a daily gain of 90% (
i.e
. 200% of 45) rather than 100%
(
i.e.
is 200% of 50%).
High Portfolio Turnover Risk
Daily rebalancing of a Fund’s holdings
pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active market trading of a Fund’s shares on such exchanges as the NYSE Arca, Inc., could cause more
frequent creation and redemption activities which could increase the number of portfolio transactions. Frequent and active trading may lead to higher transaction costs because of increased broker commissions resulting from such transactions. In
addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income when distributed to them).
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A Fund calculates portfolio turnover without
including the short-term cash instruments or derivative transactions that comprise the majority of a Fund’s trading. As such, if a Fund’s extensive use of derivative instruments were reflected, the calculated portfolio turnover rate
would be significantly higher.
Investment Risk
An investment in a Fund is not a deposit in a bank
and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
Money market instruments, including money market
funds, depositary accounts and repurchase agreements may be used for cash management purposes. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject
to credit risk with respect to the financial institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase
agreements may be subject to market and credit risk related to the collateral securing the repurchase agreement. Money market instruments may also be subject to credit risks associated with the instruments in which they invest. There is no guarantee
that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
A Fund invests a high percentage of its assets in a
limited number of securities. A Fund’s NAV and total return may fluctuate more, or fall greater, in times of weaker markets than a diversified mutual fund because the Fund may invest its assets in a smaller number of issuers or may invest a
larger proportion of its assets in a single issuer. As a result, the gains or losses on a single investment may have a greater impact on a Fund’s NAV and may make a Fund more volatile than more diversified funds.
Regulatory Risk
Each Fund is subject to the risk that a change in
U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Fund’s operations and/or change the competitive landscape. In particular, there is no guarantee that the Bear Funds will be permitted
to continue to engage in short sales, which are designed to earn the Bear Funds a profit from the decline of the price of a particular security, basket of securities or index.
Additional legislative or regulatory
changes could occur that may materially and adversely affect each Fund. For example, the regulatory environment for derivative instruments in which a Fund may invest is evolving, and changes in the regulation or taxation of derivative instruments
may materially and adversely affect the ability of a Fund to pursue its trading strategies. Similarly, the regulatory environment for leveraged funds generally also may evolve, and changes in the direct or indirect regulation of leveraged funds
could have a material adverse effect on the ability of a Fund to
pursue its investment objective or strategy. Such
legislative or regulatory changes could pose additional risks and result in material adverse consequences to a Fund.
Securities Lending Risk
Securities lending
involves the risk that a Fund may lose money because the borrower of the loaned securities fails to return the securities in a timely manner or at all. A Fund could also lose money in the event of a decline in the value of collateral provided for
loaned securities, a decline in the value of any investments made with cash collateral, or a “gap” between the return on cash collateral reinvestments and any fees a Fund has agreed to pay a borrower. These events could also trigger
adverse tax consequences for a Fund. In the event of a large redemption while a Fund has loaned portfolio securities, a Fund may suffer losses (
e.g
. overdraft fees) if it is unable to recall the securities on
loan in time to fulfill the redemption.
Special Risks of Exchange-Traded
Funds
Authorized Participants Concentration Risk
. A Fund may have a limited number of financial institutions that may act as Authorized Participants. Only Authorized Participants who have entered into agreements with a Fund’s distributor may
engage in creation or redemption transactions directly with the Fund. To the extent that those Authorized Participants exit the business or are unable to process creation and/or redemption orders, Shares may trade at a discount to NAV and possibly
face trading halts and/or delisting. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or investments that have lower trading volumes.
Market Price
Variance Risk
. Shares of a Fund that are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at NAV. The market prices of Shares will
fluctuate in response to changes in the value of a Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than NAV (a premium) or less than NAV (a
discount). The Adviser cannot predict if Shares will trade at a
premium or discount to the Fund’s NAV. Given the fact that Shares can be created and redeemed in creation units, the
Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and a shareholder may trade shares at a premium or a discount to a
Fund’s NAV. A Fund’s investment results are measured based upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent with those
experienced by those creating and redeeming directly with a Fund. There is no guarantee that an active secondary market will develop for Shares of a Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other
participants are unavailable or unable to trade a Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on a Fund’s Shares may widen and a Fund’s Shares may possibly be subject
to trading halts and/or delisting.
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Trading Issues
. Trading in Shares on the Exchange may be halted due to market conditions or for reasons that, in the view of the Exchange, make trading in Shares inadvisable, such as extraordinary market volatility
or other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the Exchange or markets. There can be no assurance that Shares will continue to meet the listing requirements of the
Exchange, and the listing requirements may be amended from time to time.
A Precautionary Note to Retail
Investors
. The Depository Trust Company (“DTC”), a limited trust company and securities depositary that serves as a national clearinghouse for the settlement of trades for its participating banks and
broker-dealers, or its nominee, will be the registered owner of all outstanding Shares of each Fund of the Trust. Your ownership of Shares will be shown on the records of DTC and the DTC Participant broker through whom you hold the Shares. THE TRUST
WILL NOT HAVE ANY RECORD OF YOUR OWNERSHIP. Your account information will be maintained by your broker, who will provide you with account statements, confirmations of your purchases and sales of Shares, and tax information. Your broker also will be
responsible for ensuring that you receive shareholder reports and other communications from a Fund whose Shares you own. Typically, you will receive other services (
e.g.
, average basis information) only if your broker offers these services.
A Precautionary Note to Purchasers of
Creation Units
. Because new Shares may be issued on an ongoing basis, a “distribution” of Shares could be occurring at any time. As a dealer, certain activities on your part could, depending on the
circumstances, result in your being deemed a participant in the distribution, in a manner that could render you a statutory underwriter and subject you to the prospectus delivery and liability provisions of the Securities Act of 1933, as amended
(“Securities Act”). For example, you could be deemed a statutory underwriter if you purchase Creation Units from an issuing Fund, break them down into the constituent Shares and sell those Shares directly to customers, or if you choose
to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for Shares. Whether a person is an underwriter depends upon all of the facts and circumstances pertaining to that
person’s activities, and the
examples mentioned here should not be considered a
complete description of all the activities that could cause you to be deemed an underwriter. Dealers who are not “underwriters,” but are participating in a distribution (as opposed to engaging in ordinary secondary market transactions),
and thus dealing with Shares as part of an “unsold allotment” within the meaning of Section 4(3)(C) of the Securities Act, will be unable to take advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities
Act.
A Precautionary Note
to Investment Companies
. For purposes of the Investment Company Act of 1940, as amended (“1940 Act”) each Fund is a registered investment company, and the acquisition of Shares by other investment
companies is subject to the restrictions of Section 12(d)(1) thereof. Section 12(d)(1) of the 1940 Act restricts investments by investment companies in the securities of other investment companies, including shares of each Fund. Provided, generally,
that a Fund’s investments comply with Section 12(d)(1)(A), registered investment companies are permitted to invest in a Fund beyond the limits set forth in Section 12(d)(1) subject to certain terms and conditions, including that such
investment companies enter into an agreement with a Fund.
The Trust and the Funds have obtained
an exemptive order from the U.S. Securities and Exchange Commission (the “SEC”) allowing a registered investment company to invest in a Fund beyond the limits of Section 12(d)(1) subject to certain conditions, including that a registered
investment company enters into a Participation Agreement with the Trust regarding the terms of the investment. Any investment company considering purchasing Shares of a Fund in amounts that would cause it to exceed the restrictions under Section
12(d)(1) should contact the Trust.
A Precautionary Note Regarding Unusual
Circumstances
. The Trust can postpone payment of redemption proceeds for any period during which (1) the Exchange is closed other than customary weekend and holiday closings, (2) trading on the Exchange is
restricted, as determined by the SEC, (3) any emergency circumstances exist, as determined by the SEC, or (4) the SEC by order permits for the protection of shareholders of a Fund.
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Share Price of the Funds
A fund’s
share price is known as its NAV. Each Fund’s share price (other than the Fixed Income Fund) is calculated as of the close of regular trading on the NYSE, usually 4:00 p.m. Eastern Time (“Valuation Time”), each day the NYSE is open
for business (“Business Day”). The NYSE is open for business Monday through Friday, except in observation of the following holidays: New Year’s Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The NYSE may close early on the business day before each of these holidays and on the day after Thanksgiving Day. NYSE holiday schedules are subject to change without notice.
The Fixed Income Fund also calculates
its NAV as of the close of regular trading on the NYSE, usually 4:00 p.m. Eastern Time each Business Day. However, on days that the bond markets close all day, which currently includes the following holidays: New Year's Day, Martin Luther King Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day (a “Bond Market Holiday”), the Fixed Income Fund does not calculate its NAV, even if the NYSE is
open for business. On such days, orders for purchase or redemption will receive the NAV next calculated on the following Business Day that is not a Bond Market Holiday. Similarly, on days that the bond markets close early but the NYSE does not
(usually at 2 p.m. Eastern Time, and which currently include the Friday before Memorial Day and New Year’s Eve), the Fixed Income Fund treats the portion of the day that the bond markets are closed as a Bond Market Holiday and calculates its
NAV as of the recommended closing time for the bond markets, which may be before 4:00 p.m. Eastern Time, subject to the discretion of the Adviser. In such instances, orders for purchase or redemption that are received prior to the close of bond
markets will receive the NAV calculated at the time of the bond markets closure, whereas orders for purchase or redemption that are received thereafter will receive the NAV next calculated on the following Business Day that is not a Bond Market
Holiday.
If the exchange
or market on which a Fund’s investments are primarily traded closes early, the NAV may be calculated prior to its normal calculation time. Creation/redemption transaction order time cutoffs would also be accelerated.
The value of a Fund’s assets that
trade in markets outside the United States or in currencies other than the U.S. Dollar may fluctuate when foreign markets are open but the Fund is not open for business.
Share price is calculated by dividing
a Fund’s net assets by its shares outstanding. In calculating its NAV, each Fund generally values its assets on the basis of market quotations, last sale or settlement prices, or estimates of value furnished by a pricing service or brokers who
make markets in such instruments. If such information is not available for a security held by a Fund, is determined to be unreliable, or (to the Adviser’s knowledge) does not reflect a significant event occurring after the close of the market
on which the security principally trades (but before the close of trading on the NYSE), the security will be valued at fair value estimates by the Adviser under guidelines established by the Board of Trustees. Foreign securities, currencies and
other assets denominated in foreign currencies are translated into U.S. Dollars at the exchange rate of such currencies against the U.S. Dollar, as provided by an independent pricing service or reporting agency. Each Fund also relies on a pricing
service in circumstances where the U.S. securities markets exceed a pre-determined threshold to value foreign securities held in a Fund’s portfolio. The pricing service, its methodology or the threshold may change from time to time. Debt
obligations with maturities of 60 days or less are valued at amortized cost.
Fair Value Pricing
. Securities are priced at a fair value as determined by the Adviser, under the oversight of the Board of Trustees, when reliable market quotations are not readily available, the Funds' pricing service does not provide a
valuation for such securities, the Funds' pricing service provides a valuation that in the judgment of the Adviser does not represent fair value, the Adviser believes that the market price is stale, or an event that affects the value of an
instrument (a “Significant Event”) has occurred since closing prices were established, but before the time as of which a Fund calculates its NAV. Examples of Significant Events may include: (1) events that relate to a single issuer or to
an entire market sector; (2) significant fluctuations in domestic or foreign markets; or (3) occurrences not tied directly to the securities markets, such as natural disasters, armed conflicts, or significant government actions. If such Significant
Events occur, the Funds may value the instruments at fair value, taking into account such events when it calculates each Fund’s NAV. Fair value determinations are made in good faith in accordance with procedures adopted by the Board of
Trustees. In addition, the Funds may also fair value an instrument if trading in a particular instrument is halted and does not resume prior to the closing of the exchange or other market.
Attempts to determine the fair value
of securities introduce an element of subjectivity to the pricing of securities. As a result, the price of a security determined through fair valuation techniques may differ from the price quoted or published by other sources and may not accurately
reflect the market value of the security when trading resumes. If a reliable market quotation becomes available for a security formerly valued through fair valuation techniques, Rafferty compares the market quotation to the fair value price to
evaluate the effectiveness of the Funds' fair valuation procedures and will use that market value in the next calculation of NAV.
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Rule 12b-1 Fees
The Board of Trustees of the Trust
has adopted a Distribution and Service Plan (the “Plan”) pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Plan, each Fund may pay an amount up to 0.25% of its average daily net assets each year for certain
distribution-related activities and shareholder services.
No 12b-1 fees are currently
authorized to be paid by a Fund, and there are no plans to impose these fees. However, in the event 12b-1 fees are charged in the future, because the fees are paid out of each Fund’s assets, over time these fees will increase the cost of your
investment and may cost you more than certain other types of sales charges.
Creations, Redemptions and Transaction
Fees
Creation Units.
Investors such as market makers, large investors and institutions who wish to deal in Creation Units directly with a Fund must have entered into an authorized participant agreement (“Authorized Participant
Agreement”) with the principal underwriter and the transfer agent, or purchase through a dealer that has entered into such an agreement. These investors are known as “Authorized Participants.” Set forth below is a brief description
of the procedures applicable to the purchase and redemption of Creation Units.
Purchase of a Bull Fund
. To purchase Creation Units directly from a Bull Fund, you must deposit with the Fund a basket of securities and/or cash. Each Business Day, prior to the opening of trading on the Exchange, an agent of the Fund
(“Index Receipt Agent”) will make available through the National Securities Clearing Corporation (“NSCC”) a list of the names and number of shares of each security, if any, to be included in that day’s creation basket
(“Deposit Securities”). The identity and number of shares of the Deposit Securities required for a Creation Unit will change from time to time. Each Bull Fund reserves the right to permit or require the substitution of an amount of cash
–
i.e.
, a “cash in
lieu” amount
–
to be added to the Balancing Amount (defined below) to replace
any Deposit Security that may not be available in sufficient quantity for delivery, eligible for transfer through the clearing process (discussed below) or the Federal Reserve System or eligible for trading by an Authorized Participant or the
investor for which it is acting. For such custom orders, “cash in lieu” may be added to the Balancing Amount (defined below). The Balancing Amount and any “cash in lieu” must be paid to the Trust on or before the third
Business Day following the Transmittal Date. You must also pay a Transaction Fee, described below, in cash.
In addition to the in-kind deposit of
securities, Authorized Participants will either pay to, or receive from, a Bull Fund an amount of cash referred to as the “Balancing Amount.” The Balancing Amount is the amount equal to the differential, if any, between the market value
of the Deposit Securities and the NAV of a Creation Unit. Each Bull Fund will publish, on a daily basis, information about the previous day’s Balancing Amount.
All purchase orders for Creation
Units must be placed by or through an Authorized Participant. Purchase orders will be processed either through a manual clearing process run at the DTC (“Manual Clearing Process”) or through an enhanced clearing process (“Enhanced
Clearing Process”) that is available only to those DTC participants that also are participants in the Continuous Net Settlement System of the NSCC. Authorized Participants that do not use the Enhanced Clearing Process will be charged a higher
Transaction Fee (discussed below). A purchase order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent’s automated system, telephone, facsimile or other means
permitted under the Authorized Participant Agreement, in order to receive that day’s NAV per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that
day.
Shares may be issued in
advance of receipt of Deposit Securities subject to various conditions including a requirement to maintain on deposit with the Trust cash in an amount up to 115% of the market value of the missing Deposit Securities. Any such transaction effected
with the Trust must be effected using the Manual Clearing Process consistent with the terms of the Authorized Participant Agreement.
Redemption from a Bull Fund
. Redemption proceeds will be paid either in cash or in-kind with a basket of securities (“Redemption Securities”). Purchase orders will be processed either through a Manual Clearing Process or through
Enhanced Clearing Process that is available only to those DTC participants that also are participants in the Continuous Net Settlement System of the NSCC. Authorized Participants that do not use the Enhanced Clearing Process will be charged a higher
Transaction Fee (discussed below). In most cases, Redemption Securities will be the same as Deposit Securities on a given day. There will be times, however, when the Deposit and Redemption Securities differ. The composition of the Redemption
Securities will be available through the NSCC. Each Bull Fund reserves the right to honor a redemption request with a non-conforming redemption basket.
If the value of a Creation Unit is
higher than the value of the Redemption Securities, you will receive from a Bull Fund a Balancing Amount in cash. If the value of a Creation Unit is lower than the value of the Redemption Securities, you will be required to pay to the Bull Fund a
Balancing Amount in cash. If you are receiving a Balancing Amount, the amount due will be reduced by the amount of the applicable Transaction Fee.
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As with purchases, redemptions may be
processed either through the Manual Clearing Process or the Enhanced Clearing Process. Authorized Participants that do not use the Enhanced Clearing Process will be charged a higher Transaction Fee (discussed below). A redemption order must be
received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent’s automated system, telephone, facsimile or other means permitted under the Authorized Participant Agreement, in
order to receive that day’s NAV per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day.
An investor may request a redemption
in cash, which a Bull Fund may in its sole discretion permit. Investors that elect to receive cash in lieu of one or more of the Redemption Securities are subject to an additional charge. Redemptions of Creation Units for cash (when available)
and/or outside of the Enhanced Clearing Process also require the payment of an additional charge.
Purchase of a Bear Fund.
Each Bear Fund only accepts cash to purchase Creation Units. The purchaser must transfer cash in an amount equal to the value of the Creation Unit(s) purchased and the applicable Transaction Fee. All purchase orders for
Creation Units must be placed by or through an Authorized Participant. Purchase orders will be processed either through a manual clearing process run at the DTC (“Manual Clearing Process”) or through an enhanced clearing process
(“Enhanced Clearing Process”) that is available only to those DTC participants that also are participants in the Continuous Net Settlement System of the National Securities Clearing Corporation (“NSCC”). Authorized
Participants that do not use the Enhanced Clearing Process will be charged a higher Transaction Fee (discussed below). A purchase order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail,
through the transfer agent’s automated system, telephone, facsimile or other means permitted under the Participant Agreement in order to receive that day’s NAV per Share. The Trust will deliver Shares of a Bear Fund upon payment of cash
to the Trust on or before the third Business Day following the Transmittal Date consistent with the terms of the Authorized Participant Agreement.
Redemption from a Bear Fund.
Redemption proceeds will be paid in cash. As with purchases, redemptions may be processed either through the Manual Clearing Process or the Enhanced Clearing Process. Authorized Participants that do not use the Enhanced
Clearing Process will be charged a higher Transaction Fee (discussed below). A redemption order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent’s automated
system, telephone, facsimile or other means permitted under the Participant Agreement in order to receive that day’s NAV per Share. All other procedures set forth in the Participant Agreement must be followed in order for you to receive the
NAV determined on that day.
Transaction Fees on Creation and
Redemption Transactions.
Each Fund will impose Transaction Fees to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units. There is a fixed and a variable component
to the total Transaction Fee on transactions in Creation Units. A fixed Transaction Fee is applicable to each creation and redemption transaction, regardless of the number of Creation Units transacted. Purchasers and redeemers of Creation Units
effected through the Manual Clearing Process may be required to pay an additional charge to compensate for brokerage and other expenses related to the costs of transferring the Deposit Securities to the Trust. A variable Transaction Fee based upon
the value of each Creation Unit also may be applicable to each purchase or redemption transaction. However, in no instance will the fees charged exceed 2% of the value of the Creation Units subject to a redemption transaction. Purchasers and
redeemers of Creation Units are responsible for the costs of transferring securities to and from the Trust in connection with in-kind transactions. Investors who use the services of a broker or other such intermediary may pay additional fees for
such services. In addition, Rafferty may, from time to time, at its own expense, compensate purchasers of Creation Units who have purchased substantial amounts of Creation Units and other financial institutions for administrative or marketing
services.
The table below
summarizes the components of the Transaction Fees.
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Fixed
Transaction Fee
|
Maximum
Additional
Charge for
Redemptions*
|
|
In-Kind
|
Cash
|
NSCC
|
Outside
NSCC
|
Outside
NSCC
|
Direxion
Daily S&P 500
®
Bull 2X Shares
|
$1,250
|
Up
to 300% of NSCC Amount
|
$1,250
|
Up
to 2.00%
|
Direxion
Daily Small Cap Bull 2X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily CSI 300 China A Share Bull 2X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily MSCI China A Bull 2X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily CSI China Internet Index Bull 2X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily High Yield Bear 2X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily MSCI European Financials Bull 2X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily MSCI European Financials Bear 2X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Preferred Stock Bull 2X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
*
|
As a percentage of the amount
invested.
|
Frequent Purchases and Redemptions
. Rafferty expects a significant portion of the Funds' assets to come from professional money managers and investors who use the Funds as part of “asset allocation” and “market timing” investment
strategies. These strategies often call for frequent trading to take advantage of anticipated changes in market conditions. The Trust’s Board of Trustees has determined not to adopt policies and procedures designed to prevent or monitor for
frequent purchases and redemptions of each Fund’s shares because the Fund sells and redeems its shares at NAV only in Creation Units pursuant to the terms of an Authorized Participant Agreement between the Authorized Participant and the
Distributor, and such direct trading between the Fund and Authorized Participants is critical to ensuring that the Fund’s shares trade at or close to NAV. Further, the vast majority of trading in Fund shares occurs on the secondary market,
which does not involve a Fund directly and therefore does not cause a Fund to experience many of the harmful effects of market timing, such as dilution and disruption of portfolio management. In addition, each Fund imposes a Transaction Fee on
Creation Unit transactions, which is designed to offset transfer and other transaction costs incurred by the Fund in connection with the issuance and redemption of Creation Units and may employ fair valuation pricing to minimize potential dilution
from market timing. Although each Fund reserves the right to reject any purchase orders, each Fund does not currently impose any trading restrictions on frequent trading or actively monitor for trading abuses.
How to Buy and Sell Shares
Each Fund issues and redeems Shares
only in large blocks of 50,000 Shares, called “Creation Units.”
Most investors will buy and sell
Shares of each Fund in secondary market transactions through brokers. Individual Shares of each Fund, once listed for trading on the Exchange, can be bought and sold throughout the trading day like other publicly traded securities. The Funds do not
require any minimum investment in such secondary market transactions.
When buying or selling Shares through
a broker, investors may incur customary brokerage commissions and charges, and may pay some or all of the spread between the bid and the offer prices in the secondary market. In addition, because secondary market transactions occur at market prices,
investors may pay more than NAV when buying Shares, and receive less than NAV when selling Shares.
The Adviser may pay brokers and other
financial intermediaries for educational training programs, the development of technology platforms and reporting systems or other administrative services related to a Fund. Ask your salesperson or visit your financial intermediary’s website
for more information.
The
Funds’ Exchange trading symbols are as follows:
Fund
|
Symbol
|
Direxion
Daily S&P 500
®
Bull 2X Shares
|
SPUU
|
Direxion
Daily Small Cap Bull 2X Shares
|
SMLL
|
Direxion
Daily CSI 300 China A Share Bull 2X Shares
|
CHAU
|
Direxion
Daily MSCI China A Bull 2X Shares
|
|
Direxion
Daily CSI China Internet Index Bull 2X Shares
|
CWEB
|
Direxion
Daily High Yield Bear 2X Shares
|
HYDD
|
Direxion
Daily MSCI European Financials Bull 2X Shares
|
EUFL
|
Direxion
Daily MSCI European Financials Bear 2X Shares
|
|
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Fund
|
Symbol
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares
|
|
Direxion
Daily Preferred Stock Bull 2X Shares
|
|
Share prices are reported in dollars and
cents per Share. For information about acquiring or selling Shares through a secondary market purchase, please contact your broker.
Book Entry
. Shares are held in book-entry form, which means that no stock certificates are issued. DTC or its nominee is the record owner of all outstanding Shares of the Funds and is recognized as the owner of all Shares for all
purposes.
Investors
owning Shares are beneficial owners as shown on the records of DTC or its participants. DTC serves as the securities depository for all Shares. Participants in DTC include securities brokers and dealers, banks, trust companies, clearing corporations
and other institutions that directly or indirectly maintain a custodial relationship with DTC. As a beneficial owner of Shares, you are not entitled to receive physical delivery of stock certificates or to have Shares registered in your name, and
you are not considered a registered owner of Shares. Therefore, to exercise any right as an owner of Shares, you must rely upon the procedures of DTC and its participants. These procedures are the same as those that apply to any other stocks that
you hold in book entry or “street name” through your brokerage account.
Rafferty provides
investment management services to the Funds. Rafferty has been managing investment companies since 1997. Rafferty is located at 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019. As of October 31, 2018, the Adviser had
approximately $12.8 billion in assets under management.
Pursuant to an investment advisory
agreement between the Trust and Rafferty, each Fund pays Rafferty the following fee at an annualized rate based on a percentage of each Fund’s average daily net assets:
Fund
|
Advisory
Fee Charged
|
Direxion
Daily S&P 500
®
Bull 2X Shares
|
0.50%
|
Direxion
Daily Small Cap Bull 2X Shares
|
0.50%
|
Direxion
Daily CSI 300 China A Share Bull 2X Shares
|
0.75%
|
Direxion
Daily MSCI China A Bull 2X Shares
|
0.75%
|
Direxion
Daily CSI China Internet Index Bull 2X Shares
|
0.75%
|
Direxion
Daily High Yield Bear 2X Shares
|
0.60%
|
Direxion
Daily MSCI European Financials Bull 2X Shares
|
0.60%
|
Direxion
Daily MSCI European Financials Bear 2X Shares
|
0.60%
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares
|
0.60%
|
Direxion
Daily Preferred Stock Bull 2X Shares
|
0.60%
|
In addition, Rafferty has voluntarily
agreed to waive its investment advisory fee and/or reimburse certain expenses of the Direxion Daily S&P 500
®
Bull 2X Shares and the Direxion
Daily Small Cap Bull 2X Shares. This expense limitation excludes acquired fund fees, taxes, swap financing and related costs, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses such as
litigation or other expenses outside the typical day-to-day operations of the Funds. Rafferty may withdraw this voluntary waiver at any time and may not recoup any waived fees and/or reimbursed expenses.
For the
fiscal year ended October 31, 2018, the Adviser received net management fees as a percentage of average daily net assets from each operational Fund as follows:
Fund
|
Percentage
|
Direxion
Daily S&P 500
®
Bull 2X Shares
|
0.00%
|
Direxion
Daily Small Cap Bull 2X Shares
|
0.00%
|
Direxion
Daily CSI 300 China A Share Bull 2X Shares
|
0.77%
|
Direxion
Daily China Internet Index Bull 2X Shares
|
0.78%
|
Direxion
Daily High Yield Bear 2X Shares
|
0.00%
|
Direxion
Daily MSCI European Financials Bull 2X Shares
|
0.26%
|
A discussion
regarding the basis on which the Board of Trustees approved the investment advisory agreement for the Funds is included in the Funds' Annual Report for the period ended October 31, 2018.
Rafferty has entered into an
Operating Expense Limitation Agreement with each Fund. Under this Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse each Fund for Other Expenses through
September 1, 2020, to the extent that a Fund’s Total Annual Fund Operating Expenses exceed the percentage listed in the table below of the Fund’s average daily net assets (excluding, as applicable, among other expenses,
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taxes, swap financing and related costs, acquired fund
fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. Solely at
Rafferty’s option and discretion, Rafferty may pay, reimburse or otherwise assume one or more of the excluded expenses, in which case such expense will be subject to reimbursement by Rafferty in accordance with the Operating Expense Limitation
Agreement. This agreement may be terminated or revised at any time with the consent of the Board of Trustees.
Fund
|
Expense
Cap
|
Direxion
Daily S&P 500
®
Bull 2X Shares
|
0.60%
|
Direxion
Daily Small Cap Bull 2X Shares
|
0.60%
|
Direxion
Daily CSI 300 China A Share Bull 2X Shares
|
0.95%
|
Direxion
Daily MSCI China A Bull 2X Shares
|
0.95%
|
Direxion
Daily CSI China Internet Index Bull 2X Shares
|
0.95%
|
Direxion
Daily High Yield Bear 2X Shares
|
0.80%
|
Direxion
Daily MSCI European Financials Bull 2X Shares
|
0.80%
|
Direxion
Daily MSCI European Financials Bear 2X Shares
|
0.80%
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares
|
0.80%
|
Direxion
Daily Preferred Stock Bull 2X Shares
|
0.80%
|
Paul
Brigandi and Tony Ng are jointly and primarily responsible for the day-to-day management of the Funds (the “Portfolio Managers”). An investment trading team of Rafferty employees assists the Portfolio Managers in the day-to-day
management of the Funds subject to their primary responsibility and oversight. The Portfolio Managers work with the investment trading team to decide the target allocation of each Fund’s investments and on a day-to-day basis, an individual
portfolio trader executes transactions for the Funds consistent with the target allocation. The members of the investment trading team rotate periodically among the various series of the Trust, including the Funds, so that no single individual is
assigned to a specific Fund for extended periods of time.
Mr. Brigandi has been a Portfolio
Manager at Rafferty since June 2004. Mr. Brigandi was previously involved in the equity trading training program for Fleet Boston Financial Corporation from August 2002 to April 2004. Mr. Brigandi is a 2002 graduate of Fordham University.
Mr. Ng has been a Portfolio Manager
at Rafferty since April 2006. Mr. Ng was previously a Team Leader in the Trading Assistant Group with Goldman Sachs from 2004 to 2006. He was employed with Deutsche Asset Management from 1998 to 2004. Mr. Ng graduated from State University at
Buffalo in 1998.
The Funds'
Statement of Additional Information ("SAI") provides additional information about the investment team members’ compensation, other accounts they manage and their ownership of securities in the Funds.
A description of the Funds' policies
and procedures with respect to the disclosure of the Funds' portfolio securities is available in the Funds' SAI.
Foreside Fund Services, LLC
(“Distributor”) serves as the Funds' distributor. U.S. Bancorp Fund Services, LLC (“USBFS”) serves as the Funds' administrator. Bank of New York Mellon (“BNYM”) serves as the Funds' transfer agent, fund
accountant, custodian and index receipt agent. The Distributor is not affiliated with Rafferty, USBFS, or BNYM.
Fund Distributions
. Each Fund pays out dividends from its net investment income, and distributes any net capital gains, if any, to its shareholders at least annually. Each Fund is authorized to declare and pay capital gain distributions
in additional Shares or in cash. A Fund may have extremely high portfolio turnover, which may cause it to generate significant amounts of taxable income. Each Fund will generally need to distribute net short-term capital gain to satisfy certain tax
requirements. As a result of the Funds' high portfolio turnover, they could need to make larger and/or more frequent distributions than traditional ETFs.
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Dividend Reinvestment Service
. Brokers may make the DTC book-entry dividend reinvestment service (“Reinvestment Service”) available to their customers who are shareholders of a Fund. If the Reinvestment Service is used with respect to a
Fund, its distributions of both net income and capital gains will automatically be reinvested in additional and fractional Shares thereof purchased in the secondary market. Without the Reinvestment Service, investors will receive Fund distributions
in cash, except as noted above under “Fund Distributions.” To determine whether the Reinvestment Service is available and whether there is a commission or other charge for using the service, consult your broker. Fund shareholders should
be aware that brokers may require them to adhere to specific procedures and timetables to use the Reinvestment Service.
As with any investment, you
should consider the tax consequences of buying, holding, and disposing of Shares. The tax information in this Prospectus is only a general summary of some important federal tax considerations generally affecting a Fund and its shareholders. No
attempt is made to present a complete explanation of the federal tax treatment of the Funds' activities, and this discussion is not intended as a substitute for careful tax planning. Accordingly, potential investors are urged to consult their own
tax advisers for more detailed information and for information regarding any state, local, or foreign taxes applicable to the Funds and to an investment in Shares.
Fund distributions to you and your
sale of your Shares will have tax consequences to you unless you hold your Shares through a tax-exempt entity or tax-deferred retirement arrangement, such as an individual retirement account (“IRA”) or 401(k) plan.
Each Fund intends to qualify, or
continue to qualify, each taxable year for taxation as a “regulated investment company” under Subchapter M of the Internal Revenue Code. If a Fund so qualifies and satisfies certain distribution requirements, the Fund will not be subject
to federal income tax on income that is distributed in a timely manner to its shareholders in the form of income dividends or capital gain distributions.
Taxes on Distributions
. Dividends from a Fund’s investment company taxable income
–
generally, the sum of net investment income, the excess of net short-term capital gain over net long-term capital loss, and net gains and losses from certain foreign currency transactions, if any, all determined without
regard to any deduction for dividends paid
–
will be taxable to you as ordinary
income to the extent of its earnings and profits, whether they are paid in cash or reinvested in additional Shares. However, dividends a Fund pays to you that are attributable to its “qualified dividend income” (i.e., dividends it
receives on stock of most domestic and certain foreign corporations with respect to which it satisfies certain holding period and other restrictions) generally will be taxed to you, if you are an individual, trust, or estate and satisfy those
restrictions with respect to your Shares, for federal income tax purposes, at the rates of 15% or 20% for such shareholders with taxable income exceeding certain thresholds (which will be indexed for inflation annually). A portion of a Fund’s
dividends also may be eligible for the dividends-received deduction allowed to corporations
–
the eligible portion may not exceed the aggregate dividends the Fund receives from domestic corporations subject to federal income tax (excluding real estate investment trusts) and excludes dividends from foreign
corporations
–
subject to similar restrictions; however, dividends a corporate
shareholder deducts pursuant to that deduction are subject indirectly to the federal alternative minimum tax. No Fund expects to earn a significant amount of income that would qualify for those maximum rates or that deduction.
Distributions of a Fund’s net
capital gain (which is the excess of net long-term capital gain over net short-term capital loss) that it recognizes on sales or exchanges of capital assets (“capital gain distributions”), if any, will be taxable to you as long-term
capital gains, at the maximum rates mentioned above if you are an individual, trust, or estate, regardless of your holding period for the Shares on which the distributions are paid and regardless of whether they are paid in cash or reinvested in
additional Shares. A Fund’s capital gain distributions may vary considerably from one year to the next as a result of its investment activities and cash flows and the performance of the markets in which it invests. No Fund expects to earn a
significant amount of net capital gain.
Distributions in excess of a
Fund’s current and accumulated earnings and profits, if any, first will reduce your adjusted tax basis in your Shares in the Fund and, after that basis is reduced to zero, will constitute capital gain. That capital gain will be long-term
capital gain, and thus will be taxed at the maximum rates mentioned above if you are an individual, trust, or estate if the distributions are attributable to Shares you held for more than one year.
Investors should be aware that the
price of Shares at any time may reflect the amount of a forthcoming dividend or capital gain distribution, so if they purchase Shares shortly before the record date therefor, they will pay full price for the Shares and receive some part of the
purchase price back as a taxable distribution even though it represents a partial return of invested capital.
In general, distributions are subject to
federal income tax for the year when they are paid. However, certain distributions paid in January may be treated as paid on December 31 of the prior year.
Because of the possibility of high
portfolio turnover, the Funds may generate significant amounts of taxable income. Accordingly, the Funds may need to make larger and/or more frequent distributions than traditional unleveraged ETFs. A substantial
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portion of that income typically will be short-term
capital gain, which will generally be treated as ordinary income when distributed to shareholders.
Fund distributions to tax-deferred or
qualified plans, such as an IRA, retirement plan or pension plan, generally will not be taxable. However, distributions from such plans will be taxable to the individual participant notwithstanding the character of the income earned by the qualified
plan. Please consult a tax adviser for a more complete explanation of the federal, state, local and foreign tax consequences of investing in a Fund through such a plan.
Taxes When Shares are Sold.
Generally, you will recognize taxable gain or loss if you sell or otherwise dispose of your Shares. Any gain arising from such a disposition generally will be treated as long-term capital gain if you held the Shares for
more than one year, taxable at the maximum rates (15% or 20%) mentioned above if you are an individual, trust, or estate; otherwise, the gain will be treated as short-term capital gain. However, any capital loss arising from the disposition of
Shares held for six months or less will be treated as long-term capital loss to the extent of capital gain distributions, if any, received with respect to those Shares. In addition, all or a portion of any loss recognized on a sale or exchange of
Shares of a Fund will be disallowed to the extent other Shares of the same Fund are purchased (whether through reinvestment of distributions or otherwise) within a period of 61 days beginning 30 days before and ending 30 days after the date of the
sale or exchange; in that event, the basis in the newly purchased Shares will be adjusted to reflect the disallowed loss.
Holders of Creation Units
. A person who purchases Shares of a Bull Fund by exchanging securities for a Creation Unit generally will recognize capital gain or loss equal to the difference between the market value of the Creation Unit and the
person’s aggregate basis in the exchanged securities, adjusted for any Balancing Amount paid or received. A shareholder who redeems a Creation Unit generally will recognize gain or loss to the same extent and in the same manner as described in
the immediately preceding paragraph.
Miscellaneous.
Backup Withholding
. A Fund must withhold and remit to the U.S. Treasury 24% of dividends and capital gain distributions otherwise payable to any individual or
certain other non-corporate shareholder who fails to certify that the social security or other taxpayer identification number furnished to the Fund is correct or who furnishes an incorrect number (together with the withholding described in the next
sentence, “backup withholding”). Withholding at that rate also is required from a Fund’s dividends and capital gain distributions otherwise payable to such a shareholder who is subject to backup withholding for any other reason.
Backup withholding is not an additional tax, and any amounts so withheld may be credited against a shareholder’s federal income tax liability or refunded.
Additional Tax
. An individual must pay a 3.8% federal tax on the lesser of (1) the individual’s “net investment income,” which generally includes dividends, interest, and net gains from the disposition of investment
property (including dividends and capital gain distributions a Fund pays and net gains realized on the sale or redemption of Shares), or (2) the excess of the individual’s “modified adjusted gross income” over a threshold amount
($250,000 for married persons filing jointly and $200,000 for single taxpayers). This tax is in addition to any other taxes due on that income. A similar tax will apply for those years to estates and trusts. Shareholders should consult their own tax
advisers regarding the effect, if any, this provision may have on their investment in Fund shares.
Basis Determination
. A shareholder who wants to use the average basis method for determining basis in Shares he or she acquires after December 31, 2011 (“Covered Shares”), must elect to do so in writing (which may be electronic)
with the broker through which he or she purchased the Shares. A shareholder who wishes to use a different IRS-acceptable method for basis determination (
e.g.
, a specific identification method) may elect to do
so. Fund shareholders are urged to consult with their brokers regarding the application of the basis determination rules to them.
You may also be subject to state and
local taxes on Fund distributions and dispositions of Shares.
Non-U.S. Shareholders
. “A “non-U.S. shareholder” is an investor that, for federal tax purposes, is a nonresident alien individual, a foreign corporation or a foreign estate or trust. Except where discussed otherwise, the
following disclosure assumes that a non-U.S. shareholder’s ownership of Shares is not effectively connected with a trade or business conducted by such non-U.S. shareholder in the United States and does not address non-U.S. shareholders who are
present in the United States for 183 days or more during the taxable year. The tax consequences to a non-U.S. shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Non-U.S. shareholders
should consult their tax advisers with respect to the particular tax consequences to them of an investment in a Fund.
Withholding
. Dividends paid by a Fund to non-U.S. shareholders will be subject to withholding tax at a 30% rate or a reduced rate specified by an applicable income tax treaty to the extent derived from investment income (other than
“qualified interest income” or “qualified short-term capital gains,” as described below). In order to obtain a reduced rate of withholding, a non-U.S. shareholder will be required to provide an IRS Form W-8BEN (or substitute
form) certifying its entitlement to benefits under a treaty. The withholding tax does not apply to regular dividends paid to a non-U.S. shareholder who provides an IRS Form W-8ECI, certifying that the dividends are effectively connected with the
non-U.S. shareholder’s conduct of a trade or business within the United States. Instead, the effectively connected dividends will be subject to regular U.S. income tax as if the non-U.S. shareholder were a U.S. shareholder. A non-U.S.
corporation’s earnings and profits attributable to such dividends may also be subject to additional “branch profits tax” imposed at a rate of 30% (or lower treaty rate).
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ETF Trust Prospectus
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118
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A non-U.S. shareholder who fails to
provide an IRS Form W-8BEN or other applicable form may be subject to backup withholding at the appropriate rate. See the discussion of backup withholding under “Miscellaneous” above.
Exemptions from Withholding
. In general, federal income tax will not apply to gain realized on the sale or other disposition of Shares or to any Fund distributions reported as capital gain dividends, short-term capital gain dividends, or
interest-related dividends.
“ Short-term capital gain
dividends” are dividends that are attributable to “qualified short-term gain” a Fund realizes (generally, the excess of a Fund’s net short-term capital gain over long-term capital loss for a taxable year, computed with
certain adjustments). “Interest-related dividends” are dividends that are attributable to “qualified net interest income” from U.S. sources. Depending on its circumstances, a Fund may report all, some or none of its
potentially eligible dividends as short-term capital gain dividends and interest-related dividends and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. To qualify for the exemption, a non-U.S.
shareholder will need to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN or substitute form). In the case of shares held through an intermediary, the
intermediary may withhold even if a Fund designates the payment as a short-term capital gain dividend or an interest-related dividend. Non-U.S. shareholders should contact their intermediaries with respect to the application of these rules to their
accounts.
Foreign Account
Tax Compliance Act (“FATCA”).
Under FATCA, “foreign financial institutions” (“FFIs”) or “non-financial foreign entities” (“NFFEs”) that are Fund
shareholders may be subject to a generally nonrefundable 30% withholding tax on income dividends. As discussed more fully in the Funds' SAI under “Taxes,” the FATCA withholding tax generally can be avoided (a) by an FFI, if it reports
certain information regarding direct and indirect ownership of financial accounts U.S. persons hold with the FFI and (b) by an NFFE, if it certifies as such and, in certain circumstances, that (i) it has no substantial U.S. persons as owners or (ii)
it does have such owners and reports information relating to them to the withholding agent. The U.S. Treasury has negotiated intergovernmental agreements (“IGAs”) with certain countries and is in various stages of negotiations with other
foreign countries with respect to one or more alternative approaches to implement FATCA; entities in those countries may be required to comply with the terms of the IGA instead of Treasury regulations. Non-U.S. shareholders should consult their own
tax advisers regarding the application of these requirements to their own situation and the impact thereof on their investment in a Fund.
More information about taxes is in the
Funds' SAI.
The Trust enters into contractual
arrangements with various parties, which may include, among others, the Funds' investment adviser, custodian, and transfer agent, who provide services to the Funds. Shareholders are not parties to any such contractual arrangements and are not
intended beneficiaries of those contractual arrangements, and those contractual arrangements are not intended to create in any shareholder any right to enforce them against the service providers or to seek any remedy under them against the service
providers, either directly or on behalf of the Trust.
This Prospectus provides information
concerning the Funds that you should consider in determining whether to purchase Fund shares. Neither this Prospectus nor the SAI is intended, or should be read, to be or give rise to an agreement or contract between the Trust or the Funds and any
investor, or to give rise to any rights in any shareholder or other person other than any rights under federal or state law that may not be waived.
Bloomberg Barclays
Index
. The Direxion Daily High Yield Bear 2X Shares, (collectively “the Fund”), is/are not sponsored, endorsed, sold or promoted by Barclays Capital. Barclays Capital makes no representation or warranty,
express or implied, to the owners of the Fund or any member of the public regarding the advisability of investing in securities generally or in the Fund particularly or the ability of the Barclays Capital Index to track general bond market
performance. Barclays Capital’s only relationship to Direxion and the Fund is/are the licensing of the Barclays Capital Index which is determined, composed and calculated by Barclays Capital without regard to Direxion or the Fund. Barclays
Capital has no obligation to take the needs of Direxion, the Fund or the owners of the Fund into consideration in determining, composing or calculating the Barclays Capital Index. Barclays Capital is not responsible for and has not participated in
the determination of the timing of, prices at, or quantities of the Fund to be issued. Barclays Capital has no obligation or liability in connection with the administration, marketing or trading of the Fund.
BARCLAYS CAPITAL SHALL HAVE NO
LIABILITY TO LICENSEE OR TO THIRD PARTIES FOR THE QUALITY, ACCURACY AND/OR COMPLETENESS OF THE INDEX OR ANY DATA INCLUDED THEREIN OR FOR INTERRUPTIONS IN THE DELIVERY OF THE INDEX. BARCLAYS CAPITAL MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE FUND(S) OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN IN
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CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR FOR
ANY OTHER USE. BARCLAYS CAPITAL MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN. BARCLAYS
CAPITAL SHALL NOT BE LIABLE FOR ANY DAMAGES, INCLUDING, WITHOUT LIMITATION, ANY INDIRECT OR CONSEQUENTIAL DAMAGES, RESULTING FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN.
CSI Indices
. The CSI 300 Index and the CSI Overseas China Internet Index are calculated by China Securities Index Company (“CSI”). CSI does not make any warranties, express or implied, to any of their customers or
anyone else regarding the accuracy or completeness of any data related to the CSI Indices. All information is provided for informational purposes only. CSI accepts no liability for any errors or any loss arising from the use of
information.
Indxx Indices.
“Indxx”
is a service mark of Indxx and has been licensed for use for certain purposes by the Adviser. The Direxion Daily Robotics &
Artificial Intelligence Bull 2X Shares and the Direxion Daily Preferred Stock Bull 2X Shares (the “Indxx Funds”) are not sponsored, endorsed, sold or promoted by Indxx.
Indxx
makes
no representation or warranty, express or implied,
to the owners of the Indxx
Funds
or any member of the public regarding the advisability of investing in securities generally or in the Indxx Funds particularly. Indxx
has no obligation to take
the needs of the Adviser or
the shareholders of the Indxx Funds into consideration in determining, composing or calculating the Indxx
Global Robotics and Artificial
Intelligence Thematic Index
and
the
Indxx
US High Yield,
Low Volatility
Preferred Stock Index.
Indxx is not
responsible for and has not participated
in
the determination of the timing,
amount or pricing of the Indxx Fund shares to be
issued or in the determination or
calculation of the equation by which the Indxx Fund shares are to be converted into cash.
Indxx has no obligation or liability in connection with the administration,
marketing or trading of the Indxx Funds.
MSCI Index.
The underlying index for the Direxion Daily MSCI European Financials Bull 2X Shares, Direxion Daily MSCI European Financials Bear 2X Shares and the MSCI China A International Index is the MSCI Europe Financials Index.
The Fund is not sponsored, endorsed, sold or promoted by Morgan Stanley Capital International Inc. (“MSCI”), any of its affiliates, any of its information providers or any other third party involved in, or related to, compiling,
computing or creating any MSCI Index (collectively, the “MSCI Parties”). The MSCI Index is the exclusive property of MSCI. MSCI and the MSCI Index names are service marks of MSCI or its affiliates and have been licensed for use for
certain purposes by the Trust. None of the MSCI Parties makes any representation or warranty, express or implied, to the issuer or shareholders of the Fund or any other person or entity regarding the advisability of investing in funds generally or
in the Fund particularly or the ability of any MSCI Index to track corresponding stock market performance. MSCI or its affiliates are the licensors of certain trademarks, service marks and trade names and of the MSCI Index which are determined,
composed and calculated by MSCI without regard to the Fund or the issuer or shareholders of the Fund or any other person or entity into consideration in determining, composing or calculating the MSCI Index. None of the MSCI Parties are responsible
for, or has participated in, the determination of the timing of, prices at, or quantities of the Fund to be issued or in the determination or calculation of the equation by or the consideration into which the Fund is/are redeemable. Further, none of
the MSCI Parties has any obligation or liability to the issuer or owners of the Fund or any other person or entity in connection with the administration, marketing or offering of the Fund.
Although MSCI shall obtain
information for inclusion in or for use in the calculation of the MSCI Index from sources that MSCI considers reliable, none of the MSCI Parties warrants or guarantees the originality, accuracy and/or the completeness of any MSCI Index or any data
included therein. None of the MSCI Parties makes any warranty, express or implied, as to results to be obtained by the issuer of the Fund, shareholders of the Fund, or any other person or entity, from the use of any MSCI Index or any data included
therein. None of the MSCI Parties shall have any liability for any errors, omissions or interruptions of, or in connection with, any MSCI Index or any data included therein. Further, none of the MSCI Parties makes any express or implied warranties
of any kind, and the MSCI Parties hereby expressly disclaim all warranties of merchantability and fitness for a particular purpose, with respect to the MSCI Index and any data included therein. Without limiting any of the foregoing, in no event
shall any of the MSCI Parties have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No purchaser, seller or holder of this
security, product or fund, or any other person or entity, should use or refer to any MSCI trade name, trademark or service mark to sponsor, endorse, market or promote this security without first contacting MSCI to determine whether MSCI’s
permission is required. Under no circumstances may any person or entity claim any affiliation with MSCI without the prior written permission of MSCI.
Russell Indices.
The Direxion Daily Small Cap Bull 2X Shares are not sponsored, endorsed, sold or promoted by Frank Russell Company (“Russell”). Russell makes no representation or warranty, express or implied, to the owners
of the Direxion Daily Small Cap Bull 2X Shares or any member of the public regarding the advisability of investing in securities generally or in the Direxion Daily Small Cap Bull 2X Shares particularly or the ability of the Russell 2000
®
Index to track general stock market performance or a segment of the same. Russell’s publication of the
Russell 2000
®
Index in no way suggests or implies an opinion by Russell as to the advisability of
investment in any or all of the securities upon which the Russell 2000
®
Index is based. Russell’s
only relationship to the Trust is the licensing of certain trademarks and trade names of Russell and of the Russell 2000
®
Index which is determined, composed and calculated by Russell without regard to the Trust or Direxion Daily Small Cap Bull 2X Shares. Russell is not responsible for and has not reviewed the Trust or Direxion Daily Small
Cap Bull 2X Shares nor any associated literature or publications and Russell makes no representation or warranty express or implied
Direxion Shares
ETF Trust Prospectus
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120
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as to their accuracy or completeness, or otherwise.
Russell reserves the right, at any time and without notice, to alter, amend, terminate or in any way change the Russell 2000
®
Index. Russell has no
obligation or liability in connection with the administration, marketing or trading of the Direxion Daily Small Cap Bull 2X Shares.
RUSSELL DOES NOT GUARANTEE THE
ACCURACY AND/OR THE COMPLETENESS OF THE Russell 2000
®
Index OR ANY DATA INCLUDED THEREIN AND RUSSELL SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS, OR INTERRUPTIONS THEREIN. RUSSELL MAKES NO WARRANTY, EXPRESS OF IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE TRUST, INVESTORS, OWNERS OF THE Direxion Daily Small Cap Bull 2X Shares, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE
Russell 2000
®
Index OR ANY DATA INCLUDED THEREIN. RUSSELL MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE Russell 2000
®
Index OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING
ANY OF THE FOREGOING, IN NO EVENT SHALL RUSSELL HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Standard and Poor’s Index.
The S&P 500
®
Index (the “S&P Index”) is/are products of S&P Dow Jones Indices LLC
(“SPDJI”), and has/have been licensed for use by the Trust. Standard & Poor’s
®
, S&P
®
and S&P 500
®
are registered trademarks of
Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones Trademark Holdings LLC
(“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by the Trust. The Funds are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, any of their respective
affiliates (collectively, “S&P Dow Jones Indices”). S&P Dow Jones Indices makes no representation or warranty, express or implied, to the owners of the Funds or any member of the public regarding the advisability of investing in
securities generally or in the Funds particularly or the ability of the S&P Index to track general market performance. S&P Dow Jones Indices’ only relationship to the Trust with respect to the S&P Index is the licensing of such
Index(es) and certain trademarks, service marks and/or trade names of S&P Dow Jones Indices or its licensors. The S&P Index is/are determined, composed and calculated by S&P Dow Jones Indices without regard to the Trust or the Funds.
S&P Dow Jones Indices have no obligation to take the needs of the Trust or the owners of the Funds into consideration in determining, composing or calculating the S&P Index. S&P Dow Jones Indices is not responsible for and has not
participated in the determination of the prices, and amount of the Funds or the timing of the issuance or sale of the Funds or in the determination or calculation of the equation by which the Funds are to be converted into cash, surrendered or
redeemed, as the case may be. S&P Dow Jones Indices has no obligation or liability in connection with the administration, marketing or trading of the Funds. There is no assurance that investment products based on the S&P Index will
accurately track index performance or provide positive investment returns. S&P Dow Jones Indices LLC is not an investment advisor. Inclusion of a security within an index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold
such security, nor is it considered to be investment advice. Notwithstanding the foregoing, CME Group Inc. and its affiliates may independently issue and/or sponsor financial products based on the S&P 500 Index and other S&P proprietary
indices unrelated to the Funds currently being issued by the Trust, but which may be similar to and competitive with the Funds. CME Group Inc. is an indirect shareholder of S&P Dow Jones Indices LLC.
S&P DOW JONES INDICES DOES NOT
GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE S&P INDEX OR ANY DATA RELATED THERETO OR ANY COMMUNICATION, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING ELECTRONIC COMMUNICATIONS) WITH
RESPECT THERETO. S&P DOW JONES INDICES SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. S&P DOW JONES INDICES MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY THE TRUST, OWNERS OF THE FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500
®
INDEX OR WITH RESPECT TO ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL S&P DOW JONES INDICES BE
LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBLITY OF SUCH DAMAGES, WHETHER IN
CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN S&P DOW JONES INDICES AND THE TRUST, OTHER THAN THE LICENSORS OF S&P DOW JONES INDICES.
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The financial highlights table is
intended to help you understand the financial performance of the Funds listed below for the periods indicated. The information set forth below was audited by Ernst & Young LLP, Independent Registered Public Accounting Firm, whose report, along
with the Funds’ financial statements, is included in the Annual shareholder report, which are available upon request and incorporated by reference into the Funds’ SAI. Certain information reflects financial results for a single Share.
The total returns in the table represent the rate that an investor would have earned (or lost) on an investment in a Fund (assuming reinvestment of all dividends and distributions).
No financial information
is available for the Direxion Daily MSCI China A Bull 2X Shares, Direxion Daily MSCI European Financials Bear 2X Shares, Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares, and the Direxion Daily Preferred Stock
Bull 2X Shares because those Funds had not commenced operations prior to October 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asset Value,
Beginning of
Year/Period
|
Net
Investment
Income (Loss)
1
|
Net
Investment
Income (Loss)
1,2
|
Net
Realized and
Unrealized Gain
(Loss) on
Investments
3
|
Net
Increase
(Decrease) in Net
Asset Value
Resulting from
Operations
|
Dividends
from
Net Investment
Income
|
Distributions
from
Realized Capital
Gains
|
Distributions
from
Return of Capital
|
Total
Distributions
|
Net
Asset Value,
End of Year/Period
|
Direxion
Daily CSI 300 China A Share Bull 2X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$28.60
|
0.17
|
0.19
|
(12.76)
|
(12.59)
|
(0.06
)
|
–
|
–
|
(0.06
)
|
$15.95
|
For
the Year Ended October 31, 2017
|
$18.53
|
(0.08)
|
(0.06)
|
10.15
|
10.07
|
–
|
–
|
–
|
–
|
$28.60
|
For
the Year Ended October 31, 2016
|
$21.71
|
(0.15)
|
(0.15)
|
(3.03)
|
(3.18)
|
–
|
–
|
–
|
–
|
$18.53
|
For
the Period April 16, 2015
8
through October 31, 2015
|
$40.00
|
(0.13)
|
(0.13)
|
(18.16)
|
(18.29)
|
–
|
–
|
–
|
–
|
$21.71
|
Direxion
Daily CSI China Internet Index Bull 2X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$49.07
|
0.22
|
0.28
|
(24.87)
|
(24.65)
|
(0.20
)
|
(1.52
)
|
–
|
(1.72
)
|
$22.70
|
For
the Period November 2, 2016
8
through October 31, 2017
|
$25.00
|
(0.21)
|
(0.21)
|
24.28
|
24.07
|
–
|
–
|
–
|
–
|
$49.07
|
Direxion
Daily High Yield Bear 2X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$18.63
|
0.14
|
0.14
|
0.25
|
0.39
|
(0.11
)
|
–
|
–
|
(0.11
)
|
$18.91
|
For
the Year Ended October 31, 2017
|
$22.05
|
(0.03)
|
(0.03)
|
(3.39)
|
(3.42)
|
–
|
–
|
–
|
–
|
$18.63
|
For
the Period June 16, 2016
8
through October 31, 2016
|
$25.00
|
(0.05)
|
(0.05)
|
(2.90)
|
(2.95)
|
–
|
–
|
–
|
–
|
$22.05
|
Direxion
Daily MSCI European Financials Bull 2X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$48.15
|
0.84
|
0.84
|
(15.85)
|
(15.01)
|
(1.70
)
|
(3.04
)
|
–
|
(4.74
)
|
$28.40
|
For
the Year Ended October 31, 2017
|
$30.35
|
0.42
|
0.43
|
20.17
|
20.59
|
–
|
(2.79
)
|
–
|
(2.79
)
|
$48.15
|
For
the Period July 27, 2016
8
through October 31, 2016
|
$25.00
|
(0.04)
|
(0.04)
|
5.39
|
5.35
|
–
|
–
|
–
|
–
|
$30.35
|
Direxion
Daily S&P 500
®
Bull 2X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$46.22
|
0.89
|
0.98
|
4.02
|
4.91
|
(0.87
)
|
(1.37
)
|
–
|
(2.24
)
|
$48.89
|
For
the Year Ended October 31, 2017
|
$36.00
|
0.17
|
0.30
|
16.07
|
16.24
|
(0.08
)
|
(5.94
)
|
–
|
(6.02
)
|
$46.22
|
For
the Year Ended October 31, 2016
|
$34.19
|
(0.15)
|
(0.14)
|
1.96
|
1.81
|
–
|
–
|
–
|
–
|
$36.00
|
For
the Year Ended October 31, 2015
|
$33.58
|
(0.21)
|
(0.21)
|
2.28
|
2.07
|
(0.50
)
|
(0.96
)
|
–
|
(1.46
)
|
$34.19
|
For
the Period May 28, 2014
8
through October 31, 2014
|
$30.00
|
0.18
|
0.18
|
3.40
|
3.58
|
–
|
–
|
–
|
–
|
$33.58
|
Direxion
Daily Small Cap Bull 2X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$48.57
|
0.49
|
0.64
|
(0.33)
|
0.16
|
(0.56
)
|
(2.32
)
|
–
|
(2.88
)
|
$45.85
|
For
the Year Ended October 31, 2017
|
$30.66
|
0.11
|
0.13
|
17.80
|
17.91
|
–
|
–
|
–
|
–
|
$48.57
|
For
the Year Ended October 31, 2016
|
$30.51
|
(0.03)
|
(0.02)
|
1.13
|
1.10
|
–
|
(0.95
)
|
–
|
(0.95
)
|
$30.66
|
For
the Year Ended October 31, 2015
|
$31.73
|
(0.17)
|
(0.16)
|
(0.65)
|
(0.82)
|
–
|
(0.40
)
|
–
|
(0.40
)
|
$30.51
|
For
the Period July 29, 2014
8
through October 31, 2014
|
$30.00
|
(0.05)
|
(0.05)
|
1.78
|
1.73
|
–
|
–
|
–
|
–
|
$31.73
|
Direxion Shares
ETF Trust Prospectus
|
122
|
Financial Highlights
(continued)
|
|
|
RATIOS
TO AVERAGE NET ASSETS
5
|
|
|
Total
Return
4
|
Net
Assets, End of
Year/Period (000's
omitted)
|
Net
Expenses
6
|
Total
Expenses
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
|
Net
Expenses
2,6
|
Total
Expenses
2
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
2
|
Portfolio
Turnover
Rate
7
|
Direxion
Daily CSI 300 China A Share Bull 2X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(44.05)%
|
$76,552
|
1.05%
|
1.03%
|
0.68%
|
0.95%
|
0.93%
|
0.78%
|
339%
|
For
the Year Ended October 31, 2017
|
54.34%
|
$70,078
|
1.03%
|
1.05%
|
(0.36)%
|
0.95%
|
0.97%
|
(0.28)%
|
1747%
|
For
the Year Ended October 31, 2016
|
(14.65)%
|
$60,228
|
0.96%
|
1.01%
|
(0.81)%
|
0.95%
|
1.00%
|
(0.80)%
|
2606%
|
For
the Period April 16, 2015
8
through October 31, 2015
|
(45.73)%
|
$62,968
|
0.95%
|
1.09%
|
(0.93)%
|
0.95%
|
1.09%
|
(0.93)%
|
1592%
|
Direxion
Daily CSI China Internet Index Bull 2X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(52.04)%
|
$49,937
|
1.06%
|
1.03%
|
0.46%
|
0.95%
|
0.92%
|
0.57%
|
189%
|
For
the Period November 2, 2016
8
through October 31, 2017
|
96.28%
|
$85,879
|
0.97%
|
1.13%
|
(0.48)%
|
0.95%
|
1.11%
|
(0.46)%
|
0%
|
Direxion
Daily High Yield Bear 2X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
2.09%
|
$
3,782
|
0.80%
|
1.99%
|
0.76%
|
0.80%
|
1.99%
|
0.76%
|
0%
|
For
the Year Ended October 31, 2017
|
(15.51)%
|
$
3,726
|
0.80%
|
2.06%
|
(0.16)%
|
0.80%
|
2.06%
|
(0.16)%
|
0%
|
For
the Period June 16, 2016
8
through October 31, 2016
|
(11.80)%
|
$
5,512
|
0.80%
|
2.32%
|
(0.56)%
|
0.80%
|
2.32%
|
(0.56)%
|
0%
|
Direxion
Daily MSCI European Financials Bull 2X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(34.53)%
|
$
7,100
|
0.80%
|
1.14%
|
2.14%
|
0.80%
|
1.14%
|
2.14%
|
38%
|
For
the Year Ended October 31, 2017
|
72.58%
|
$
9,630
|
0.82%
|
1.30%
|
1.02%
|
0.80%
|
1.28%
|
1.04%
|
190%
|
For
the Period July 27, 2016
8
through October 31, 2016
|
21.40%
|
$
3,035
|
0.80%
|
3.32%
|
(0.59)%
|
0.80%
|
3.32%
|
(0.59)%
|
0%
|
Direxion
Daily S&P 500
®
Bull 2X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
10.13%
|
$
6,514
|
0.18%
|
1.24%
|
1.71%
|
0.00%
9
|
1.06%
|
1.89%
|
59%
|
For
the Year Ended October 31, 2017
|
48.62%
|
$
3,847
|
0.82%
|
1.87%
|
0.40%
|
0.49%
|
1.54%
|
0.73%
|
363%
|
For
the Year Ended October 31, 2016
|
5.29%
|
$
2,996
|
0.64%
|
1.33%
|
(0.44)%
|
0.60%
|
1.29%
|
(0.40)%
|
419%
|
For
the Year Ended October 31, 2015
|
6.81%
|
$11,394
|
0.60%
|
0.92%
|
(0.59)%
|
0.60%
|
0.92%
|
(0.59)%
|
208%
|
For
the Period May 28, 2014
8
through October 31, 2014
|
11.92%
|
$31,336
|
0.60%
|
0.93%
|
1.34%
|
0.60%
|
0.93%
|
1.34%
|
91%
|
Direxion
Daily Small Cap Bull 2X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(0.89)%
|
$
3,055
|
0.28%
|
2.14%
|
0.92%
|
0.00%
9
|
1.86%
|
1.20%
|
119%
|
For
the Year Ended October 31, 2017
|
58.41%
|
$
3,237
|
0.54%
|
2.63%
|
0.26%
|
0.49%
|
2.58%
|
0.31%
|
109%
|
For
the Year Ended October 31, 2016
|
3.79%
|
$
2,044
|
0.63%
|
3.47%
|
(0.09)%
|
0.60%
|
3.44%
|
(0.06)%
|
0%
|
For
the Year Ended October 31, 2015
|
(2.54)%
|
$
2,033
|
0.61%
|
1.52%
|
(0.49)%
|
0.60%
|
1.51%
|
(0.48)%
|
289%
|
For
the Period July 29, 2014
8
through October 31, 2014
|
5.76%
|
$
4,230
|
0.60%
|
2.86%
|
(0.60)%
|
0.60%
|
2.86%
|
(0.60)%
|
503%
|
1
|
Net investment income (loss)
per share represents net investment income divided by the daily average shares of beneficial interest outstanding throughout each period.
|
2
|
Excludes interest expense and
extraordinary expenses which comprise of tax and litigation expenses.
|
3
|
Due to the timing of sales
and redemptions of capital shares, the net realized and unrealized gain (loss) per share will not equal the Fund's changes in net realized and unrealized gain (loss) on investments, in-kind redemptions, futures and swaps for the period.
|
4
|
Total return is calculated
assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period and redemption on the last day of the period. Total return calculated for
a period of less than one year is not annualized. The total return would have been lower if certain expenses had not been reimbursed/waived or recouped by the investment advisor.
|
5
|
For periods less than a year,
these ratios are annualized.
|
6
|
Net expenses include effects
of any reimbursement/waiver or recoupment.
|
7
|
Portfolio turnover rate is
not annualized and excludes the value of portfolio securities received or delivered as a result of in-kind creations or redemptions of the Fund's capital shares. Portfolio turnover rate does not include effects of turnover of the swap and future
contracts portfolio. Short-term securities with maturities less than or equal to 365 days are also excluded from portfolio turnover calculation.
|
8
|
Commencement of investment
operations.
|
9
|
This ratio includes the
voluntary waiver of expenses by the Adviser. Excluding the voluntary waiver, the net expense ratio would have been 0.60%.
|
123
|
Direxion Shares ETF
Trust Prospectus
|
1301
Avenue of the Americas (6th Avenue), 28th Floor
|
New York,
New York 10019
|
866-476-7523
|
More Information on the Direxion Shares ETF Trust
Statement of Additional Information
(“SAI”):
The Funds' SAI contains
more information on each Fund and its investment policies. The SAI is incorporated in this Prospectus by reference (meaning it is legally part of this Prospectus). A current SAI is on file with the Securities and Exchange Commission
(“SEC”).
Annual and Semi-Annual Reports
to Shareholders:
The Funds' reports will provide
additional information on the Funds' investment holdings, performance data and a letter discussing the market conditions and investment strategies that significantly affected the Funds' performance during that period.
To Obtain the SAI or Fund Reports Free of Charge:
Write
to:
|
Direxion
Shares ETF Trust
|
|
1301 Avenue
of the Americas (6th Avenue), 28th Floor
New York, New York 10019
|
Call:
|
866-476-7523
|
By
Internet:
|
www.direxioninvestments.com
|
These documents and other
information about the Funds can be reviewed and copied at the SEC Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at (202) 551-8090. Reports and other information
about the Funds may be viewed on screen or downloaded from the EDGAR Database on the SEC’s website at http://www.sec.gov. Copies of these documents may be obtained, after paying a duplicating fee, by electronic request at the following e-mail
address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-1520.
SEC File Number: 811-22201
Direxion Shares ETF Trust
Statement of Additional Information
1301
Avenue of the Americas (6th Avenue), 28th Floor
|
New York,
New York 10019
|
866-476-7523
|
www.direxioninvestments.com
The Direxion Shares ETF Trust
(“Trust”) is an investment company that offers shares of a variety of exchange-traded funds to the public. The shares of the funds offered in this Statement of Additional Information (“SAI”) are, or upon commencement of
operations will be, listed and traded on the NYSE Arca, Inc. This SAI relates to the funds listed below (each, a “Fund” and collectively, the “Funds”).
2X
BULL FUNDS
|
2X BEAR FUNDS
|
Direxion
Daily S&P 500
®
Bull 2X Shares (SPUU)
|
|
Direxion
Daily Small Cap Bull 2X Shares (SMLL)
|
|
Direxion
Daily CSI 300 China A Share Bull 2X Shares (CHAU)
|
|
Direxion
Daily MSCI China A Bull 2X Shares
|
|
Direxion
Daily CSI China Internet Index Bull 2X Shares (CWEB)
|
|
|
Direxion
Daily High Yield Bear 2X Shares (HYDD)
|
Direxion
Daily MSCI European Financials Bull 2X Shares (EUFL)
|
Direxion
Daily MSCI European Financials Bear 2X Shares
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares
|
|
Direxion
Daily Preferred Stock Bull 2X Shares
|
|
The Funds seek
daily
leveraged
investment results and are intended to be used as short-term trading vehicles. The Funds with “Bull” in their names attempt to provide daily investment results that correspond to two times the performance of an
underlying index and are collectively referred to as the “Bull Funds.” The Funds with “Bear” in their names attempt to provide daily investment results that correspond to two times the inverse (or opposite) of the performance
of an underlying index and are collectively referred to as the “Bear Funds.”
The Funds are not intended to be used by, and are not appropriate
for, investors who do not intend to actively monitor and manage their portfolios. The Funds are very different from most mutual funds and exchange-traded funds. Investors should note that:
(1)
|
The Funds pursue
daily leveraged
investment objectives, which means that the Funds are riskier than alternatives that do not use leverage because the Funds magnify the performance of their underlying index.
|
(2)
|
Each Bear Fund pursues a
daily leveraged
investment objective that is
inverse
to the performance of its underlying index, a result opposite of most mutual funds and exchange-traded funds.
|
(3)
|
The
pursuit of daily investment objectives means that the return of a Fund for a period longer than a full trading day will be the product of a series of daily leveraged returns for each trading day during the relevant period. As a consequence,
especially in periods of market volatility, the volatility of the underlying index may affect a Fund’s return as much as, or more than, the return of the underlying index. Further, the return for investors that invest for periods less than a
full trading day will not be the product of the return of a Fund’s stated daily leveraged investment objective and the performance of the underlying index for the full trading day. During periods of high volatility, the Funds may not perform
as expected and the Funds may have losses when an investor may have expected gains if the Funds are held for a period that is different than one trading day.
|
The Funds are not suitable for all investors. The Funds are
designed to be utilized only by sophisticated investors, such as traders and active investors employing dynamic strategies. Investors in the Funds should:
(a)
|
understand the risks
associated with the use of leverage;
|
(b)
|
understand the consequences
of seeking daily leveraged investment results;
|
(c)
|
for a Bear Fund, understand
the risk of shorting; and
|
(d)
|
intend
to actively monitor and manage their investments.
|
Investors who do not understand the Funds, or do not intend to
actively manage their funds and monitor their investments, should not buy the Funds.
There is no assurance that any Fund will achieve its investment
objective and an investment in a Fund could lose money. No single Fund is a complete investment program.
If a Fund’s underlying index moves
more than 50% on a given trading day in a direction adverse to the Fund, the Fund’s investors would lose all of their money. The Funds’ investment adviser, Rafferty Asset Management, LLC, will attempt to position each Fund’s
portfolio to ensure that a Fund does not gain or lose more than 90% of its net asset value on a given trading day. As a consequence, a Fund’s portfolio should not be responsive to underlying index movements beyond 45% on a given trading day,
whether that movement is favorable or adverse to the Fund. For example, if a Bull Fund’s underlying index was to gain 50% on a given trading day, that Fund should be limited to a gain of 90% for that day, which corresponds to 200% of an
underlying index gain of 45%, rather than 200% of an underlying index gain of 50%.
This SAI, dated February 28, 2019, is not a prospectus. It
should be read in conjunction with the Funds' prospectus dated February 28, 2019 (“Prospectus”). This SAI is incorporated by reference into the Prospectus. In other words, it is legally part of the Prospectus. To receive a copy of the
Prospectus, without charge, write or call the Trust at the address or telephone number listed above.
February 28, 2019
Table of Contents
|
Page
|
|
2
|
|
3
|
|
3
|
|
3
|
|
4
|
|
4
|
|
5
|
|
5
|
|
6
|
|
13
|
|
13
|
|
15
|
|
16
|
|
16
|
|
17
|
|
17
|
|
18
|
|
18
|
|
19
|
|
20
|
|
25
|
|
25
|
|
26
|
|
26
|
|
27
|
|
27
|
|
27
|
|
28
|
|
28
|
|
33
|
|
33
|
|
34
|
|
34
|
|
34
|
|
35
|
|
35
|
|
36
|
|
38
|
|
38
|
|
39
|
|
40
|
|
41
|
|
41
|
|
41
|
|
Page
|
|
41
|
|
44
|
|
44
|
|
46
|
|
49
|
|
51
|
|
52
|
|
52
|
|
53
|
|
54
|
|
55
|
|
55
|
|
55
|
|
55
|
|
56
|
|
56
|
|
57
|
|
58
|
|
58
|
|
59
|
|
59
|
|
60
|
|
60
|
|
61
|
|
61
|
|
61
|
|
64
|
|
64
|
|
65
|
|
65
|
|
65
|
|
65
|
|
70
|
|
A-1
|
Direxion Shares ETF Trust
The Trust is a
Delaware statutory trust organized on April 23, 2008 and is registered with the Securities and Exchange Commission (“SEC”) as an open-end management investment company under the Investment Company Act of 1940, as amended (“1940
Act”). The Trust currently consists of 120 separate series or “Funds.”
Prior to February 28, 2017, the
Direxion Daily MSCI European Financials Bull 2X Shares and the Direxion Daily MSCI European Financials Bear 2X Shares pursued their respective investment strategies under their former names, Direxion Daily European Financial Bull 2X Shares and
Direxion Daily European Financials Bear 2X Shares, respectively.
The Direxion Daily CSI 300 China A Share
Bull 2X Shares, the Direxion Daily MSCI China A Bull 2X Shares, and the Direxion Daily CSI Internet Index Bull 2X Shares are collectively referred to as the “China Funds.”
The Direxion Daily High Yield Bear 2X
Shares is referred to as the “Fixed Income Fund.”
The Funds with the
word “Bull” in their name (collectively, the “Bull Funds”), attempt to provide investment results that correlate positively to the return of an underlying index, meaning the Bull Funds attempt to move in the same direction as
the underlying index. The Funds with the word “Bear” in their name (collectively, the “Bear Funds”), attempt to provide investment results that correlate negatively to the return of an underlying index, meaning that the Bear
Funds attempt to move in the opposite or inverse direction of the underlying index. As used in this Prospectus, the terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one
trading day to the close of the markets on the next trading day.
The Bull Funds seek daily leveraged
investment results, before fees and expenses, of 200% of the performance of an underlying index. The Bear Funds seek daily inverse leveraged investment results, before fees and expenses, of 200% of the inverse of the performance of an underlying
index. If, on a given day, the underlying index gains 1%, the Bull Funds are designed to gain approximately 2% (which is equal to 200% of 1%), while the Bear Funds are designed to lose approximately 2%. Conversely, if the the underlying index loses
1% on a given day, the Bull Funds are designed to lose approximately 2%, while the Bear Funds are designed to gain approximately 2% (which is equal to -200% of the 1% index loss). The Funds seek leveraged investment results on a daily basis
—
from the close of regular trading on one trading day to the close on the next trading
day
—
which should not be equated with seeking a leveraged investment objective for any other period.
The Funds are designed as
short-term trading vehicles. The Funds are intended to be used by investors who intend to actively monitor and manage their portfolios.
Shares of each Fund
(“Shares”) are issued and redeemed only in large blocks called “Creation Units.” The Shares offered in this SAI are, or upon commencement of operations will be, listed and traded on the NYSE Arca, Inc. (the
“Exchange”). Most investors will buy and sell Shares of each Fund in secondary market transactions through brokers. Shares can be bought and sold throughout the trading day like other publicly traded shares. There is no minimum
investment. Investors may acquire Shares directly from each Fund, and shareholders may tender their Shares for redemption directly to each Fund, only in Creation Units of 50,000 Shares, as discussed in the “Purchases and Redemptions”
section below.
The
Funds seek daily leveraged investment results and are intended to be used as short-term trading vehicles. The Funds are not intended to be used by, and are not appropriate for, investors who do not intend to actively monitor and manage their
portfolios. The Funds are very different from most mutual funds and exchange-traded funds. Investors in the Funds should note that:
(1)
|
Each Fund pursues a daily
leveraged investment objective, which means that the Funds are riskier than alternatives that do not use leverage because each Fund magnifies the performance of its underlying index.
|
(2)
|
Each Bear Fund pursues a
daily leveraged investment objective that is
inverse
to the performance of its underlying index, a result opposite of most mutual funds and ETFs.
|
(3)
|
The
pursuit of daily leveraged investment objectives means that the return of a Fund for a period different than a trading day will be the product of the series of daily leveraged returns for each trading day during the relevant period. As a
consequence, especially in periods of market volatility, the volatility of the underlying index may affect a Fund’s return as much or more than the return of the underlying index. Further, the return for investors that invest for a period
different than a full trading day will not be the product of the return of a Fund’s stated daily leveraged investment objective and the performance of the underlying index for the full trading day. During periods of high volatility, the Funds
may not perform as expected and the Funds may have losses when an investor may have expected gains if the Funds are held for a period that is different than one trading day.
|
The Funds are not suitable for all
investors. The Funds are designed to be utilized only by sophisticated investors, such as traders and active investors employing dynamic strategies. Investors in the Funds should:
(a)
|
understand the risks
associated with the use of leverage;
|
(b)
|
understand the
consequences of seeking daily leveraged investment results;
|
(c)
|
for
the Bear Funds, understand the risk of shorting; and
|
(d)
|
intend to actively
monitor and manage their investments.
|
Investors who do
not understand the Funds or do not intend to actively manage their funds and monitor their investments should not buy the Funds. There is no assurance that any Fund offered in this SAI will achieve its daily leveraged objective and an investment in
a Fund could lose money. No single Fund is a complete investment program.If a Fund’s underlying index moves more than 50% on a given trading day in a direction adverse to the Fund, the Fund’s investors would lose all of their money.
Rafferty will attempt to position each Fund’s portfolio to ensure that a Fund does not gain or lose more than 90% of its net asset value (“NAV”) on a given trading day. As a consequence, a Fund’s portfolio should not be
responsive to underlying index movements beyond 45% on a given trading day, whether that movement is favorable or adverse to the Fund. For example, if a Bull Fund’s underlying index was to gain 50% on a given trading day, that Fund should be
limited to a gain of 90% for that day, which corresponds to 200% of an underlying index gain of 45%, rather than 200% of an underlying index gain of 50%.
Classification of the Funds
Each Fund is a
“non-diversified” series of the Trust pursuant to the 1940 Act. A Fund is considered “non-diversified” because a relatively high percentage of its assets may be invested in the securities of a limited number of issuers. To
the extent that a Fund assumes large positions in the securities of a small number of issuers, the Fund’s NAV may fluctuate to a greater extent than that of a diversified company as a result of changes in the financial condition or in the
market’s assessment of the issuers, and the Fund may be more susceptible to any single economic, political or regulatory occurrence than a diversified company.
Exchange Listing and Trading
The Shares are, or
upon commencement of operations will be, listed and traded on the Exchange and may trade at prices that differ to some degree from their NAV. There can be no assurance that the requirements of the Exchange necessary to maintain the listing of Shares
of each Fund will continue to be met. The Exchange may, but is not required to, remove the Shares of a Fund from listing if (i) following the initial 12-month period beginning at the commencement of trading of a Fund, there are fewer than 50
beneficial owners of the Shares of the Fund; (ii) the value of the underlying index is no longer calculated or available; (iii) a Fund's underlying index no longer meets various liquidity and other metrics as required by the Exchange’s
continued listing standards; or (iv)such other event shall occur or condition exist that, in the opinion of the Exchange, makes further dealings on the Exchange inadvisable. The Exchange will remove the Shares of a Fund from listing and trading upon
termination of such Fund.
As is
the case with other publicly listed securities, when Shares of a Fund are bought or sold through a broker, an investor may incur a brokerage commission determined by that broker, as well as other charges.
The Trust reserves the right to
adjust the price levels of the Shares in the future to help maintain convenient trading ranges for investors. Any adjustments would be accomplished through stock splits or reverse stock splits, which would have no effect on the net assets of a Fund
or an investor’s equity interest in a Fund.
The trading prices of each
Fund’s shares in the secondary market generally differ from each Fund’s daily NAV per share and are affected by market forces such as supply and demand, economic conditions and other factors. Rafferty Asset Management, LLC ("Rafferty" or
"Adviser") may, from time to time, make payments to certain market makers in the Trust’s shares pursuant to an Exchange authorized program.
In order to provide additional
information regarding the value of Shares of a Fund, the Exchange, a market data vendor or other information provider, disseminates an Intraday Optimized Portfolio Value (“IOPV”) for each Fund. Each Fund’s IOPV is expected to be
disseminated every 15 seconds during the regular trading hours of the Exchange. The IOPV is based on the current market value of the securities and cash required to be deposited in exchange for a Creation Unit. The IOPV does not necessarily reflect
the precise composition of the current portfolio holdings of a Fund as of a particular point in time, or an accurate valuation of the current portfolio. The quotations of certain Fund holdings may not be updated during U.S. trading hours if such
holdings do not trade in the U.S. The Funds are not involved in, nor responsible for, the calculation or dissemination of the IOPV and make no representations or warranty as to its accuracy.
Investment Policies and Techniques
Each Fund seeks investment
results that correspond to the performance of an underlying index, before fees and expenses, as follows:
Fund
|
Underlying
Index
|
Daily
Leveraged
Investment
Objective
|
Direxion
Daily S&P 500
®
Bull 2X Shares
|
S&P
500
®
Index
|
200%
|
Direxion
Daily Small Cap Bull 2X Shares
|
Russell
2000
®
Index
|
200%
|
Direxion
Daily CSI 300 China A Share Bull 2X Shares
|
CSI
300 Index
|
200%
|
Direxion
Daily MSCI China A Bull 2X Shares
|
MSCI
China A International Index
|
200%
|
Direxion
Daily CSI China Internet Index Bull 2X Shares
|
CSI
Overseas China Internet Index
|
200%
|
Direxion
Daily High Yield Bear 2X Shares
|
Bloomberg
Barclays US High Yield Very Liquid Index
|
-200%
|
Direxion
Daily MSCI European Financials Bull 2X Shares
|
MSCI
Europe Financials Index
|
200%
|
Direxion
Daily MSCI European Financials Bear 2X Shares
|
-200%
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares
|
Indxx
Global Robotics and Artificial Intelligence Thematic Index
|
200%
|
Direxion
Daily Preferred Stock Bull 2X Shares
|
Indxx
US High Yield, Low Volatility Preferred Stock Index
|
200%
|
Each
Fund’s investment objective is a non-fundamental policy of the Fund that may be changed by the Board without shareholder approval.
With the exception of limitations
described in the “Investment Restrictions” section, each Fund may engage in the investment strategies discussed below. There is no assurance that any of these strategies or any other strategies and methods of investment available to a
Fund will result in the achievement of the Fund’s investment objective.
This section provides a description
of the securities in which a Fund may invest to achieve its investment objective, the strategies it may employ and the corresponding risks of such securities and strategies. The greatest risk of investing in an exchange-traded fund ("ETF") is that
its returns will fluctuate and you could lose money.
A Fund may invest in asset-backed
securities of any rating or maturity. Asset-backed securities are securities issued by trusts and special purpose entities that are backed by pools of assets, such as automobile and credit-card receivables and home equity loans, which pass through
the payments on the underlying obligations to the security holders (less servicing fees paid to the originator or fees for any credit enhancement). Typically, the originator of the loan or accounts receivable paper transfers it to a specially
created trust, which repackages it as securities with a minimum denomination and a specific term. The securities are then privately placed or publicly offered. Examples include certificates for automobile receivables and so-called plastic bonds,
backed by credit card receivables.
The value of an asset-backed security
is affected by, among other things, changes in the market’s perception of the asset backing the security, the creditworthiness of the servicing agent for the loan pool, the originator of the loans and the financial institution providing any
credit enhancement. Payments of principal and interest passed through to holders of asset-backed securities are frequently supported by some form of credit enhancement, such as a letter of credit, surety bond, limited guarantee by another entity or
by having a priority to certain of the borrower’s other assets. The degree of credit enhancement varies, and generally applies to only a portion of the asset-backed security’s par value. Value is also affected if any credit enhancement
has been exhausted.
Money Market Instruments
. A Fund may invest in bankers’ acceptances, certificates of deposit, demand and time deposits, savings shares and commercial paper of domestic
banks and savings and loans that have assets of at least $1 billion and capital, surplus, and undivided profits of over $100 million as of the close of their most recent fiscal year, or instruments that are insured by the Bank Insurance Fund or the
Savings Institution Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”). A Fund also may invest in high quality, short-term, corporate debt obligations, including variable rate demand notes, having terms-to-maturity of
less than 397 days. Because there is no secondary trading market in demand notes, the inability of the issuer to make required payments could impact adversely a Fund’s ability to resell when it deems advisable to do so.
A Fund may invest in foreign money
market instruments, which typically involve more risk than investing in U.S. money market instruments. See “Foreign Securities” below. These risks include, among others, higher brokerage commissions, less public information, and less
liquid markets in which to sell and meet large shareholder redemption requests.
Bankers’ Acceptances
. Bankers’ acceptances generally are negotiable instruments (time drafts) drawn to finance the export, import, domestic shipment or storage
of goods. They are termed “accepted” when a bank writes on the draft its agreement to pay it at maturity, using the word “accepted.” The bank is, in effect, unconditionally guaranteeing to pay the face value of the instrument
on its maturity date. The acceptance may then be held by the accepting bank as an asset, or it may be sold in the secondary market at the going rate of interest for a specified maturity.
Certificates of Deposit (“CDs”)
. The FDIC is an agency of the U.S. government that insures the deposits of certain banks and savings and loan associations up to
$250,000 per deposit. The interest on such deposits may not be insured to the extent this limit is exceeded. Current federal regulations also permit such institutions to issue insured negotiable CDs in amounts of $250,000 or more without regard to
the interest rate ceilings on other deposits. To remain fully insured, these investments must be limited to $250,000 per insured bank or savings and loan association.
Commercial Paper
. Commercial paper includes notes, drafts or similar instruments payable on demand or having a maturity at the time of issuance not exceeding nine months,
exclusive of days of grace or any renewal thereof. A Fund may invest in commercial paper rated A-l or A-2 by Standard & Poor’s
®
Ratings
Services (“S&P
®
”) or Prime-1 or Prime-2 by Moody’s Investors Service
®
, Inc. (“Moody’s”), and in other lower quality commercial paper.
Corporate Debt Securities
A Fund may invest in investment
grade corporate debt securities of any rating or maturity. Investment grade corporate bonds are those rated BBB or better by S&P
®
or Baa or
better by Moody’s. Securities rated BBB by S&P
®
are considered investment grade, but Moody’s considers securities rated Baa to have
speculative characteristics. See Appendix A for a description of corporate bond ratings. A Fund may also invest in unrated securities.
Corporate debt securities are
fixed-income securities issued by businesses to finance their operations, although corporate debt instruments may also include bank loans to companies. Notes, bonds, debentures and commercial paper are the most common types of corporate debt
securities, with the primary difference being their maturities and secured or un-secured status. Commercial paper has the shortest term and is usually unsecured.
The broad category of corporate debt
securities includes debt issued by domestic or foreign companies of all kinds, including those with small-, mid- and large-capitalizations. Corporate debt may be rated investment-grade or below investment-grade and may carry variable or floating
rates of interest.
Because of
the wide range of types and maturities of corporate debt securities, as well as the range of creditworthiness of its issuers, corporate debt securities have widely varying potentials for return and risk profiles. For example, commercial paper issued
by a large established domestic corporation that is rated investment grade may have a modest return on principal, but carries relatively limited risk. On the other hand, a long-term corporate note issued by a small foreign corporation from an
emerging market country that has not been rated may have the potential for relatively large returns on principal, but carries a relatively high degree of risk.
Corporate debt securities carry both
credit risk and interest rate risk. Credit risk is the risk that a Fund could lose money if the issuer of a corporate debt security is unable to pay interest or repay principal when it is due. Some corporate debt securities that are rated below
investment grade are generally considered speculative because they present a greater risk of loss, including default, than higher-quality debt securities. The credit risk of a particular issuer’s debt security may vary based on its priority
for repayment. For example, higher ranking (senior) debt securities have a higher priority than lower ranking (subordinated) securities. This means that the issuer might not make payments on subordinated securities while continuing to make payments
on senior securities. In addition, in the event of bankruptcy, holders of higher-ranking senior securities may receive amounts otherwise payable to the holders of more junior securities. Interest rate risk is the risk that the value of certain
corporate debt securities will tend to fall when interest rates rise. In general, corporate debt securities with longer terms tend to fall more in value when interest rates rise than corporate debt securities with shorter terms.
On July 27, 2017, the U.K.-based
Financial Conduct Authority (the “FCA”) announced its intention to cease sustaining LIBOR after 2021. It is possible that the ICE Benchmark Administration (“IBA”) and the banks that offer reference rates could continue to
produce LIBOR on the current basis after 2021, but it cannot be assured that LIBOR will survive in its current form. The effect of the FCA’s decision not to sustain LIBOR, or, if changes are ultimately made to LIBOR, the effect of those
changes, cannot be predicted. In addition, it cannot be predicted what alternative index would be chosen should this occur. If LIBOR in its current form does not survive or if an alternative index is chosen, the market value and/or liquidity of
securities with distributions or interest rates based on LIBOR could be adversely affected.
Common Stocks
. A Fund may invest in common stocks. Common stocks represent the residual ownership interest in the issuer and are entitled to the income and increase in the
value of the assets and business of the entity after all of its obligations and preferred stock are satisfied. Common stocks generally have voting rights. Common stocks fluctuate in price in response
to many factors including historical and prospective
earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity.
Convertible Securities
. A Fund may invest in convertible securities that may be considered high yield securities. Convertible securities include corporate bonds, notes and
preferred stock that can be converted into or exchanged for a prescribed amount of common stock of the same or a different issue within a particular period of time at a specified price or formula. A convertible security entitles the holder to
receive interest paid or accrued on debt or dividends paid on preferred stock until the convertible stock matures or is redeemed, converted or exchanged. While no securities investment is without some risk, investments in convertible securities
generally entail less risk than the issuer’s common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a fixed income security. The
market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline. While convertible securities generally offer lower interest or dividend yields than nonconvertible debt
securities of similar quality, they do enable the investor to benefit from increases in the market price of the underlying common stock. When investing in convertible securities, a Fund may invest in the lowest credit rating category.
Preferred Stock
. A Fund may invest in preferred stock. A preferred stock blends the characteristics of a bond and common stock. It can offer the higher yield of a bond and
has priority over common stock in equity ownership, but does not have the seniority of a bond and its participation in the issuer’s growth may be limited. Preferred stock has preference over common stock in the receipt of dividends and in any
residual assets after payment to creditors if the issuer is dissolved. Although the dividend is set at a fixed annual rate, in some circumstances it can be changed or omitted by the issuer. When investing in preferred stocks, a Fund may invest in
the lowest credit rating category.
Warrants and Rights
. A Fund may purchase warrants and rights, which are instruments that permit a Fund to acquire, by subscription, the capital stock of a corporation at a
set price, regardless of the market price for such stock. Warrants may be either perpetual or of limited duration, but they usually do not have voting rights or pay dividends. The market price of warrants is usually significantly less than the
current price of the underlying stock. Thus, there is a greater risk that warrants might drop in value at a faster rate than the underlying stock.
A Fund may have both direct and
indirect exposure to foreign securities through investments in publicly traded securities such as stocks and bonds, stock index futures contracts, options on stock index futures contracts and options on securities and on stock indices to foreign
securities. In most cases, the best available market for foreign securities will be on exchanges or in OTC markets located outside the United States.
Investing in foreign securities
carries political and economic risks distinct from those associated with investing in the United States. Non-U.S. securities may be subject to currency risks or to foreign government taxes. There may be less information publicly available about a
non-U.S. issuer than about a U.S. issuer, and a foreign issuer may or may not be subject uniform accounting, auditing and financial reporting standards and practices comparable to those in the U.S. Other risks of investing in such securities include
political or economic instability in the country involved, the difficulty of predicting international trade patterns and the possibility of the imposition of exchange controls. The prices of such securities may be more volatile than those of U.S.
securities. There maybe also be the possibility of expropriation of assets or nationalization, imposition of withholding taxes on dividend or interest payments, difficulty obtaining and enforcing judgments against foreign entities or diplomatic
developments which could affect investment in these countries. Losses and other expenses may be incurred in converting currencies in connection with purchases and sales of foreign securities.
Non-U.S. stocks markets may not be as
developed or efficient as, and may be more volatile than, those in the U.S. While the volume of shares traded on non-U.S. stock markets generally has been growing, such markets usually have substantially less volume than U.S. markets. Therefore, a
Fund’s investment in non-U.S. equity securities may be less liquid and subject to more rapid and erratic price movements than comparable securities listed for trading on U.S. exchanges. Non-U.S. equity securities may trade at price/earnings
multiples higher than comparable U.S. securities and such levels may not be sustainable. There may be less government supervision and regulation of foreign stock exchanges, brokers, banks and listed companies abroad than in the U.S. Moreover,
settlement practices for transactions in foreign markets may differ from those in U.S. markets. Such differences may include delays beyond periods customary in the U.S. and practices, such as delivery of securities prior to receipt of payment, that
increase the likelihood of a failed settlement, which can result in losses to a Fund. The value of non-U.S. investments and the investment income derived from them may also be affected unfavorably by changes in currency exchange control regulations.
Foreign brokerage commissions, custodial expenses and other fees are also generally higher than for securities traded in the U.S. This may cause a Fund to incur higher portfolio transaction costs than domestic equity funds. Fluctuations in exchanges
rates may also affect the earning power and asset value of the foreign entity issuing a security, even on denominated in U.S. dollars. Dividend and interest payments may be repatriated based on the exchange rate at the time of disbursement, and
restrictions on capital flows may be imposed.
Developing and Emerging Markets
.
Emerging and developing markets abroad may offer special opportunities for
investing,
but may have greater risks than more developed foreign markets, such as those in Europe,
Canada,
Australia,
New Zealand
and Japan. There
may be even less liquidity in their securities markets, and settlements of purchases and sales of securities may be subject to additional delays. They are subject to greater risks of limitations on the repatriation of income and profits because of
currency restrictions imposed by local governments. Those countries may also be subject to the risk of greater political and economic instability, which can greatly affect the volatility of prices of securities in those countries.
Investing in emerging market
securities imposes risks different from, or greater than, risks of investing in foreign developed countries. These risks include: smaller market capitalization of securities markets, which may suffer periods of relative illiquidity; significant
price volatility; restrictions on foreign investment; and possible repatriation of investment income and capital. In addition, foreign investors may be required to register the proceeds of sales; future economic or political crises could lead to
price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization, or creation of government monopolies. The currencies of emerging market countries may experience significant declines against the U.S. Dollar.
Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries. Additional risks of emerging markets securities may include:
greater social, economic and political uncertainty and instability; more substantial governmental involvement in the economy; less governmental supervision and regulation; unavailability of currency hedging techniques; companies that are newly
organized and small; differences in auditing and financial reporting standards, which may result in unavailability of material information about issuers; and less developed legal systems. In addition, emerging securities markets may have different
clearance and settlement procedures, which may be unable to keep pace with the volume of securities transactions or otherwise make it difficult to engage in such transactions.
Asia-Pacific Countries
. In addition to the risks associated with foreign and emerging markets, the developing market Asia-Pacific countries in which a Fund may invest are
subject to certain additional or specific risks. A Fund may make substantial investments in Asia-Pacific countries. In the Asia-Pacific markets, there is a high concentration of market capitalization and trading volume in a small number of issuers
representing a limited number of industries, as well as a high concentration of investors and financial intermediaries. Many of these markets also may be affected by developments with respect to more established markets in the region, such as Japan
and Hong Kong. Brokers in developing market Asia-Pacific countries typically are fewer in number and less well-capitalized than brokers in the United States. These factors, combined with the U.S. regulatory requirements for open-end investment
companies and the restrictions on foreign investment, result in potentially fewer investment opportunities for a Fund and may have an adverse impact on a Fund’s investment performance.
Many of the developing market
Asia-Pacific countries may be subject to a greater degree of economic, political and social instability than is the case in the United States and Western European countries. Such instability may result from, among other things: (i) authoritarian
governments or military involvement in political and economic decision-making, including changes in government through extra-constitutional means; (ii) popular unrest associated with demands for improved political, economic and social conditions;
(iii) internal insurgencies; (iv) hostile relations with neighboring countries; and/or (v) ethnic, religious and racial disaffection. In addition, the governments of many of such countries, such as Indonesia, have a heavy role in regulating and
supervising the economy.
An
additional risk common to most such countries is that the economy is heavily export-oriented and, accordingly, is dependent upon international trade. The existence of overburdened infrastructure and obsolete financial systems also present risks in
certain countries, as do environmental problems. Certain economies also depend to a significant degree upon exports of primary commodities and, therefore, are vulnerable to changes in commodity prices that, in turn, may be affected by a variety of
factors. The legal systems in certain developing market Asia-Pacific countries also may have an adverse impact on a Fund. For example, while the potential liability of a shareholder in a U.S. corporation with respect to acts of the corporation is
generally limited to the amount of the shareholder's investment, the notion of limited liability is less clear in certain emerging market Asia-Pacific countries. Similarly, the rights of investors in developing market Asia-Pacific companies may be
more limited than those of shareholders of U.S. corporations. It may be difficult or impossible to obtain and/or enforce a judgment in a developing market Asia-Pacific country.
Governments of many developing
market Asia-Pacific countries have exercised and continue to exercise substantial influence over many aspects of the private sector. In certain cases, the government owns or controls many companies, including the largest in the country. Accordingly,
government actions in the future could have a significant effect on economic conditions in developing market Asia-Pacific countries, which could affect private sector companies and a Fund itself, as well as the value of securities in a Fund's
portfolio. In addition, economic statistics of developing market Asia-Pacific countries may be less reliable than economic statistics of more developed nations.
It is possible that developing market
Asia-Pacific issuers may not be subject to the same accounting, auditing and financial reporting standards as U.S. companies. Inflation accounting rules in some developing market Asia-Pacific countries require companies that keep accounting records
in the local currency, for both tax and accounting purposes, to restate certain assets and liabilities on the company’s balance sheet in order to express items in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits for certain developing market Asia-Pacific companies. In addition, satisfactory custodial services for investment securities may not be available in some developing Asia-Pacific countries, which may result in a
Fund incurring additional costs and delays in providing transportation and custody services for such securities outside such countries.
Certain developing Asia-Pacific
countries are especially large debtors to commercial banks and foreign governments. Fund management may determine that, notwithstanding otherwise favorable investment criteria, it may not be practicable or appropriate to invest in a particular
developing Asia-Pacific country. A Fund may invest in countries in which foreign investors, including management of the Fund, have had no or limited prior experience.
Brazil
. Investing in Brazil involves certain considerations not typically associated with investing in the United States. Additional considerations include: (i) investment
and repatriation controls, which could affect a Fund’s ability to operate, and to qualify for the favorable tax treatment afforded to RICs for U.S. federal income tax purposes; (ii) fluctuations in the rate of exchange between the Brazilian
Real and the U.S. Dollar; (iii) the generally greater price volatility and lesser liquidity that characterize Brazilian securities markets, as compared with U.S. markets; (iv) the effect that balance of trade could have on Brazilian economic
stability and the Brazilian government's economic policy; (v) potentially high rates of inflation, a rising unemployment rate, and a high level of debt, each of which may hinder economic growth; (vi) governmental involvement in and influence on the
private sector; (vii) Brazilian accounting, auditing and financial standards and requirements, which differ from those in the United States; (viii) political and other considerations, including changes in applicable Brazilian tax laws; and (ix)
restrictions on investments by foreigners. In addition, commodities, such as oil, gas and minerals, represent a significant percentage of Brazil’s exports and, therefore, its economy is particularly sensitive to fluctuations in commodity
prices. Additionally, an investment in Brazil is subject to certain risks stemming from political and economic corruption. For example, the Brazilian Federal Police conducted a criminal investigation into corruption allegations, known as Operation
Car Wash, which led to charges against high level politicians and corporate executives and resulted in substantial fines for some of Brazil’s largest companies. This has had a widespread political and economic impact and may continue to affect
negatively the country and the reputation of Brazilian companies connected with the investigation, and therefore, the trading price of securities issued by those companies. While the economy of Brazil has enjoyed substantial economic growth in
recent years, there can be no guarantee that this growth will continue.
China
. Investing in China involves special considerations not typically associated with investing in countries with more democratic governments or more established economies
or currency markets. These risks include: (i) the risk of nationalization or expropriation of assets or confiscatory taxation; (ii) greater governmental involvement in and control over the economy, interest rates and currency exchange rates; (iii)
controls on foreign investment and limitations on repatriation of invested capital; (iv) greater social, economic and political uncertainty (including the risk of war); (v) dependency on exports and the corresponding importance of international
trade; (vi) currency exchange rate fluctuations; (vii) differences in, or lack of, auditing and financial reporting standards that may result in unavailability of material information about issuers; and (viii) the risk that certain companies in
which the Fund may invest may have dealings with countries subject to sanctions or embargoes imposed by the U.S. government or identified as state sponsors of terrorism.
For over three decades, the Chinese
government has been reforming economic and market practice and has been providing a larger sphere for private ownership of property. While currently contributing to growth and prosperity, the government may decide not to continue to support these
economic reform programs and could possible return to the completely centrally planned economy that existed prior to 1978. There is also a greater risk in China than in many other countries of currency fluctuations, currency non-convertibility,
interest rate fluctuations and higher rates of inflation as a result of internal social unrest or conflicts with other countries. China is an emerging market and demonstrates significantly higher volatility from time to time in comparison to
developed markets. The government of China maintains strict currency controls in support of economic, trade and political objectives and regularly intervenes in the currency market. The government's actions in this respect may not be transparent or
predictable. As a result, the value of the Yuan, and the value of securities designed to provide exposure to the Yuan, can change quickly and arbitrarily. Furthermore, it is difficult for foreign investors to directly access money market securities
in China because of investment and trading restrictions. While the economy of China has enjoyed substantial economic growth in recent years, there can be no guarantee this growth will continue. Reduction in spending on Chinese products and services,
the institution of additional tariffs or other trade barriers, including as a result of heightened trade tensions between China and the United States, or a downturn in any of the economies of China’s key trading partners may have an adverse
impact on the Chinese economy. These and other factors may decrease the value and liquidity of a Fund's investments. The Chinese economy may experience a significant slowdown as a result of, among other things, a deterioration of global demand for
Chinese exports, as well as contraction in spending on domestic goods by Chinese consumers. In addition, China may experience substantial rates of inflation or economic recessions, which would have a negative effect on its economy and securities
market.
Recently, there has
been increased attention from the SEC and the Public Company Accounting Oversight Board (“PCAOB”) with regard to international auditing standards of U.S.-listed companies with significant operations in China as well as PCAOB-registered
auditing firms in China. Currently, the SEC and PCAOB are only able to get limited information about these auditing firms and are restricted from inspecting the audit work and practices of registered accountants in China. These restrictions may
result in the unavailability of material information about the Chinese issuers.
China A-shares are equity securities
of companies based in mainland China that trade on Chinese stock exchanges such as the Shanghai Stock Exchange (“SSE”) and the Shenzhen Stock Exchange (“SZSE”) (“A-shares”). Foreign investment in A-shares on the
SSE and SZSE has historically not been permitted other than through licenses granted by the People’s Republic of
China
(“PRC”) known as the Qualified Foreign Institutional Investor (“QFII”) and Renminbi Qualified Foreign Institutional Investor (“RQFII”) licenses. Each license permits investment in A-shares only up to a specified
quota.
Because restrictions
continue to exist and capital therefore cannot flow freely into and out of the A-Share market, it is possible that in the event of a market disruption, the liquidity of the A-Share market and trading prices of A-Shares could be more severely
affected than the liquidity and trading prices of markets where securities are freely tradable and capital therefore flows more freely. The nature and duration of such a market disruption or the impact that it may have on the A-Share market are
unknown. In the event that a Fund invests in A-Shares directly, a Fund may incur significant losses, or may not be able fully to implement or pursue its investment objectives or strategies, due to investment restrictions on RQFIIs and QFIIs,
illiquidity of the Chinese securities markets, or delay or disruption in execution or settlement of trades. A-Shares may become subject to frequent and widespread trading halts.
The Chinese government has in the
past taken actions that benefitted holders of A-Shares. As A-Shares become more available to foreign investors, such as a Fund, the Chinese government may be less likely to take action that would benefit holders of A-Shares. In addition, there is no
guarantee that an A-Shares quota will be sufficient for a Fund’s intended scope of investment.
The regulations which apply to
investments by RQFIIs and QFIIs, including the repatriation of capital, are relatively new. The application and interpretation of such regulations are therefore relatively untested. In addition, there is little precedent or certainty evidencing how
such discretion may be exercised now or in the future; and even if there were precedent, it may provide little guidance as PRC authorities would likely continue to have broad discretion.
Investment in eligible A-shares
listed and traded on the SSE is now permitted through the Stock Connect program. Stock Connect is a securities trading and clearing program established by Hong Kong Securities Clearing Company Limited, the SSE and Chinese Securities Depositary and
Clearing Corporation that aims to provide mutual stock market access between China and Hong Kong by permitting investors to trade and settle shares on each market through their local exchanges. Certain Funds may invest in other investment companies
that invest in A-shares through Stock Connect or on such other stock exchanges in China which participate in Stock Connect from time to time. Under Stock Connect, a Fund’s trading of eligible A-shares listed on the SSE would be effectuated
through its Hong Kong broker.
Although no individual investment
quotas or licensing requirements apply to investors in Stock Connect, trading through Stock Connect’s Northbound Trading Link is subject to aggregate and daily investment quota limitations that require that buy orders for A-shares be rejected
once the remaining balance of the relevant quota drops to zero or the daily quota is exceeded (although a Fund will be permitted to sell A-shares regardless of the quota balance). These limitations may restrict a Fund from investing in A-shares on a
timely basis, which could affect a Fund’s ability to effectively pursue its investment strategy. Investment quotas are also subject to change. Investment in eligible A-shares through Stock Connect is subject to trading, clearance and
settlement procedures that could pose risks to a Fund. A-shares purchased through Stock Connect generally may not be sold or otherwise transferred other than through Stock Connect in accordance with applicable rules. In addition, Stock Connect will
only operate on days when both the Chinese and Hong Kong markets are open for trading and when banks in both markets are open on the corresponding settlement days. Therefore, an investment in A-shares through Stock Connect may subject a Fund to a
risk of price fluctuations on days where the Chinese market is open, but Stock Connect is not trading.
Europe
.
Investing in European countries may impose economic and political risks associated with Europe in general and the specific European countries in which it invests.
The economies and markets of European countries are often closely connected and interdependent, and events in one European country can have an adverse impact on other European countries. A Fund makes investments in securities of issuers that are
domiciled in, or have significant operations in, member countries of the Economic and Monetary Union of the European Union (the “EU”), which requires member countries to comply with restrictions on inflation rates, deficits, interest
rates, debt levels and fiscal and monetary controls, each of which may significantly affect every country in Europe. Decreasing imports or exports, changes in governmental or EU regulations on trade, changes in the exchange rate of the euro (the
common currency of certain EU countries), the default or threat of default by an EU member country on its sovereign debt, and/or an economic recession in an EU member country may have a significant adverse effect on the economies of EU member
countries and their trading partners, including some or all of the emerging markets materials sector countries. Although certain European countries do not use the euro, many of these countries are obliged to meet the criteria for joining the euro
zone. Consequently, these countries must comply with many of the restrictions noted above. The European financial markets have experienced volatility and adverse trends in recent years due to concerns about economic downturns, rising government debt
levels and the possible default of government debt in several European countries, including Greece, Ireland, Italy, Portugal and Spain. In order to prevent further economic deterioration, certain countries, without prior warning, can institute
“capital controls.” Countries may use these controls to restrict volatile movements of capital entering and exiting their country. Such controls may negatively affect a Fund’s investments. A default or debt restructuring by any
European country would adversely impact holders of that country’s debt and sellers of credit default swaps linked to that country’s creditworthiness, which may be located in countries other than those listed above. In addition, the
credit ratings of certain European countries were recently downgraded. These downgrades may result in further deterioration of investor confidence. These events have adversely affected the value and exchange rate of the euro and may continue to
significantly affect the economies of every country in Europe, including countries that do not use the euro and non-EU
member countries. Responses to the financial
problems by European governments, central banks and others, including austerity measures and reforms, may not produce the desired results, may result in social unrest and may limit future growth and economic recovery or have other unintended
consequences. Further defaults or restructurings by governments and other entities of their debt could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, one or more countries may
abandon the euro and/or withdraw from the EU, including, with respect to the latter, the United Kingdom, which is a significant market in the global economy. The impact of these actions, especially if they occur in a disorderly fashion, is not clear
but could be significant and far-reaching and could adversely impact the value of investments in the region.
In a referendum
held on June 23, 2016, the United Kingdom (the “UK”) resolved to leave the EU (referred to as “Brexit”). The referendum has introduced significant uncertainties and instability in the financial markets as the UK negotiates
its exit from the EU, which is currently scheduled for March 29, 2019, however, this timing could change. The outcome of negotiations and the potential consequences remain uncertain. The effects of Brexit will depend on any agreements the UK makes
to retain access to the EU Common Market either during a transitional period or more permanently. Brexit could lead to legal and tax uncertainty and potentially divergent national laws and regulations as the UK determines which EU laws to replace or
replicate. Additionally, Brexit could lead to global economic uncertainty and result in significant volatility in the global stock markets and currency exchange rate fluctuations. The UK has one of the largest economies in Europe and is a major
trading partner with the other EU countries and the United States. If implemented, Brexit might negatively affect the City of London’s economy, which is heavily dominated by financial services, as banks might be forced to move staff and comply
with two separate sets of rules or lose business to banks in Continental Europe. In addition, Brexit would likely create additional economic stresses for the UK, including the potential for decreased trade, capital outflows, devaluation of the
British pound, wider corporate bond spreads due to uncertainty, and declines in business and consumer spending as well as foreign direct investment.
Brexit may also have a destabilizing
impact on the EU to the extent that other member states similarly seek to withdraw from the EU. Any further exits from the EU would likely cause additional market disruptions globally and introduce new legal and regulatory uncertainties.
India
. Investments in India involve special considerations not typically associated with investing in countries with more established economies or currency markets.
Political, religious, and border disputes persist in India. India has recently experienced and may continue to experience civil unrest and hostilities with certain of its neighboring countries, including Pakistan, and the Indian government has
confronted separatist movements in several Indian states, including Kashmir. Government control over the economy, currency fluctuations or blockage, and the risk of nationalization or expropriation of assets offer higher potential losses.
Governmental actions could have a negative effect on the economic conditions in India, which could adversely affect the value and liquidity of investments made by a Fund. The securities markets in India are comparatively underdeveloped with some
exceptions and consist of a small number of listed companies with small market capitalization, greater price volatility and substantially less liquidity than companies in more developed markets. The limited liquidity of the Indian securities market
may also affect a Fund’s ability to acquire or dispose of securities at the price or time that it desires or the Fund’s ability to track its underlying index.
The Indian government exercises
significant influence over many aspects of the economy, and the number of public sector enterprises in India is substantial. While the Indian government has implemented economic structural reform with the objectives of liberalizing India's exchange
and trade policies, reducing the fiscal deficit, controlling inflation, promoting a sound monetary policy, reforming the financial sector, and placing greater reliance on market mechanisms to direct economic activity, there can be no assurance that
these policies will continue or that the economic recovery will be sustained.
Global factors and foreign actions
may inhibit the flow of foreign capital on which India is dependent to sustain its growth. In addition, the Reserve Bank of India has imposed limits on foreign ownership of Indian companies, which may decrease the liquidity of a Fund’s
portfolio and result in extreme volatility in the prices of Indian securities. In November 2016, the Indian government eliminated certain large denomination cash notes as legal tender, causing uncertainty in certain financial markets. These factors,
coupled with the lack of extensive accounting, auditing and financial reporting standards and practices, as applicable in the United States, may increase the risk of loss for a Fund.
Securities laws in India are
relatively new and unsettled and, as a result, there is a risk of significant and unpredictable change in laws governing foreign investment, securities regulation, title to securities and shareholder rights. Foreign investors in particular may be
adversely affected by new or amended laws and regulations. Certain Indian regulatory approvals, including approvals from the Securities and Exchange Board of India, the central government and the tax authorities (to the extent that tax benefits need
to be utilized), may be required before a Fund can make investments in Indian companies. Foreign investors in India still face burdensome taxes on investments in income producing securities.
While the Indian economy has enjoyed
substantial economic growth in recent years, there can be no guarantee this growth will continue. Technology and software sectors represent a significant portion of the total capitalization of the Indian securities markets. The value of these
companies will generally fluctuate in response to technological and regulatory developments, and, as a result, a Fund’s holdings are expected to experience correlated fluctuations. Natural disasters, such as tsunamis, flooding or droughts,
could occur in India or surrounding areas and could negatively affect the Indian economy. Agriculture
occupies a prominent position in the Indian economy,
therefore, it may be negatively affected by adverse weather conditions and the effects of global climate change. These and other factors may decrease the value and liquidity of a Fund's investments.
Italy
.
Investment in Italian issuers involves risks that are specific to Italy, including, regulatory, political, currency, and economic risks. Italy’s economy is
dependent upon external trade with other economies
—
specifically Germany, France and
other Western European developed countries. As a result, Italy is dependent on the economies of these other countries and any change in the price or demand for Italy’s exports may have an adverse impact on its economy. Interest rates on
Italy’s debt may rise to levels that may make it difficult for it to service high debt levels without significant financial help from the EU and could potentially lead to default. Recently, the Italian economy has experienced volatility due to
concerns about economic downturn and rising government debt levels. Italy has been warned by the Economic and Monetary Union of the EU to reduce its public spending and debt and actions by Italy to cut spending or increase taxes in response could
have significant adverse effects on the Italian economy. These events have adversely impacted the Italian economy, causing credit agencies to lower Italy’s sovereign debt rating and could decrease outside investment in Italian companies. High
amounts of debt and public spending may stifle Italian economic growth or cause prolonged periods of recession.
Japan
. Japanese investments may be significantly affected by events influencing Japan’s economy and changes in the exchange rate between the Japanese yen and the U.S.
Dollar. Japan’s economy fell into a long recession in the 1990s. After a few years of mild recovery in the mid-2000s, Japan’s economy fell into another recession as a result of the recent global economic crisis. Japan is heavily
dependent on exports and foreign oil and may be adversely affected by higher commodity prices, trade tariffs, protectionist measures, competition from emerging economies, and the economic conditions of its trading partners, such as China.
Furthermore, Japan is located in a seismically active area, and in 2011 experienced an earthquake of a sizeable magnitude and a tsunami that significantly affected important elements of its infrastructure and resulted in a nuclear crisis. Since
these events, Japan’s financial markets have fluctuated dramatically. The full extent of the impact of these events on Japan’s economy and on foreign investment in Japan is difficult to estimate. The risks of natural disaster of varying
degrees, such as earthquakes and tsunamis, and the resulting damage, continue to exist. Japan’s economic prospects may be affected by the political and military situations of its near neighbors, notably North and South Korea, China, and
Russia. In addition, Japan’s labor market is adapting to an aging workforce, declining population, and demand for increased labor mobility. These demographic shifts and fundamental structural changes to the labor markets may negatively impact
Japan’s economic competiveness.
South Korea
. South Korean investments may be significantly affected by events influencing its economy, which is heavily dependent on exports and the demand for certain
finished goods. South Korea’s main industries include electronics, automobile production, chemicals, shipbuilding, steel, textiles, clothing, footwear, and food processing. Conditions that weaken demand for such products worldwide or in other
Asian countries could have a negative impact on the South Korean economy as a whole. The South Korean economy’s reliance on international trade makes it highly sensitive to fluctuations in international commodity prices, currency exchanges
rates and government regulation, and vulnerable to downturns of the world economy, particularly with respects to its four largest export markets (the EU, Japan, United States, and China). South Korea has experienced modest economic growth in recent
years, but such continued growth may slow due, in part, to the economic slowdown in China and the increased competitive advantage of Japanese exports with the weakened yen. The South Korean economy’s long-term challenges include an aging
population, inflexible labor market, and overdependence on exports to drive economic growth. Relations with North Korea could also have as significant impact on the economy of South Korea. Relations between South Korea and North Korea remain tense,
as exemplified in periodic acts of hostility, and the possibility of serious military engagement still exists. Armed conflict between North Korea and South Korea could have a severe adverse impact on the South Korean economy and its securities
markets.
Latin America
. Investments in Latin American countries involve special considerations not typically associated with investing in the United States. Most Latin American
countries have experienced, at one time or another, severe and persistent levels of inflation, including, in some cases, hyperinflation. This has, in turn, led to high interest rates, extreme measures by governments to keep inflation in check, and a
generally debilitating effect on economic growth. Although inflation in many countries has lessened, there is no guarantee it will remain at lower levels. In addition, the political history of certain Latin American countries has been characterized
by political uncertainty, military intervention in civilian and economic spheres, and political corruption. Such developments, if they were to reoccur, could reverse favorable trends toward market and economic reform, privatization, and removal of
trade barriers, and result in significant disruption to the securities markets. Certain Latin American countries may also have managed currencies, which are maintained at artificial levels to the U.S. Dollar rather than at levels determined by the
market. This type of system can lead to sudden and large adjustments in the currency which, in turn, can have a disruptive and negative effect on foreign investors. For example, in late 1994, the value of the Mexican peso lost more than one-third of
its value relative to the U.S. Dollar. Certain Latin American countries also restrict the free conversion of their currency into foreign currencies, including the U.S. Dollar. There is no significant foreign exchange market for many currencies and
it would, as a result, be difficult for the Fund to engage in foreign currency transactions designed to protect the value of the Fund’s interests in securities denominated in such currencies. Finally, a number of Latin American countries are
among the largest debtors of developing countries. There have been moratoria on, and reschedulings of, repayment with respect to these debts. Such events can restrict the flexibility of these debtor nations in the international markets and result in
the imposition of onerous conditions on their economies.
Mexico
. Investment in Mexican issuers involves risks that are specific to Mexico, including regulatory, political, and economic risks. In the past, Mexico has experienced
high interest rates, economic volatility, significant devaluation of its currency (the peso), and high unemployment rates. The Mexican economy is dependent upon external trade with other economies, specifically with the United States and certain
Latin American countries. Additionally, a high level of foreign investment in Mexican assets may increase Mexico’s exposure to risks associated with changes in international investor sentiment. Recent political developments in the U.S. may
also have potential implications for the current trade arrangements between the U.S. and Mexico, which could affect the value of securities held by the Fund. For example, uncertainty regarding the status of the North American Free Trade Agreement
(NAFTA) or its recently negotiated successor -- the United States-Mexico-Canada Agreement -- may have a significant impact on Mexico’s economic outlook and the value of a fund’s investment in Mexico.
The Mexican economy is heavily
dependent on trade with, and foreign investment from, the U.S. and Canada, which are Mexico’s principal trading partners. Any changes in the supply, demand, price or other economic component of Mexico’s imports or exports, as well as any
reductions in foreign investment from, or changes in the economies of, the U.S. or Canada, may have an adverse impact on the Mexican economy. Because commodities such as oil and gas, minerals and metals represent a large portion of the
region’s exports, the economies of these countries are particularly sensitive to fluctuations in commodity prices. Mexico’s economy has also become increasingly oriented toward manufacturing in the years since NAFTA entered into force.
Because Mexico’s top export is automotive vehicles, its economy is strongly tied to the U.S. automotive market, and changes to certain segments in the U.S. market could have an impact on the Mexican economy. The automotive industry and other
industrial products can be highly cyclical, and companies in these industries may suffer periodic operating losses. These industries can also be significantly affected by labor relations and fluctuating component prices. The agricultural and mining
sectors of Mexico’s economy also account for a large portion of its exports, and Mexico is susceptible to fluctuations in the price and demand for agricultural products and natural resources. In addition, Mexico has privatized or has begun the
process of privatization of certain entities and industries, and some investors have suffered losses due to the inability of the newly privatized entities to adjust to a competitive environment and changing regulatory standards.
Mexico has been destabilized by local
insurrections, social upheavals and drug related violence. Additionally, violence near border areas, border-related political disputes, and other social upheaval may lead to strained international relations. Mexico has also experienced contentious
and very closely decided elections. Changes in political parties and other political events may affect the economy and contribute to additional instability. Recurrence of these or similar conditions may adversely impact the Mexican economy.
Russia
. Investing in Russia involves risks and special considerations not typically associated with investing in United States. Since the breakup of the Soviet Union at the
end of 1991, Russia has experienced dramatic political, economic, and social change. The political system in Russia is emerging from a long history of extensive state involvement in economic affairs. The country is undergoing a rapid transition from
a centrally-controlled command system to a market-oriented, democratic model. As a result, companies in Russia are characterized by a lack of: (i) management with experience of operating in a market economy; (ii) modern technology; and, (iii) a
sufficient capital base with which to develop and expand their operations. It is unclear what will be the future effect on Russian companies, if any, of Russia’s continued attempts to move toward a more market-oriented economy. Russia’s
economy has experienced severe economic recession, if not depression, since 1990 during which time the economy has been characterized by high rates of inflation, high rates of unemployment, declining gross domestic product, deficit government
spending, and a devalued currency. The economic reform program has involved major disruptions and dislocations in various sectors of the economy, and those problems have been exacerbated by growing liquidity problems. Russia’s economy is also
heavily reliant on the energy and defense-related sectors, and is therefore susceptible to the risks associated with these industries. Further, Russia presently receives significant financial assistance from a number of countries through various
programs. To the extent these programs are reduced or eliminated in the future, Russian economic development may be adversely impacted. The laws and regulations in Russia affecting Western business investment continue to evolve in an unpredictable
manner. Russian laws and regulations, particularly those involving taxation, foreign investment and trade, title to property or securities, and transfer of title, which may be applicable to a Fund’s activities are relatively new and can change
quickly and unpredictably in a manner far more volatile than in the United States or other developed market economies. Although basic commercial laws are in place, they are often unclear or contradictory and subject to varying interpretation, and
may at any time be amended, modified, repealed or replaced in a manner adverse to the interest of the Funds.
As a result of
recent events involving Ukraine and Russia and other political conflicts, the United States and the European Union imposed sanctions on certain Russian individuals and companies, including certain financial institutions, and have limited certain
exports and imports to and from Russia. The United States and other nations or international organizations may impose additional, broader economic sanctions or take other actions that may adversely affect Russian-related issuers in the future. These
sanctions, any future sanctions or other actions, or even the threat of further sanctions or other actions, may negatively affect the value and liquidity of a Fund’s investments. Russia may undertake countermeasures or retaliatory actions
which may further impair the value and liquidity of a Fund’s investments.
To the extent a Fund invests in
stocks of foreign corporations, a Fund’s investment in such stocks may also be in the form of depositary receipts or other securities convertible into securities of foreign issuers. Depository receipts are receipts, typically issued by a
financial institution, with evidence of underlying securities issued by a non-U.S. issuer. Types of depositary receipts include American Depositary Receipts (“ADRs”), Global Depositary Receipts (“GDRs”) and European
Depositary Receipts (“EDRs”). Depository receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted.
ADRs are receipts typically issued by
an American bank or trust company that evidence ownership of underlying securities issued by a foreign corporation. Investments in ADRs have certain advantages over direct investment in the underlying foreign securities because: (i) ADRs are U.S.
dollar-denominated investments that are easily transferable and for which market quotations are readily available, and (ii) issuers whose securities are represented by ADRs are generally subject to auditing, accounting and financial reporting
standards similar to those applied to domestic issuers. By investing in ADRs rather than directly in the stock of foreign issuers outside the U.S. a Fund may avoid certain risks related to investing in foreign securities in non-U.S. markets,
however, ADRs do not eliminate all risks inherent in investing in the securities of foreign issuers.
EDRs are receipts issued in Europe
that evidence a similar ownership arrangement. GDRs are receipts issued throughout the world that evidence a similar arrangement. Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are
designed for use in European securities markets. GDRs are tradable both in the United States and in Europe and are designed for use throughout the world.
Depositary receipts may be purchased
through “sponsored” or “unsponsored” facilities, in which a Fund may invest. A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a depositary may establish an
unsponsored facility without participation by the issuer of the depositary security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts of the deposited securities.
Fund investments in depositary receipts,
which include ADRs, GDRs and EDRs, are deemed to be investments in foreign securities for purposes of a Fund’s investment strategy.
A Fund may invest directly and
indirectly in foreign currencies. Investments in foreign currencies are subject to numerous risks not least being the fluctuation of foreign currency exchange rates with respect to the U.S. Dollar. Exchange rates fluctuate for a number of
reasons.
Inflation
. Exchange rates change to reflect changes in a currency’s buying power. Different countries experience different inflation rates due to different monetary
and fiscal policies, different product and labor market conditions, and a host of other factors.
Trade
Deficits
. Countries with trade deficits tend to experience a depreciating currency. Inflation may be the cause of a trade deficit, making a country’s goods more expensive and less competitive and so
reducing demand for its currency.
Interest
Rates
. High interest rates may raise currency values in the short term by making such currencies more attractive to investors. However, since high interest rates are often the result of high inflation,
long-term results may be the opposite.
Budget Deficits and Low Savings Rates
. Countries that run large budget deficits and save little of their national income tend to suffer a depreciating currency because they
are forced to borrow abroad to finance their deficits. Payments of interest on this debt can inundate the currency markets with the currency of the debtor nation. Budget deficits also can indirectly contribute to currency depreciation if a
government chooses inflationary measures to cope with its deficits and debt.
Political
Factors
. Political instability in a country can cause a currency to depreciate. Demand for a certain currency may fall if a country appears a less desirable place in which to invest and do
business.
Government Control
. Through their own buying and selling of currencies, the world’s central banks sometimes manipulate exchange rate movements. In addition,
governments occasionally issue statements to influence people’s expectations about the direction of exchange rates, or they may instigate policies with an exchange rate target as the goal.
The value of a Fund’s
investments is calculated in U.S. Dollars each day that the New York Stock Exchange (“NYSE”) is open for business. As a result, to the extent that a Fund’s assets are invested in instruments denominated in foreign currencies and
the currencies appreciate relative to the U.S. Dollar, a Fund’s NAV per share as expressed in U.S. Dollars (and, therefore, the value of your investment) should increase. If the U.S. Dollar appreciates relative to the other currencies, the
opposite should occur.
The
currency-related gains and losses experienced by a Fund will be based on changes in the value of portfolio securities attributable to currency fluctuations only in relation to the original purchase price of such securities as stated in U.S. Dollars.
Gains or losses on shares of a Fund will be based on changes attributable to fluctuations in the NAV of such shares, expressed in U.S. Dollars, in relation to the original U.S. Dollar purchase price of the shares. The amount of appreciation or
depreciation in a Fund’s assets also will be affected by the net investment income generated by the money market instruments in which each Fund invests and by changes in the value of the securities that are unrelated to changes in currency
exchange rates.
A Fund may incur
currency exchange costs when it sells instruments denominated in one currency and buys instruments denominated in another.
Currency Transactions
. A Fund conducts currency exchange transactions on a spot basis. Currency transactions made on a spot basis are for cash at the spot rate prevailing in
the currency exchange market for buying or selling currency. A Fund also enters into forward currency contracts. See “Futures Contracts, Options, and Other Derivative Strategies” section below. A forward currency contract is an
obligation to buy or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are entered into on the
interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A currency forward contract will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the
currency that is purchased, similar to when a fund sells a security denominated in one currency and purchases a security denominated in another currency. For example, a Fund may enter into a forward contract when it owns a security that is
denominated in a non-U.S. currency and desires to “lock in” the U.S. dollar value of the security.
A Fund may invest in a combination of
forward currency contracts and U.S. Dollar-denominated market instruments in an attempt to obtain an investment result that is substantially the same as a direct investment in a foreign currency-denominated instrument. This investment technique
creates a “synthetic” position in the particular foreign-currency instrument whose performance the Adviser is trying to duplicate. For example, the combination of U.S. Dollar-denominated instruments with “long” forward
currency exchange contracts creates a position economically equivalent to a money market instrument denominated in the foreign currency itself. Such combined positions are sometimes necessary when the money market in a particular foreign currency is
small or relatively illiquid.
A
Fund may invest in forward currency contracts to hedge either specific transactions (transaction hedging) or portfolio positions (position hedging). Transaction hedging is the purchase or sale of forward currency contracts with respect to specific
receivables or payables of a Fund in connection with the purchase and sale of portfolio securities. Position hedging is the sale of a forward currency contract on a particular currency with respect to portfolio positions denominated or quoted in
that currency.
A Fund may use
forward currency contracts for position hedging if consistent with its policy of trying to expose its net assets to foreign currencies. A Fund is not required to enter into forward currency contracts for hedging purposes and it is possible that a
Fund may not be able to hedge against a currency devaluation that is so generally anticipated that a Fund is unable to contract to sell the currency at a price above the devaluation level it anticipates. It also is possible, under certain
circumstances, that a Fund may have to limit its currency transactions to qualify, or continue to qualify, as a “regulated investment company” (“RIC”) under Subchapter M of Chapter 1 of Subtitle A of the Internal Revenue Code
of 1986, as amended (“Code”). See “Dividends, Other Distributions and Taxes.”
Each Fund currently does not intend
to enter into a forward currency contract with a term of more than one year, or to engage in position hedging with respect to the currency of a particular country to more than the aggregate market value (at the time the hedging transaction is
entered into) of its portfolio securities denominated in (or quoted in or currently convertible into or directly related through the use of forward currency contracts in conjunction with money market instruments to) that particular currency.
Under definitions adopted by the
Commodity Futures Trading Commission (“CFTC”) and SEC, non-deliverable forwards are considered swaps, and therefore are included in the definition of “commodity interests.” Although non-deliverable forwards have historically
been traded in the over-the-counter (“OTC”) market, as swaps they may in the future be required to be centrally cleared and traded on public facilities. For more information on central clearing and trading of cleared swaps, see
“Cleared swaps,” “Risks of cleared swaps,” “Comprehensive swaps regulation” and “Developing government regulation of derivatives.” Currency forwards that qualify as deliverable forwards are not
regulated as swaps for most purposes, and are not included in the definition of “commodity interests.” However these forwards are subject to some requirements applicable to swaps, including reporting to swap data repositories,
documentation requirements, and business conduct rules applicable to swap dealers. CFTC regulation of currency forwards, especially non-deliverable forwards, may restrict a Fund’s ability to use these instruments in the manner described above
or subject the investment manager to CFTC registration and regulation as a commodity pool operator (“CPO”).
At or before the maturity of a
forward currency contract, a Fund may either sell a portfolio security and make delivery of the currency, or retain the security and terminate its contractual obligation to deliver the currency by buying an “offsetting” contract
obligating it to buy, on the same maturity date, the same amount of the currency. If a Fund engages in an offsetting transaction, it may later enter into a new forward currency contract to sell the currency.
If a Fund engages
in an offsetting transaction, it will incur a gain or loss to the extent that there has been movement in forward currency contract prices. If forward prices go down during the period between the date a Fund enters into a forward currency contract
for the sale of a currency and the date it enters into an offsetting contract for the purchase of the currency, a Fund will realize a gain to the extent that the price of the currency it has agreed to sell exceeds the price of the currency it has
agreed to buy. If forward prices go up, a Fund will suffer a loss to the extent the price of the currency it has agreed to buy exceeds the price of the currency it has agreed to sell.
Since a Fund invests in money market
instruments denominated in foreign currencies, it may hold foreign currencies pending investment or conversion into U.S. Dollars. Although a Fund values its assets daily in U.S. Dollars, it does not convert its holdings of foreign currencies into
U.S. Dollars on a daily basis. A Fund will convert its holdings from time to time, however, and incur the costs of currency conversion. Foreign exchange dealers do not charge a fee for conversion, but they do realize a profit based on the difference
between the prices at which they buy and sell various currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one rate, and offer to buy the currency at a lower rate if a Fund tries to resell the currency to the dealer.
Risks of currency forward contracts
.
The successful use of these transactions will usually depend on the Adviser’s ability to accurately forecast currency exchange
rate movements. Should exchange rates move in an unexpected manner, a Fund may not achieve the anticipated benefits of the transaction, or it may realize losses. In addition, these techniques could result in a loss if the counterparty to the
transaction does not perform as promised, including because of the counterparty’s bankruptcy or insolvency. While a Fund uses only counterparties that meet its credit quality standards, in unusual or extreme market conditions, a
counterparty’s creditworthiness and ability to perform may deteriorate rapidly, and the availability of suitable replacement counterparties may become limited. Currency forward contracts may limit potential gain from a positive change in the
relationship between the U.S. Dollar and foreign currencies. Unanticipated changes in currency prices may result in poorer overall performance for a Fund than if it had not engaged in such contracts. Moreover, there may be an imperfect correlation
between a Fund’s portfolio holdings of securities denominated in a particular currency and the currencies bought or sold in the forward contracts entered into by a Fund. This imperfect correlation may cause a Fund to sustain losses that will
prevent the Fund from achieving a complete hedge or expose the Fund to risk of foreign exchange loss.
Foreign Currency Options
. A Fund may invest in foreign currency-denominated securities and may buy or sell put and call options on foreign currencies. A Fund may buy or sell
put and call options on foreign currencies either on exchanges or in the OTC market. A put option on a foreign currency gives the purchaser of the option the right to sell a foreign currency at the exercise price until the option expires. A call
option on a foreign currency gives the purchaser of the option the right to purchase the currency at the exercise price until the option expires. Currency options traded on U.S. or other exchanges may be subject to position limits which may limit
the ability of a Fund to reduce foreign currency risk using such options. OTC options differ from traded options in that they are two-party contracts with price and other terms negotiated between buyer and seller, and generally do not have as much
market liquidity as exchange-traded options.
Foreign Currency
Exchange-Related Securities
Foreign Currency Warrants
. Foreign currency warrants such as Currency Exchange Warrants
SM
(“CEWs
SM
”) are warrants which entitle the
holder to receive from their issuer an amount of cash (generally, for warrants issued in the United States, in U.S. Dollars) which is calculated pursuant to a predetermined formula and based on the exchange rate between a specified foreign currency
and the U.S. Dollar as of the exercise date of the warrant. Foreign currency warrants generally are exercisable upon their issuance and expire as of a specified date and time. Foreign currency warrants have been issued in connection with U.S.
Dollar-denominated debt offerings by major corporate issuers in an attempt to reduce the foreign currency exchange risk which, from the point of view of prospective purchasers of the securities, is inherent in the international fixed-income
marketplace. Foreign currency warrants may attempt to reduce the foreign exchange risk assumed by purchasers of a security by, for example, providing for a supplemental payment in the event that the U.S. Dollar depreciates against the value of a
major foreign currency such as the Japanese yen or the Euro. The formula used to determine the amount payable upon exercise of a foreign currency warrant may make the warrant worthless unless the applicable foreign currency exchange rate moves in a
particular direction (
e.g.
, unless the U.S. Dollar appreciates or depreciates against the particular foreign currency to which the warrant is linked or indexed). Foreign currency warrants are severable from
the debt obligations with which they may be offered, and may be listed on exchanges. Foreign currency warrants may be exercisable only in certain minimum amounts, and an investor wishing to exercise warrants who possesses less than the minimum
number required for exercise may be required either to sell the warrants or to purchase additional warrants, thereby incurring additional transaction costs. In the case of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate relating to exercise is determined, during which time the exchange rate could change significantly, thereby affecting both the market and cash settlement values of the
warrants being exercised. The expiration date of the warrants may be accelerated if the warrants should be delisted from an exchange or if their trading should be suspended permanently, which would result in the loss of any remaining “time
value” of the warrants (
i.e.
, the difference between the current market value and the exercise value of the warrants), and, in the case the warrants were “out-of-the-money,” in a total loss
of the purchase price of the warrants.
Warrants are
generally unsecured obligations of their issuers and are not standardized foreign currency options issued by the Options Clearing Corporation (“OCC”). Unlike foreign currency options issued by OCC, the terms of foreign exchange warrants
generally will not be amended in the event of governmental or regulatory actions affecting exchange rates or in the event of the imposition of other regulatory controls affecting the international currency markets. The initial public offering price
of foreign currency warrants is generally considerably in excess of the price that a commercial user of foreign currencies might pay in the interbank market for a comparable option involving significantly larger amounts of foreign currencies.
Foreign currency warrants are subject to significant foreign exchange risk, including risks arising from complex political or economic factors.
Principal Exchange Rate Linked Securities
. Principal exchange rate linked securities (“PERLs
SM
”) are debt obligations the principal on which is payable at maturity in an amount that may vary based on the exchange rate between the U.S. Dollar
and a particular foreign currency at or about that time. The return on “standard” principal exchange rate linked securities is enhanced if the foreign currency to which the security is linked appreciates against the U.S. Dollar, and is
adversely affected by increases in the foreign exchange value of the U.S. Dollar; “reverse” principal exchange rate linked securities are like the “standard” securities, except that their return is enhanced by increases in
the value of the U.S. Dollar and adversely impacted by increases in the value of foreign currency. Interest payments on the securities are generally made in U.S. Dollars at rates that reflect the degree of foreign currency risk assumed or given up
by the purchaser of the notes (
i.e.
, at relatively higher interest rates if the purchaser has assumed some of the foreign exchange risk, or relatively lower interest rates if the issuer has assumed some of the
foreign exchange risk, based on the expectations of the current market). Principal exchange rate linked securities may in limited cases be subject to acceleration of maturity (generally, not without the consent of the holders of the securities),
which may have an adverse impact on the value of the principal payment to be made at maturity.
Performance Indexed Paper
. Performance indexed paper
(“PIPs
SM
”)
is U.S.
Dollar-denominated commercial paper the yield of which
is
linked
to certain foreign exchange rate movements.
The
yield to the investor on
performance indexed paper is established at maturity as a function of spot exchange rates between the U.S. Dollar
and a designated currency as
of
or about that time
(generally, the index maturity two days prior to maturity).
The yield to the
investor will be within a range stipulated at the time of purchase of the obligation, generally with a guaranteed minimum rate of return that is below, and a potential maximum rate of return that is above,
market yields on U.S. Dollar-denominated commercial paper, with both the minimum and
maximum rates
of return
on the investment
corresponding to the minimum and maximum values of the spot exchange rate two business days prior to maturity.
A Fund may invest in hybrid
instruments. A hybrid instrument is a type of potentially high-risk derivative that combines a traditional stock, bond, or commodity with an option or forward contract. Generally, the principal amount, amount payable upon maturity or redemption, or
interest rate of a hybrid is tied (positively or negatively) to the price of some commodity, currency or securities index or another interest rate or some other economic factor (each a “benchmark”). The interest rate or (unlike most
fixed income securities) the principal amount payable at maturity of a hybrid security may be increased or decreased, depending on changes in the value of the benchmark. A hybrid could be, for example, a bond issued by an oil company that pays a
small base level of interest, in addition to interest that accrues when oil prices exceed a certain predetermined level. Such a hybrid instrument would be a combination of a bond and a call option on oil.
Hybrids can be used as an efficient
means of pursuing a variety of investment goals, including currency hedging, and increased total return. Hybrids may not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a result,
may be leveraged and move (up or down) more steeply and rapidly than the benchmark. These benchmarks may be sensitive to economic and political events, such as commodity shortages and currency devaluations, which cannot be readily foreseen by the
purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero. Thus, an investment in a hybrid may entail significant market risks that are not associated with a similar investment in a traditional, U.S.
Dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest. The purchase of hybrids also exposes a Fund to the credit risk of the issuer of the hybrids. These risks may cause significant fluctuations
in the NAV of a Fund.
Certain
issuers of structured products such as hybrid instruments may be deemed to be investment companies as defined in the 1940 Act. As a result, a Fund’s investment in these products may be subject to limits applicable to investments in investment
companies and may be subject to restrictions contained in the 1940 Act.
Illiquid Investments and Restricted
Securities
Each Fund
may purchase and hold illiquid investments. A Fund will not purchase or otherwise acquire any security if, as a result, more than 15% of its net assets (taken at current value) would be invested in investments that are illiquid.
The term “illiquid
investments” for this purpose means any investment that a Fund reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing
the market value of the investment. A Fund will not
acquire illiquid securities if, as a result, such securities would comprise more than 15% of the value of the Fund’s net assets. Rafferty, subject to oversight by the Board of Trustees, has the ultimate authority to determine, to the extent
permissible under the federal securities laws, which securities are liquid or illiquid for purposes of this 15% limitation under a Fund’s liquidity risk management program, adopted pursuant to Rule 22e-4 under the 1940 Act. Illiquid securities
will be priced at fair value as determined in good faith under procedures adopted by the Board of Trustees. If, through the appreciation of illiquid securities or the depreciation of liquid securities, a Fund should be in a position where more than
15% of the value of its net assets are invested in illiquid securities, including restricted securities which are not readily marketable, Rafferty will report such occurrence to the Board of Trustees and take such steps as are deemed advisable to
protect liquidity in accordance with a Fund’s liquidity risk management program.
A Fund may not be able to sell
illiquid investments when Rafferty considers it desirable to do so or may have to sell such investments at a price that is lower than the price that could be obtained if the investments were liquid. In addition, the sale of illiquid investments may
require more time and result in higher dealer discounts and other selling expenses than does the sale of investments that are not illiquid. Illiquid investments also may be more difficult to value due to the unavailability of reliable market
quotations for such investments, and investment in illiquid investments may have an adverse impact on NAV.
Rule 144A
establishes a “safe harbor” from the registration requirements of the 1933 Act for resales of certain securities to qualified institutional buyers. Institutional markets for restricted securities that have developed as a result of Rule
144A provide both readily ascertainable values for certain restricted securities and the ability to liquidate an investment to satisfy share redemption orders. This policy does not include restricted securities eligible for resale pursuant to Rule
144A under the Securities Act of 1933, as amended (“1933 Act”), which the Trust’s Board of Trustees (“Board” or “Trustees”), or Rafferty, under Board-approved guidelines, has determined are liquid. Each Fund
currently does not anticipate investing in such restricted securities. However, to the extent that a Fund does invest in such restricted securities, an insufficient number of qualified institutional buyers interested in purchasing Rule 144A-eligible
securities held by a Fund could adversely affect the marketability of such portfolio securities, and a Fund may be unable to dispose of such securities promptly or at reasonable prices.
A Fund may purchase indexed
securities, which are securities, the value of which varies positively or negatively in relation to the value of other securities, securities indices or other financial indicators, consistent with its investment objective. Indexed securities may be
debt securities or deposits whose value at maturity or coupon rate is determined by reference to a specific instrument or statistic. Recent issuers of indexed securities have included banks, corporations and certain U.S. government agencies.
The performance of indexed securities
depends to a great extent on the performance of the security or other instrument to which they are indexed and also may be influenced by interest rate changes in the United States and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values may decline substantially if the issuer’s creditworthiness deteriorates. Indexed securities may be more volatile than the underlying instruments. Certain indexed
securities that are not traded on an established market may be deemed illiquid. See “Illiquid Investments and Restricted Securities” above.
Inflation Protected Securities
Inflation protected securities
are fixed income securities whose value is periodically adjusted according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers utilize a structure that accrues inflation into the principal value of the bond.
Other issuers pay out the Consumer Price Index (“CPI”) accruals as part of a semiannual coupon. Inflation protected securities issued by the U.S. Treasury have maturities of approximately five, ten or thirty years, although it is
possible that securities with other maturities will be issued in the future. The U.S. Treasury securities pay interest on a semi-annual basis equal to a fixed percentage of the inflation adjusted principal amount.
If the periodic adjustment rate
measuring inflation falls, the principal value of inflation protected bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of
the original bond principal upon maturity (as adjusted for inflation) is guaranteed by the U.S. Treasury in the case of U.S. Treasury inflation indexed bonds, even during a period of deflation. However, the current market value of the bonds is not
guaranteed and will fluctuate. A Fund may also invest in other inflation related bonds which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond to be repaid at maturity
may be less than the original principal amount and, therefore, is subject to credit risk.
The value of inflation protected
bonds is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate
than nominal interest rates, real interest rates might decline, leading to an increase in value
of inflation protected bonds. In contrast, if
nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation protected bonds. While these securities are expected to be protected from long-term inflationary trends,
short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation, investors in these securities may not be protected to the extent that the increase is not reflected in the bond’s
inflation measure.
The periodic
adjustment of U.S. inflation protected bonds is tied to the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (“CPI-U”), published monthly by the U.S. Bureau of Labor Statistics. The CPI-U
is a measurement of changes in the cost of living, made up of components such as housing, food, transportation and energy.
Any increase in principal for an
inflation protected security resulting from inflation adjustments is considered by the IRS to be taxable income in the year it occurs. A Fund’s distributions to shareholders include interest income and the income attributable to principal
adjustments, both of which will be taxable to shareholders. The tax treatment of the income attributable to principal adjustments may result in the situation where a Fund needs to make its required annual distributions to shareholders in amounts
that exceed the cash received. As a result, a Fund may need to liquidate certain investments when it is not advantageous to do so. Also, if the principal value of an inflation protected security is adjusted downward due to deflation, amounts
previously distributed in the taxable year may be characterized in some circumstances as a return of capital.
A Fund may invest in lower-rated
debt securities, including securities in the lowest credit rating category, of any maturity, otherwise known as “junk bonds.”
Junk bonds generally offer a higher
current yield than that available for higher-grade issues. However, lower-rated securities involve higher risks, in that they are especially subject to adverse changes in general economic conditions and in the industries in which the issuers are
engaged, to changes in the financial condition of the issuers and to price fluctuations in response to changes in interest rates. During periods of economic downturn or rising interest rates, highly leveraged issuers may experience financial stress
that could adversely affect their ability to make payments of interest and principal and increase the possibility of default. In addition, the market for lower-rated debt securities has expanded rapidly in recent years, and its growth paralleled a
long economic expansion. At times in recent years, the prices of many lower-rated debt securities declined substantially, reflecting an expectation that many issuers of such securities might experience financial difficulties. As a result, the yields
on lower-rated debt securities rose dramatically, but such higher yields did not reflect the value of the income stream that holders of such securities expected, but rather, the risk that holders of such securities could lose a substantial portion
of their value as a result of the issuers’ financial restructuring or default. There can be no assurance that such declines will not recur.
The market for lower-rated debt
issues generally is thinner and less active than that for higher quality securities, which may limit a Fund’s ability to sell such securities at fair value in response to changes in the economy or financial markets. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may also decrease the values and liquidity of lower-rated securities, especially in a thinly traded market. Changes by recognized rating services in their rating of a fixed-income
security may affect the value of these investments. A Fund will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase. However, Rafferty will monitor the investment to determine whether continued
investment in the security will assist in meeting a Fund’s investment objective.
Mortgage-Backed Securities
A Fund may invest in
mortgage-backed securities. A mortgage-backed security is a type of pass-through security, which is a security representing pooled debt obligations repackaged as interests that pass income through an intermediary to investors. In the case of
mortgage-backed securities, the ownership interest is in a pool of mortgage loans.
Mortgage-backed securities are most
commonly issued or guaranteed by the Government National Mortgage Association (“Ginnie Mae
®
” or “GNMA”), Federal National
Mortgage Association (“Fannie Mae
®
” or “FNMA”) or Federal Home Loan Mortgage Corporation (“Freddie Mac
®
” or “FHLMC”), but may also be issued or guaranteed by other private issuers. GNMA is a government-owned corporation that is an
agency of the U.S. Department of Housing and Urban Development. It guarantees, with the full faith and credit of the United States, full and timely payment of all monthly principal and interest on its mortgage-backed securities. FNMA is a publicly
owned, government-sponsored corporation that mostly packages mortgages backed by the Federal Housing Administration, but also sells some non-governmentally backed mortgages. Pass-through securities issued by FNMA are guaranteed as to timely payment
of principal and interest only by FNMA. FHLMC is a publicly chartered agency that buys qualifying residential mortgages from lenders, re-packages them and provides certain guarantees. Pass-through securities issued by FHLMC are guaranteed as to
timely payment of principal and interest only by FHLMC.
The Federal
Housing Finance Agency (“FHFA”) is mandating that Fannie Mae
®
and Freddie Mac
®
cease issuing their own mortgage-backed securities and begin issuing "Uniform Mortgage-Backed Securities" or "UMBS" in 2019. Each UMBS will have a
55-day remittance cycle and can be used as collateral in either a Fannie Mae
®
or Freddie Mac
®
security or held for
investment. Investors may be approached to convert
existing mortgage-backed securities into UMBS, possibly with an inducement fee being offered to holders of Freddie Mac
®
mortgage-backed securities.
Mortgage-backed securities issued by private issuers, whether or not such obligations are subject to guarantees by the private issuer, may entail greater risk than obligations directly guaranteed by the U.S. government. The average life of a
mortgage-backed security is likely to be substantially less than the original maturity of the mortgage pools underlying the securities. Prepayments of principal by mortgagors and mortgage foreclosures will usually result in the return of the greater
part of principal invested far in advance of the maturity of the mortgages in the pool.
Collateralized mortgage obligations
(“CMOs”) are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collateral collectively hereinafter referred to as “Mortgage Assets”). Multi-class pass-through securities are interests in a
trust composed of Mortgage Assets and all references in this section to CMOs include multi-class pass-through securities. Principal prepayments on the Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated
maturities or final distribution dates, resulting in a loss of all or part of the premium if any has been paid. Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly or semi-annual basis. The principal and interest payments
on the Mortgage Assets may be allocated among the various classes of CMOs in several ways. Typically, payments of principal, including any prepayments, on the underlying mortgages are applied to the classes in the order of their respective stated
maturities or final distribution dates, so that no payment of principal is made on CMOs of a class until all CMOs of other classes having earlier stated maturities or final distribution dates have been paid in full.
Stripped
mortgage-backed securities (“SMBS”) are derivative multi-class mortgage securities. A Fund will only invest in SMBS issued by Ginnie
Mae
®
, which are obligations backed by the full faith and credit of the U.S. government. SMBS are usually structured with two or more classes that
receive different proportions of the interest and principal distributions from a pool of Mortgage Assets. A Fund will only invest in SMBS whose Mortgage Assets are U.S. government obligations. A common type of SMBS will be structured so that one
class receives some of the interest and most of the principal from the Mortgage Assets, while the other class receives most of the interest and the remainder of the principal. If the underlying Mortgage Assets experience greater than anticipated
prepayments of principal, each Fund may fail to fully recoup its initial investment in these securities. The market value of any class which consists primarily, or entirely, of principal payments generally is unusually volatile in response to
changes in interest rates.
Investment in mortgage-backed
securities poses several risks, including among others, prepayment, market and credit risk. Prepayment risk reflects the risk that borrowers may prepay their mortgages faster than expected, thereby affecting the investment’s average life and
perhaps its yield. Whether or not a mortgage loan is prepaid is almost entirely controlled by the borrower. Borrowers are most likely to exercise prepayment options at the time when it is least advantageous to investors, generally prepaying
mortgages as interest rates fall, and slowing payments as interest rates rise. Besides the effect of prevailing interest rates, the rate of prepayment and refinancing of mortgages may also be affected by home value appreciation, ease of the
refinancing process and local economic conditions. Market risk reflects the risk that the price of a security may fluctuate over time. The price of mortgage-backed securities may be particularly sensitive to prevailing interest rates, the length of
time the security is expected to be outstanding, and the liquidity of the issue. In a period of unstable interest rates, there may be decreased demand for certain types of mortgage-backed securities, and a Fund invested in such securities wishing to
sell them may find it difficult to find a buyer, which may in turn decrease the price at which they may be sold. Credit risk reflects the risk that a Fund may not receive all or part of its principal because the issuer or credit enhancer has
defaulted on its obligations. Obligations issued by U.S. government-sponsored entities are guaranteed as to the payment of principal and interest, but are not backed by the full faith and credit of the U.S. government. The performance of private
label mortgage-backed securities, issued by private institutions, is based on the financial health of those institutions. With respect to GNMA certificates, although GNMA guarantees timely payment even if homeowners delay or default, tracking the
“pass-through” payments may, at times, be difficult.
A Fund may invest in municipal
obligations. Municipal securities are fixed-income securities issued by states, counties, cities and other political subdivisions and authorities. Although most municipal securities are exempt from federal income tax, municipalities also may issue
taxable securities. Tax exempt securities are generally classified by their source of payment. In addition to the usual risks associated with investing for income, the value of municipal obligations can be affected by changes in the actual or
perceived credit quality of the issuers. The credit quality of a municipal obligation can be affected by, among other factors: a) the financial condition of the issuer or guarantor; b) the issuer’s future borrowing plans and sources of
revenue; c) the economic feasibility of the revenue bond project or general borrowing purpose; d) political or economic developments in the region or jurisdiction where the security is issued; and e) the liquidity of the security. Because municipal
obligations are generally traded OTC, the liquidity of a particular issue often depends on the willingness of dealers to make a market in the security. The liquidity of some municipal issues can be enhanced by demand features, which enable a Fund to
demand payment from the issuer or a financial intermediary on short notice.
Futures Contracts, Options, and
Other Derivative Strategies
Generally, derivatives are
financial instruments whose value depends on, or is derived from, the value of one or more underlying assets, reference rates, or indices or other market factors (“reference assets”) and may relate to stocks bonds, interest rates, credit
currencies, commodities or related indices. Derivative instruments can provide an efficient means to gain long or short exposure to the value of a reference asset without actually owning or selling the instrument. Examples of derivative instruments
include futures contracts, swap agreements, options, options on futures contracts and forward currently contracts.
Each Fund may enter into derivatives
instruments which may include futures contracts, forward contracts, options on currencies, commodities, indices, or futures contracts and swaps which provide long and short exposure to reference assets. Derivatives may be more sensitive to changes
in interest rates or to sudden fluctuations in market prices and thus a Fund’s losses may be greater if it invests in derivatives than if it invests in non-derivative instruments. Derivatives are also subject to counterparty risk, which is the
risk that the other party in the transaction will not fulfill its contractual obligations.
The use of derivative instruments is
subject to applicable regulations of the SEC, the several exchanges upon which they are traded and the CFTC. In addition, a Fund’s ability to use derivative instruments will be limited by tax considerations. See “Dividends, Other
Distributions and Taxes.”
Under current CFTC regulations, if a
Fund uses commodity interests (such as futures contracts, options on futures contracts and swaps) other than for bona fide hedging purposes (as defined by the CFTC) the aggregate initial margin and premiums required to establish these positions
(after taking into account unrealized profits and unrealized losses on any such positions and excluding the amount by which options that are “in-the-money” at the time of purchase) may not exceed 5% of a Fund’s NAV, or
alternatively, the aggregate net notional value of those positions, as determined at the time the most recent position was established, may not exceed 100% of the fund’s NAV (after taking into account unrealized profits and unrealized losses
on any such positions). Accordingly, each Fund has registered, or will register prior to commencement of operations, as a commodity pool, and the Adviser has registered as a CPO, with the National Futures Association.
Each Fund is subject to the risk that
a change in U.S. law and related regulations will impact the way a Fund operates, increase the particular costs of a Fund’s operation and/or change the competitive landscape. In this regard, any further amendment to the Commodity Exchange Act
or its related regulations that subject a Fund to additional regulation may have adverse impacts on a Fund’s operations and expenses.
In addition to the
instruments, strategies and risks described below and in the Prospectus, Rafferty may discover additional opportunities in connection with derivative instruments and other similar or related techniques. These new opportunities may become available
as Rafferty develops new techniques, as regulatory authorities broaden the range of permitted transactions and as new derivative instruments or other techniques are developed. Rafferty may utilize these opportunities to the extent that they are
consistent with a Fund’s investment objective and permitted by a Fund’s investment limitations and applicable regulatory authorities. A Fund’s Prospectus or this SAI will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or in the Prospectus.
Special Risks
. The use of derivative instruments involves special considerations and risks, certain of which are described below. Risks pertaining to particular derivative instruments are described in the sections that
follow.
(1) Options and
futures prices can diverge from the prices of their underlying instruments. Options and futures prices are affected by such factors as current and anticipated short-term interest rates, changes in volatility of the underlying instrument and the time
remaining until expiration of the contract, which may not affect security prices the same way. Imperfect or no correlation also may result from differing levels of demand in the options and futures markets and the securities markets, from structural
differences in how options and futures and securities are traded, and from imposition of daily price fluctuation limits or trading halts.
(2) As described below, a Fund might
be required to maintain assets as “cover,” maintain segregated accounts or make margin payments when it takes positions in Financial Instruments involving obligations to third parties (
e.g.
,
Financial Instruments other than purchased options). If a Fund were unable to close out its positions in such Financial Instruments, it might be required to continue to maintain such assets or accounts or make such payments until the position
expired or matured. These requirements might impair a Fund’s ability to sell a portfolio security or make an investment when it would otherwise be favorable to do so or require that a Fund sell a portfolio security at a disadvantageous time. A
Fund’s ability to close out a position in a Financial Instrument prior to expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of the other party to the
transaction (the “counterparty”) to enter into a transaction closing out the position. Therefore, there is no assurance that any position can be closed out at a time and price that is favorable to a Fund.
(3) Losses may arise due to
unanticipated market price movements, lack of a liquid secondary market for any particular instrument at a particular time or due to losses from premiums paid by a Fund on options transactions.
Cover
. Transactions using derivative instruments, other than purchased options, expose a Fund to an obligation to another party. A Fund will not enter into any such
transactions unless it owns either (1) an offsetting (“covered”) position in securities or other options or futures contracts or (2) cash and liquid assets with a value, marked-to-market daily, sufficient to cover
its potential obligations to the extent not covered
as provided in (1) above. Each Fund will comply with SEC guidelines regarding cover for these instruments and will, if the guidelines so require, set aside cash or liquid assets in an account with its custodian, the Bank of New York Mellon ("BNYM"),
in the prescribed amount as determined daily.
Assets used as
cover or held in an account cannot be sold while the position in the corresponding derivative instrument is open, unless they are replaced with other appropriate assets. As a result, the commitment of a large portion of a Fund’s assets to
cover or accounts could impede portfolio management or a Fund’s ability to meet redemption requests or other current obligations.
Futures Contracts
. A Fund may use certain options (traded on an exchange or OTC, or otherwise), futures contracts (sometimes referred to as “futures”) and
options on futures contracts as a substitute for a comparable market position in the underlying security or index, to attempt to hedge or limit the exposure of a Fund’s position, to create a synthetic money market position, for certain
tax-related purposes or to effect closing transactions.
Generally, a futures contract is a
standard binding agreement to buy or sell a specified quantity of an underlying reference instrument, such as a specific security, currency or commodity, at a specified price at a specified later date. A “sale” of a futures contract
means the acquisition of a contractual obligation to deliver the underlying reference instrument called for by the contract at a specified price on a specified date. A “purchase” of a futures contract means the acquisition of a
contractual obligation to acquire the underlying reference instrument called for by the contract at a specified price on a specified date. The purchase or sale of a futures contract will allow a Fund to increase or decrease its exposure to the
underlying reference instrument without having to buy the actual instrument.
The underlying reference instruments
to which futures contracts may relate include non-U.S. currencies, interest rates, stock and bond indices and debt securities, including U.S. government debt obligations. In most cases the contractual obligation under a futures contract may be
offset, or “closed out,” before the settlement date so that the parties do not have to make or take delivery. The closing out of a contractual obligation is usually accomplished by buying or selling, as the case may be, an identical,
offsetting futures contract. This transaction, which is effected through a member of an exchange, cancels the obligation to make or take delivery of the underlying instrument or asset. If the original position entered into is a long position
(futures contract purchased), there will be a gain (loss) if the offsetting sell transaction is carried out at a higher (lower) price, inclusive of commissions. If the original position entered into is a short position (futures contract sold) there
will be a gain (loss) if the offsetting buy transaction is carried out at a lower (higher) price, inclusive of commissions.
Certain futures contracts are
cash-settled, meaning the futures contract obligates the seller to deliver (and purchaser to accept) an amount of cash equal to a specific dollar amount multiplied by the difference between the final settlement price of a specific futures contract
and the price at which the agreement is made. No physical delivery of the underlying asset is made.
Whether a Fund realizes a gain/loss
from futures activities depends generally upon the movements in the underlying reference asset (generally a commodity, currency, security or index). The extent of a Fund’s loss from an unhedged short position in a futures contract is
potentially unlimited, and investors may lose the amount that they invest plus any profits recognized on their investment.
Futures contracts may be bought and
sold on U.S. and non-U.S. exchanges. Futures contracts in the U.S. have been designed by exchanges that have been designated “contract markets” by the CFTC and must be executed through a futures commission merchant (“FCM”),
which is a brokerage firm that is a member of the relevant contract market. Each exchange guarantees performance of the contracts as between the clearing members of the exchange, thereby reducing the risk of counterparty default. Because all
transactions in the futures market are made, offset, or fulfilled by an FCM through a clearinghouse associated with the exchange on which the contracts are traded, a Fund will incur brokerage fees when it buys or sells futures contracts. A Fund
generally buys and sells futures contracts only on contract markets (including exchanges or boards of trade) where there appears to be an active market for the futures contracts, but there is no assurance that an active market will exist for any
particular contract or at any particular time. An active market makes it more likely that futures contracts will be liquid and bought and sold at competitive market prices. In addition, many of the futures contracts available may be relatively new
instruments without a significant trading history. As a result, there can be no assurance that an active market will develop or continue to exist.
When a Fund enters into a futures
contract, it must deliver to an account controlled by the FCM (that has been selected by the Fund), an amount referred to as “initial margin” that is typically calculated as an amount equal to the volatility in market value of a contract
over a fixed period. Initial margin requirements are determined by the respective exchanges on which the futures contracts are traded and the FCM. Thereafter, a “variation margin” amount may be required to be paid by a Fund or received
by a Fund in accordance with margin controls set for such accounts, depending upon changes in the marked-to-market value of the futures contract. The account is marked-to-market daily and the variation margin is monitored by a Fund’s
investment manager and custodian on a daily basis. When the futures contract is closed out, if a Fund has a loss equal to, or greater than, the margin amount, the margin amount is paid to the FCM along with any loss in excess of the margin amount.
If a Fund has a loss of less than the margin amount, the excess margin is returned to a Fund. If a Fund has a gain, the full margin amount and the amount of the gain is paid to the Fund. Some futures contracts provide for the delivery of securities
that are different than those that are specified in the contract. For a futures contract
for delivery of debt securities, on the settlement
date of the contract, adjustments to the contract can be made to recognize differences in value arising from the delivery of debt securities with a different interest rate from that of the particular debt securities that were specified in the
contract. In some cases, securities called for by a futures contract may not have been issued when the contract was written.
Risks of futures contracts.
A Fund’s use of futures contracts is subject to the risks associated with derivative instruments generally. A Fund may not be able to properly effect its strategy when a liquid market is unavailable for the futures
contract the Fund wishes to close, which may at times occur. If a Fund were unable to liquidate a futures position due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial losses. A Fund would
continue to be subject to market risk with respect to the position. In addition, a Fund would continue to be required to make daily variation margin payments and might be required to maintain cash or liquid assets in an account.
A purchase or sale of a futures
contract may result in losses to a Fund in excess of the amount that the Fund delivered as initial margin. Because of the relatively low margin deposits required, futures trading involves a high degree of leverage; as a result, a relatively small
price movement in a futures contract may result in immediate and substantial loss, or gain, to a Fund. In addition, if a Fund has insufficient cash to meet daily variation margin requirements or close out a futures position, it may have to sell
securities from its portfolio at a time when it may be disadvantageous to do so. Adverse market movements could cause a Fund to experience substantial losses on an investment in a futures contract. There is a risk of loss by a Fund of the initial
and variation margin deposits in the event of bankruptcy of the FCM with which the Fund has an open position in a futures contract. The assets of a Fund may not be fully protected in the event of the bankruptcy of the FCM or central counterparty
because the Fund might be limited to recovering only a pro rata share of all available funds and margin segregated on behalf of an FCM’s customers. If the FCM does not provide accurate reporting, a Fund is also subject to the risk that the FCM
could use a Fund’s assets, which are held in an omnibus account with assets belonging to the FCM’s other customers, to satisfy its own financial obligations or the payment obligations of another customer to the central
counterparty.
The difference
(called the “spread”) between prices in the cash market for the purchase and sale of the underlying reference instrument and the prices in the futures market is subject to fluctuations and distortions due to differences in the nature of
those two markets. First, all participants in the futures market are subject to initial deposit and variation margin requirements. Rather than meeting additional variation margin requirements, investors may close futures contracts through offsetting
transactions that could distort the normal pricing spread between the cash and futures markets. Second, the liquidity of the futures markets depends on participants entering into offsetting transactions rather than making or taking delivery of the
underlying instrument. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, resulting in pricing distortion. Third, from the point of view of speculators, the margin deposit requirements that
apply in the futures market are less onerous than similar margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions. When such distortions occur, a
correct forecast of general trends in the price of an underlying reference instrument by the investment manager may still not necessarily result in a profitable transaction.
Futures contracts that are traded on
non-U.S. exchanges may not be as liquid as those purchased on CFTC-designated contract markets. In addition, non-U.S. futures contracts may be subject to varied regulatory oversight. The price of any non-U.S. futures contract and, therefore, the
potential profit and loss thereon, may be affected by any change in the non-U.S. exchange rate between the time a particular order is placed and the time it is liquidated, offset or exercised.
The CFTC and the various exchanges
have established limits referred to as “speculative position limits” on the maximum net long or net short position that any person, such as a Fund, may hold or control in a particular futures contract. Trading limits are also imposed on
the maximum number of contracts that any person may trade on a particular trading day. An exchange may order the liquidation of positions found to be in violation of these limits and it may impose other sanctions or restrictions. The regulation of
futures, as well as other derivatives, is a rapidly changing area of law.
Futures exchanges may also limit the
amount of fluctuation permitted in certain futures contract prices during a single trading day. This daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day’s settlement
price. Once the daily limit has been reached in a futures contract subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and does not
limit potential losses because the limit may prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of positions and subjecting some holders of futures contracts to substantial losses.
Risks Associated with Commodity Futures
Contracts
. There are several additional risks associated with transactions in commodity futures contracts.
Unlike the financial futures markets,
in the commodity futures markets there are costs of physical storage associated with purchasing the underlying commodity. The price of the commodity futures contract will reflect the storage costs of purchasing the physical commodity, including the
time value of money invested in the physical commodity. To the extent that the
storage costs for an underlying commodity change while
a Fund is invested in futures contracts on that commodity, the value of the futures contract may change proportionately.
In the commodity futures markets,
producers of the underlying commodity may decide to hedge the price risk of selling the commodity by selling futures contracts today to lock in the price of the commodity at delivery tomorrow. In order to induce speculators to purchase the other
side of the same futures contract, the commodity producer generally must sell the futures contract at a lower price than the expected future spot price. Conversely, if most hedgers in the futures market are purchasing futures contracts to hedge
against a rise in prices, then speculators will only sell the other side of the futures contract at a higher futures price than the expected future spot price of the commodity. The changing nature of the hedgers and speculators in the commodity
markets will influence whether futures prices are above or below the expected future spot price, which can have significant implications for a Fund. If the nature of hedgers and speculators in futures markets has shifted when it is time for a Fund
to reinvest the proceeds of a maturing contract in a new futures contract, the Fund might reinvest at higher or lower futures prices, or choose to pursue other investments.
The commodities which underlie
commodity futures contracts may be subject to additional economic and non-economic variables, such as drought, floods, weather, livestock disease, embargoes, tariffs, and international economic, political and regulatory developments. These factors
may have a larger impact on commodity prices and commodity-linked instruments, including futures contracts, than on traditional securities. Certain commodities are also subject to limited pricing flexibility because of supply and demand factors.
Others are subject to broad price fluctuations as a result of the volatility of the prices for certain raw materials and the instability of supplies of other materials. These additional variables may create additional investment risks which subject
a Fund’s investments to greater volatility than investments in traditional securities.
Forward Contracts
. Each Fund may enter into equity, equity index or interest rate forward contracts for purposes of attempting to gain exposure to an index or group of
securities without actually purchasing these securities, or to hedge a position. Forward contracts are two-party contracts pursuant to which one party agrees to pay the counterparty a fixed price for an agreed upon amount of commodities, securities,
or the cash value of the commodities, securities or the securities index, at an agreed upon date. Because they are two-party contracts and may have terms greater than seven days, forward contracts may be considered to be illiquid for a Fund’s
illiquid investment limitations. A Fund will not enter into any forward contract unless Rafferty believes that the other party to the transaction is creditworthy. A Fund bears the risk of loss of the amount expected to be received under a forward
contract in the event of the default or bankruptcy of a counterparty. If such a default occurs, a Fund will have contractual remedies pursuant to the forward contract, but such remedies may be subject to bankruptcy and insolvency laws which could
affect the Fund’s rights as a creditor.
Options
. The value of an option position will reflect, among other things, the current market value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying investment and general market conditions. Options that expire unexercised have no value. Options currently are traded on the Chicago Board Options Exchange
®
and other exchanges, as well as the OTC markets.
By buying a call option on a
security, a Fund has the right, in return for the premium paid, to buy the security underlying the option at the exercise price. By writing (selling) a call option and receiving a premium, a Fund becomes obligated during the term of the option to
deliver securities underlying the option at the exercise price if the option is exercised. By buying a put option, a Fund has the right, in return for the premium, to sell the security underlying the option at the exercise price. By writing a put
option, a Fund becomes obligated during the term of the option to purchase the securities underlying the option at the exercise price.
Because options premiums paid or
received by a Fund are small in relation to the market value of the investments underlying the options, buying and selling put and call options can be more speculative than investing directly in securities.
A Fund may effectively terminate its
right or obligation under an option by entering into a closing transaction. For example, a Fund may terminate its obligation under a call or put option that it had written by purchasing an identical call or put option; this is known as a closing
purchase transaction. Conversely, a Fund may terminate a position in a put or call option it had purchased by writing an identical put or call option; this is known as a closing sale transaction. Closing transactions permit a Fund to realize profits
or limit losses on an option position prior to its exercise or expiration.
Risks of Options on Currencies and
Securities
. Exchange-traded options in the United States are issued by a clearing organization affiliated with the exchange on which the option is listed that, in effect, guarantees completion of every
exchange-traded option transaction. In contrast, OTC options are contracts between a Fund and its counterparty (usually a securities dealer or a bank) with no clearing organization guarantee. Thus, when a Fund purchases an OTC option, it relies on
the counterparty from which it purchased the option to make or take delivery of the underlying investment upon exercise of the option. Failure by the counterparty to do so would result in the loss of any premium paid by a Fund as well as the loss of
any expected benefit of the transaction.
A Fund’s ability to establish
and close out positions in exchange-traded options depends on the existence of a liquid market. However, there can be no assurance that such a market will exist at any particular time. Closing transactions can be made for OTC options only by
negotiating directly with the counterparty, or by a transaction in the secondary market if any such market exists. There can be no assurance that a Fund will in fact be able to close out an OTC option position at a favorable
price prior to expiration. In the event of insolvency
of the counterparty, a Fund might be unable to close out an OTC option position at any time prior to its expiration.
If a Fund were unable to effect a
closing transaction for an option it had purchased, it would have to exercise the option to realize any profit. The inability to enter into a closing purchase transaction for a covered call option written by a Fund could cause material losses
because a Fund would be unable to sell the investment used as cover for the written option until the option expires or is exercised.
Options on Indices
. An index fluctuates with changes in the market values of the securities included in the index. Options on indices give the holder the right to receive an
amount of cash upon exercise of the option. Receipt of this cash amount will depend upon the closing level of the index upon which the option is based being greater than (in the case of a call) or less than (in the case of put) the exercise price of
the option. Some stock index options are based on a broad market index such as the S&P 500
®
Composite Stock Index, the NYSE Composite Index or
the NYSE Arca Major Market Index or on a narrower index such as the Philadelphia Stock Exchange Over-the-Counter Index.
Each of the exchanges has established
limitations governing the maximum number of call or put options on the same index that may be bought or written by a single investor, whether acting alone or in concert with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through one or more brokers). Under these limitations, option positions of all investment companies advised by Rafferty are combined for purposes of these limits. Pursuant to
these limitations, an exchange may order the liquidation of positions and may impose other sanctions or restrictions. These position limits may restrict the number of listed options that a Fund may buy or sell.
Puts and calls on indices are similar
to puts and calls on securities or futures contracts except that all settlements are in cash and gain or loss depends on changes in the index in question rather than on price movements in individual securities or futures contracts. When a Fund
writes a call on an index, it receives a premium and agrees that, prior to the expiration date, the purchaser of the call, upon exercise of the call, will receive from a Fund an amount of cash if the closing level of the index upon which the call is
based is greater than the exercise price of the call. The amount of cash is equal to the difference between the closing price of the index and the exercise price of the call multiplied by a specific factor (“multiplier”), which
determines the total value for each point of such difference. When a Fund buys a call on an index, it pays a premium and has the same rights to such call as are indicated above. When a Fund buys a put on an index, it pays a premium and has the
right, prior to the expiration date, to require the seller of the put, upon a Fund’s exercise of the put, to deliver to a Fund an amount of cash if the closing level of the index upon which the put is based is less than the exercise price of
the put, which amount of cash is determined by the multiplier, as described above for calls. When a Fund writes a put on an index, it receives a premium and the purchaser of the put has the right, prior to the expiration date, to require a Fund to
deliver to it an amount of cash equal to the difference between the closing level of the index and the exercise price times the multiplier if the closing level is less than the exercise price.
Risks of Options on Indices
. If a Fund has purchased an index option and exercises it before the closing index value for that day is available, it runs the risk that the level of the index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, a Fund will be required to pay the difference between the closing index value and the exercise price of the option (times the applicable multiplier) to the assigned writer.
OTC Options
. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size and strike price, the terms of
OTC options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract. While this type of arrangement allows a Fund great flexibility to tailor the option to its needs, OTC options
generally involve greater risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded.
Options on Futures Contracts
. When a Fund writes an option on a futures contract, it becomes obligated, in return for the premium paid, to assume a position in the futures
contract at a specified exercise price at any time during the term of the option. If a Fund writes a call, it assumes a short futures position. If it writes a put, it assumes a long futures position. When a Fund purchases an option on a futures
contract, it acquires the right in return for the premium it pays to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put).
Whether a Fund realizes a gain or
loss from futures activities depends upon movements in the underlying security or index. The extent of a Fund’s loss from an unhedged short position from writing unhedged call options on futures contracts is potentially unlimited. A Fund only
purchases and sells options on futures contracts that are traded on a U.S. exchange or board of trade.
Purchasers and sellers of options on
futures can enter into offsetting closing transactions, similar to closing transactions in options, by selling or purchasing, respectively, an instrument identical to the instrument purchased or sold. Positions in options on futures contracts may be
closed only on an exchange or board of trade that provides a secondary market. However, there can be no assurance that a liquid secondary market will exist for a particular contract at a particular time. In such event, it may not be possible to
close a futures contract or options position.
Under certain
circumstances, futures exchanges may establish daily limits on the amount that the price of an option on a futures contract can vary from the previous day’s settlement price; once that limit is reached, no trades may be made that day at a
price beyond the limit. Daily price limits do not limit potential losses because prices could move to the daily limit for several consecutive days with little or no trading, thereby preventing liquidation of unfavorable positions.
If a Fund were unable to liquidate an
option on a futures position due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial losses. A Fund would continue to be subject to market risk with respect to the position. In addition, except
in the case of purchased options, a Fund would continue to be required to make daily variation margin payments and might be required to maintain cash or liquid assets in an account.
Risks of Options on Futures Contracts
. The ordinary spreads between prices in the cash and futures markets (including the options on futures markets), due to differences in the natures of those markets, are subject to the following factors, which may create
distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions,
which could distort the normal relationships between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery. To the extent
participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing distortion. Third, from the point of view of speculators, the deposit requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions.
Combined Positions
. A Fund may purchase and write options in combination with each other. For example, a Fund may purchase a put option and write a call option on the same
underlying instrument, in order to construct a combined position whose risk and return characteristics are similar to selling a futures contract. Another possible combined position would involve writing a call option at one strike price and buying a
call option at a lower price, in order to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
A Fund may enter into
caps, floors and collars relating to securities, interest rates or currencies. In a cap or floor, the buyer pays a premium (which is generally, but not always, a single up-front amount) for the right to receive payments from the other party if, on
specified payment dates, the applicable rate, index or asset is greater than (in the case of a cap) or less than (in the case of a floor) an agreed level, for the period involved and the applicable notional amount. A collar is a combination
instrument in which the same party buys a cap and sells a floor. Depending upon the terms of the cap and floor comprising the collar, the premiums will partially, or entirely, offset each other. The notional amount of a cap, collar or floor is used
to calculate payments, but is not itself exchanged. A Fund may be both a buyer and seller of these instruments. In addition, a Fund may engage in combinations of put and call options on securities (also commonly known as collars), which may involve
physical delivery of securities. Like swaps, caps, floors and collars are very flexible products. The terms of the transactions entered by the Funds may vary from the typical examples described here.
Other Investment Companies
Each Fund may invest in the
securities of other investment companies, including open- and closed-end funds and ETFs. Investments in the securities of other investment companies may involve duplication of advisory fees and certain other expenses. By investing in another
investment company, a Fund becomes a shareholder of that investment company. As a result, Fund shareholders indirectly will bear a Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and
expenses Fund shareholders bear in connection with a Fund’s own operations.
Each Fund intends
to limit its investments in securities issued by other investment companies in accordance with the 1940 Act. Section 12(d)(1) of the 1940 Act precludes a Fund from acquiring (i) more than 3% of the total outstanding shares of another investment
company; (ii) shares of another investment company having an aggregate value in excess of 5% of the value of the total assets of the Fund; or (iii) shares of another registered investment company and all other investment companies having an
aggregate value in excess of 10% of the value of the total assets of the Fund. In addition, the Fund is subject to Section 12(d)(1)(C), which provides that the Fund may not acquire shares of a closed-end fund if, immediately after such acquisition,
the Fund and other investment companies having the same adviser as the Fund would hold more than 10% of the closed-end fund’s total outstanding voting stock.
Section 12(d)(1)(F) of the 1940 Act
provides that the provisions of paragraph 12(d)(1)(A) and (B) shall not apply to securities purchased or otherwise acquired by a Fund if (i) immediately after such purchase or acquisition not more than 3% of the total outstanding shares of such
investment company is owned by the Fund and all affiliated persons of the Fund; and (ii) the Fund has not offered or sold, and is not proposing to offer or sell its shares through a principal underwriter or otherwise at a public or offering price
that includes a sales load of more than 1 1/2%. If a Fund invests in investment companies pursuant to Section 12(d)(1)(F), it must comply with the following voting restrictions: when the Fund exercises voting rights,
by proxy or otherwise, with respect to investment
companies owned by the Fund, the Fund will either seek instruction from the Funds' shareholders with regard to the voting of all proxies and vote in accordance with such instructions, or vote the shares held by a Fund in the same proportion as the
vote of all other holders of such security. In addition, an investment company purchased by a Fund pursuant to Section 12(d)(1)(F) shall not be required to redeem its shares in an amount exceeding 1% of such investment company’s total
outstanding shares in any period of less than thirty days. Also, to the extent that an ETF has exemptive relief under Section 12(d)(1)(J), a Fund may rely on that exemptive relief to exceed the limits imposed by Section 12(d)(1)(A).
Shares of another investment company
or ETF that has received exemptive relief from the SEC to permit other funds to invest in its shares without these limitations are excluded from such restrictions to the extent that a Fund has complied with the requirements of such orders. To the
extent that a Fund invests in open-end or closed-end investment companies that invest primarily in the securities of companies located outside the United States, see the risks related to foreign securities set forth above.
Exchange-Traded Products
. Each Fund may invest in Exchange Traded Products (“ETPs”), which include ETFs, partnerships, commodity pools or trusts that are bought
and sold on a securities exchange. A Fund may also invest in exchange-traded notes (“ETNs”), which are structured debt securities, whereby the issuer of the ETN promises to pay ETN holders the return on an index or market segment over a
certain period of time and then return the principal of the investment at maturity. Whereas ETPs’ liabilities are secured by their portfolio securities, ETNs’ liabilities are unsecured general obligations of the issuer. Therefore, ETNs
are subject to the credit risk of the issuer of the ETN, which is different than other ETPs. The value of an ETN security should also be expected to fluctuate with the credit rating of the issuer. Most ETPs and ETNs are designed to track a
particular market segment or index, although an ETP or ETN may be actively managed. ETPs and ETNs share expenses associated with their operation, typically including advisory fees and other management expenses. When a Fund invests in an ETP or ETN,
in addition to directly bearing expenses associated with its own operations, it will bear its pro rata portion of the ETP’s or ETN’s expenses. ETPs and ETNs trade like stocks on a securities exchange at market prices rather than NAV and
as a result ETP or ETN shares may trade at a price greater than NAV (premium) or less than NAV (discount). The risks of owning an ETP or ETN generally reflect the risks of owning the underlying securities the ETP or ETN is designed to track,
although lack of liquidity in an ETP or ETN could result in it being more volatile than the underlying portfolio of securities. In addition, because of ETP or ETN expenses, compared to owning the underlying securities directly, it may be more costly
to own an ETP or ETN.
Additionally, a Fund may invest in swap
agreements referencing ETFs. If a Fund invests in ETFs or swap agreements referencing ETFs, the underlying ETFs may not necessarily track the same index as a Fund.
Money Market Funds
. Money market funds are open-end registered investment companies which have historically traded at a stable $1.00 per share price. In October 2016, the
SEC implemented amendments to money market fund regulations (“Amendments”) intended to address perceived systemic risks associated with money market funds and to improve transparency for money market fund investors. In general, the
Amendments require money market funds that do not meet the definitions of a retail money market fund or government money market fund to transact at a floating NAV per share (similar to all other non-money market mutual funds), instead of at a $1
stable share price, as has traditionally been the case. The Amendments also permit all money market funds to impose liquidity fees and redemption gates for use in times of market stress. The SEC also implemented additional diversification, stress
testing, and disclosure measures. The Amendments represented significant departures from the traditional operation of money market funds. Any impact on the trading and value of money market instruments may negatively affect a Fund’s yield and
return potential.
A Fund may make investments in
the securities of real estate companies, which are regarded as those which derive at least 50% of their respective revenues from the ownership, construction, financing, management or sale of commercial, industrial, or residential real estate, or
have at least 50% of their respective assets in such real estate. Such investments include common stocks (including real estate investment trust shares, see “Real Estate Investment Trusts” below), rights or warrants to purchase common
stocks, securities convertible into common stocks where the conversion feature represents, in Rafferty’s view, a significant element of the securities’ value, and preferred stocks.
Real Estate Investment Trusts
(“REITs”)
A Fund may make investments in
REITs. REITs include equity, mortgage and hybrid REITs. Equity REITs own real estate properties, and their revenue comes principally from rent. Mortgage REITs loan money to real estate owners, and their revenue comes principally from interest earned
on their mortgage loans. Hybrid REITs combine characteristics of both equity and mortgage REITs. The value of an equity REIT may be affected by changes in the value of the underlying property, while a mortgage REIT may be affected by the quality of
the credit extended. The performance of both types of REITs depends upon conditions in the real estate industry, management skills and the amount of cash flow. The risks associated with REITs include defaults
by borrowers, self-liquidation, failure to qualify as a
pass-through entity under the federal tax law, failure to qualify as an exempt entity under the 1940 Act and the fact that REITs are not diversified.
A Fund may enter into repurchase
agreements with banks that are members of the Federal Reserve System or securities dealers who are members of a national securities exchange or are primary dealers in U.S. government securities. Repurchase agreements generally are for a short period
of time, usually less than a week. Under a repurchase agreement, a Fund purchases a U.S. government security and simultaneously agrees to sell the security back to the seller at a mutually agreed-upon future price and date, normally one day or a few
days later. The resale price is greater than the purchase price, reflecting an agreed-upon market interest rate during a Fund’s holding period. While the maturities of the underlying securities in repurchase agreement transactions may be more
than one year, the term of each repurchase agreement always will be less than one year. Repurchase agreements with a maturity of more than seven days are considered to be illiquid investments. A Fund may not enter into such a repurchase agreement
if, as a result, more than 15% of the value of its net assets would then be invested in such repurchase agreements and other illiquid investments. See “Illiquid Investments and Restricted Securities” above.
A Fund will always receive, as
collateral, securities whose market value, including accrued interest, at all times will be at least equal to 100% of the dollar amount invested by a Fund in each repurchase agreement. In the event of default or bankruptcy by the seller, a Fund will
liquidate those securities (whose market value, including accrued interest, must be at least 100% of the amount invested by a Fund) held under the applicable repurchase agreement, which securities constitute collateral for the seller’s
obligation to repurchase the security. If the seller defaults, a Fund might incur a loss if the value of the collateral securing the repurchase agreement declines and might incur disposition costs in connection with liquidating the collateral. In
addition, if bankruptcy or similar proceedings are commenced with respect to the seller of the security, realization upon the collateral by a Fund may be delayed or limited.
Reverse Repurchase Agreements
A Fund may borrow by entering
into reverse repurchase agreements with the same parties with whom it may enter into repurchase agreements. Under a reverse repurchase agreement, a Fund sells securities and agrees to repurchase them at a mutually agreed to price. At the time a Fund
enters into a reverse repurchase agreement, it will establish and maintain a segregated account with an approved custodian containing liquid high-grade securities, marked-to-market daily, having a value not less than the repurchase price (including
accrued interest). Reverse repurchase agreements involve the risk that the market value of securities retained in lieu of sale by a Fund may decline below the price of the securities a Fund has sold but is obliged to repurchase. If the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce a Fund’s obligation to repurchase the securities.
During that time, a Fund’s use of the proceeds of the reverse repurchase agreement effectively may be restricted. Reverse repurchase agreements create leverage, a speculative factor, and are considered borrowings for the purpose of a
Fund’s limitation on borrowing.
Each Fund may lend portfolio
securities to certain borrowers that Rafferty determines to be creditworthy. The borrowers provide collateral that is maintained in an amount at least equal to the current market value of the securities loaned, marked to market daily. Borrowers
continuously secure their obligations to return securities on loan from a Fund by depositing any combination of short-term U.S. government securities and cash as collateral with a Fund. No securities loan will be made on behalf of a Fund if, as a
result, the aggregate value of all securities loaned by a Fund exceeds one-third of the value of the Fund's total assets (including the value of the collateral received) or such lower limit as set by Rafferty or the Board. A Fund may terminate a
loan at any time and obtain the return of the securities loaned. Each Fund receives, by way of substitute payment, the value of any interest or cash or non-cash distributions paid on the loaned securities that it would have received if the
securities were not on loan. Any gain or loss in the market price of the borrowed securities that occurs during the term of the loan inures to the lending Fund and that Fund’s shareholders.
With respect to loans that are
collateralized by cash, the borrower may be entitled to receive a fee based on the amount of cash collateral. The Funds are typically compensated by the difference between the amount earned on the reinvestment of cash collateral and the fee paid to
the borrower. In the case of collateral other than cash, a Fund is typically compensated by a fee paid by the borrower equal to a percentage of the market value of the loaned securities. A Fund may also receive such fees on “special”
loans that are cash-collateralized. Any cash collateral may be reinvested in money market funds. Such money market fund shares will not be subject to a sales load, redemption fee, distribution fee or service fee. However, such investments are
subject to investment risk.
Securities lending involves exposure
to certain risks, including operational risk (
i.e.
, the risk of losses resulting from problems in the settlement and accounting process), “gap” risk (
i.e.
,
the risk of a mismatch between the return of cash collateral
reinvestments and the fees a Fund has agreed to pay
a borrower), and credit, legal, counterparty and market risk. If a securities lending counterparty were to default, a Fund would be subject to the risk of a possible delay in receiving collateral or in recovering the loaned securities, or to a
possible loss of rights in the collateral. In the event a borrower does not return a Fund’s securities as agreed, the Fund could experience losses if the proceeds received from liquidating the collateral do not at least equal the value of the
loaned security at the time the collateral is liquidated, plus the transaction costs incurred in purchasing replacement securities. This event could trigger adverse tax consequences for a Fund. A Fund could lose money if its investment of cash
collateral declines in value over the period of the loan. Substitute payments for dividends received by a Fund while its securities are loaned out will not be considered qualified dividend income.
A Fund may engage
in short sale transactions under which a Fund sells a security it does not own. To complete such a transaction, a Fund must borrow the security to make delivery to the buyer. A Fund then is obligated to replace the security borrowed by purchasing
the security at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by a Fund. Until the security is replaced, a Fund is required to pay to the lender amounts equal to
any dividends that accrue during the period of the loan. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet the margin requirements, until the short position is closed out. A Fund will also incur
transactions costs when conducting short sales.
Until a Fund closes its short
position or replaces the borrowed stock, a Fund will: (1) maintain an account containing cash or liquid assets at such a level that (a) the amount deposited in the account plus the amount deposited with the broker as collateral will equal the
current value of the stock sold short and (b) the amount deposited in the account plus the amount deposited with the broker as collateral will not be less than the market value of the stock at the time the stock was sold short; or (2) otherwise
cover a Fund’s short position.
A Fund will incur
a loss as a result of a short sales or short exposure to reference assets utilizing derivatives if the price of the security or reference asset increases between the date of the short sale or exposure and the date on which a Fund replaces the
borrowed security or terminates the derivatives providing short exposure. A Fund will realize a gain if the price of a security or reference asset declines in price between those dates. The amount of any gain will be decreased, and the amount of any
loss will be increased, by the amount of the premium, dividends or interest a Fund may be required to pay, if any, in connection with a short sale or derivatives that provide short exposure.
A Fund may enter
into swap and other derivatives to obtain long and/or short exposure to an underlying asset without actually purchasing such asset. Swap agreements are generally two-party contracts entered into primarily by institutional investors for periods
ranging from a day to more than one year. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The
gross returns to be exchanged or “swapped” between the parties are calculated with respect to a “notional amount,”
i.e.
, the return on, or increase/decrease, in value of a particular
dollar amount invested in a “basket” of securities representing a particular index or an ETF representing a particular index or group of securities.
Each Fund may enter into swaps to
invest in a market without owning or taking physical custody of securities. For example, in one common type of total return swap, a Fund’s counterparty will agree to pay the Fund the rate at which the specified asset or indicator (
e.g.
, an ETF, or securities comprising a benchmark index, plus the dividends or interest that would have been received on those assets) increased in value multiplied by the relevant notional amount of the swap. A
Fund will agree to pay to the counterparty an interest fee (based on the notional amount) and the rate at which, the specified asset or indicator would decreased in value multiplied by the notional amount of the swap, plus, in certain instances,
commissions or trading spreads on the notional amount.
As a result, the swap has a similar
economic effect as if a Fund were to invest in the assets underlying the swap in an amount equal to the notional amount of the swap. The return to the Fund on such swap should be the gain or loss on the notional amount plus dividends or interest on
the assets less the interest paid by a Fund on the notional amount. However, unlike cash investments in the underlying assets, a Fund will not be an owner of the underlying assets and will not have voting or similar rights in respect of such
assets.
As a trading technique,
Rafferty may substitute physical securities with a swap having investment characteristics substantially similar to the underlying securities. A Fund may also enter into swaps that provide the opposite return of their benchmark or a security. Their
operations are similar to that of the swaps discussed above except that the counterparty pays interest to each Fund on the notional amount outstanding and that dividends or interest on the underlying instruments reduce the value of the swap, plus,
in certain instances, each Fund will agree to pay to the counterparty commissions or trading spreads on the notional amount. These amounts are often netted with any unrealized gain or loss to determine the value of the swap.
The use of swaps
is a highly specialized activity which involves investment techniques and risks in addition to, and in some cases different from, those associated with ordinary portfolio securities transactions. The primary risks associated with the use of swaps
are mispricing or improper valuation, imperfect correlation between movements in the notional amount and the price of the underlying investments, and the inability of the counterparties or clearing organization to perform. If a counterparty’s
creditworthiness for an over-the-counter swap declines, the value of the swap would likely decline. Moreover, there is no guarantee that a Fund could eliminate its exposure under an outstanding swap by entering into an offsetting swap with the same
or another party. In addition, a Fund may use a combination of swaps on an underlying index and swaps on an ETF that is designed to track the performance of that index. The performance of an ETF may deviate from the performance of its underlying
index due to embedded costs and other factors. Thus, to the extent a Fund invests in swaps that use an ETF as the reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of correlation with its
underlying index as it would if a Fund used only swaps on the underlying index. Rafferty, under the supervision of the Board of Trustees, is responsible for determining and monitoring the liquidity of a Fund’s transactions in swaps.
Common
Types of Swaps
A Fund may
enter into any of several types of swaps, including:
Total Return Swaps.
Total return swaps may be used either as economically similar substitutes for owning the reference asset specified in the swap, such as the securities that comprise a given market index, particular securities or
commodities, or other assets or indicators. They also may be used as a means of obtaining exposure in markets where the reference asset is unavailable or it may otherwise be impossible or impracticable for a Fund to own that asset. “Total
return” refers to the payment (or receipt) of the total return on the underlying reference asset, which is then exchanged for the receipt (or payment) of an interest rate. Total return swaps provide a Fund with the additional flexibility of
gaining exposure to a market or sector index by using the most cost-effective vehicle available.
Interest Rate Swaps.
Interest rate swaps, in their most basic form, involve the exchange by a Fund with another party of their respective commitments to pay or receive interest. For example, a Fund might exchange its right to receive certain
floating rate payments in exchange for another party’s right to receive fixed rate payments. Interest rate swaps can take a variety of other forms, such as agreements to pay the net differences between two different interest indexes or rates.
Despite their differences in form, the function of interest rate swaps is generally the same: to increase or decrease a Fund’s exposure to long- or short-term interest rates. For example, a Fund may enter into an interest rate swap to preserve
a return or spread on a particular investment or a portion of its portfolio or to protect against any increase in the price of securities a Fund anticipates purchasing at a later date.
Other Financial Instruments
. Other forms
of swaps that a Fund may enter into include: interest rate caps,
under which,
in return
for a premium,
one party agrees to make payments to the other to the extent that interest rates exceed
a specified rate, or “cap”;
interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified level, or “floor,”
and interest rate
collars,
under which a party sells a cap and
purchases a floor or vice versa in an
attempt to protect itself against interest rate movements exceeding given minimum or maximum levels.
Mechanics
of Swaps
Payments
. Most swaps entered into by a Fund calculate and settle the obligations of the parties to the agreement on a “net basis” with a single payment. Consequently, a Fund’s current obligations (or rights)
under a swap will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the “net amount”). Other swaps may require initial
premium (discount) payments as well as periodic payments (receipts) related to the interest leg of the swap or to the default of the reference entity. A Fund’s current obligations under most swaps (
e.g.
,
total return swaps, equity/index swaps, interest rate swaps) will be accrued daily (offset against any amounts owed to a Fund by the counterparty to the swap) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by
segregating or earmarking cash or other assets determined to be liquid. However, typically no payments will be made until the settlement date. The net amount of the excess, if any, of a Fund’s obligations over its entitlements with respect to
a swap agreement entered into on a net basis will be accrued daily and an amount of cash or liquid asset having an aggregate NAV at least equal to the accrued excess will be maintained in an account with the Custodian that satisfies the 1940 Act. A
Fund also will establish and maintain such accounts with respect to its total obligations under any swaps that are not entered into on a net basis. Obligations under swap agreements so covered will not be construed to be “senior
securities” for purposes of a Fund’s investment restriction concerning senior securities.
Counterparty Credit Risk
. A Fund will not enter into any uncleared swap (
i.e.
,
not cleared by a central counterparty) unless Rafferty believes that the other party
to the transaction is creditworthy. The counterparty to an uncleared swap will typically be a major global financial institution. A Fund bears the risk of loss of the amount expected to be received under a swap in the event of the default or
bankruptcy of a swap counterparty. If such a default occurs, a Fund will have contractual remedies pursuant to the swaps, but such remedies may be subject to bankruptcy and insolvency laws that could affect the Fund’s rights as a creditor. The
counterparty risk for cleared swaps is generally lower than for uncleared over-the-counter
swaps because, in a cleared swap, a clearing
organization becomes substituted for each counterparty to a cleared swap. The clearing organization takes on the obligations of each side of the swap and a Fund would only to the clearing organization for performance of financial obligations.
However, there can be no assurance that the clearing organization, or its members, will satisfy its obligations to a Fund. Upon entering into a cleared swap, a Fund may be required to deposit with its futures commission merchant an amount of cash or
cash equivalents equal to a small percentage of the notional amount (this amount is subject to change by the clearing organization that clears the trade). This amount, known as “initial margin,” is in the nature of a performance bond or
good faith deposit on the cleared swap and is returned to a Fund upon termination of the swap, assuming all contractual obligations have been satisfied. Subsequent payments, known as “variation margin” to and from the broker will be made
daily as the price of the swap fluctuates, making the long and short position in the swap contract more or less valuable, a process known as “marking-to-market.” The premium (discount) payments are built into the daily price of the swap
and thus are amortized through the variation margin. The variation margin payment also includes the daily portion of the periodic payment stream.
Termination and Default Risk
. Swap agreements do not involve the delivery of securities or other underlying assets. Accordingly, if a swap is entered into on a net basis, if the other party to a swap agreement defaults, a Fund’s risk of loss
consists of the net amount of payments that the Fund is contractually entitled to receive, if any.
Regulatory
Margin
In recent years,
regulators across the globe, including the CFTC and the U.S. banking regulators, have adopted margin requirements applicable to uncleared swaps. While a Fund is not directly subject to these requirements, where a Fund’s counterparty is subject
to the requirements, uncleared swaps between a Fund and that counterparty are required to be marked-to-market on a daily basis, and collateral is required to be exchanged to account for any changes in the value of such swaps. The rules impose a
number of requirements as to these exchanges of margin, including as to the timing of transfers, the type of collateral (and valuations for such collateral) and other matters that may be different than what a Fund would agree with its counterparty
in the absence of such regulation. In all events, where a Fund is required to post collateral to its swap counterparty, such collateral will be posted to an independent bank custodian, where access to the collateral by the swap counterparty will
generally not be permitted unless a Fund is in default on its obligations to the swap counterparty.
In addition to the variation margin
requirements, regulators have adopted “initial” margin requirements applicable to uncleared swaps. Where applicable, these rules require parties to an uncleared swap to post, to a custodian that is independent from the parties to the
swap, collateral (in addition to any “variation margin” collateral noted above) in an amount that is either (i) specified in a schedule in the rules or (ii) calculated by the regulated party in accordance with a model that has been
approved by that party’s regulator(s). At this time, the initial margin rules do not apply to a Fund’s swap trading relationships. However, the rules are being implemented on a phased basis, and it is possible that in the future, the
rules could apply to the Funds. In the event that the rules apply, they would impose significant costs on a Fund’s ability to engage in uncleared swaps and, as such, could adversely affect Rafferty’s ability to manage a Fund, may impair
a Fund’s ability to achieve its investment objective and/or may result in reduced returns to a Fund’s investors.
Comprehensive swaps regulation.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and related regulatory developments have imposed comprehensive new regulatory requirements on swaps and swap market
participants. The regulatory framework includes: (1) registration and regulation of swap dealers and major swap participants; (2) requiring central clearing and execution of standardized swaps; (3) imposing margin requirements on swap transactions;
(4) regulating and monitoring swap transactions through position limits and large trader reporting requirements; and (5) imposing record keeping and centralized and public reporting requirements, on an anonymous basis, for most swaps. The CFTC is
responsible for the regulation of most swaps. The SEC has jurisdiction over a small segment of the market referred to as “security-based swaps,” which includes swaps on single securities or credits, or narrow-based indices of securities
or credits.
Uncleared
swaps.
In an uncleared swap, the swap counterparty is typically a brokerage firm, bank or
other financial institution.
A Fund
customarily enters into uncleared swaps based on the standard terms and conditions of an International Swaps and Derivatives Association
(“ISDA”)
Master
Agreement.
ISDA is a voluntary industry association of participants in the
OTC derivatives markets that has developed
standardized contracts used by such participants that have agreed to be bound by such standardized contracts. In the event that one party to a swap transaction defaults and the transaction is terminated prior to its scheduled termination date, one
of the parties may be required to make an early termination payment to the other. An early termination payment may be payable by either the defaulting or non-defaulting party, depending upon which of them is “in-the-money” with respect
to the swap at the time of its termination. Early termination payments may be calculated in various ways, but are intended to approximate the amount the “in-the-money” party would have to pay to replace the swap as of the date of its
termination. During the term of an uncleared swap, a Fund will be required to pledge to the swap counterparty,
from time to time, an amount of cash and/or other assets equal to the total net amount (if
any)
that would be payable by a Fund to the counterparty if all outstanding swaps between the parties were terminated on the date in question, including any early termination payments (variation margin).
Periodically,
changes in the amount pledged are made to recognize changes in value of the contract resulting from, among other things, interest on the notional value of the contract,
market value changes in the underlying investment, and/or dividends paid by the issuer of the underlying
instrument. Likewise, the counterparty will be
required to pledge cash or other assets to cover its obligations to a Fund. However, the amount pledged may not always be equal to or more than the amount due to the other party. Therefore, if a counterparty defaults in its obligations to a Fund,
the amount pledged by the counterparty and available to a Fund may not be sufficient to cover all the amounts due to a Fund and the Fund may sustain a loss. Currently, a Fund does not typically provide initial margin in connection with uncleared
swaps. However, rules requiring initial margin to be posted by certain market participants for uncleared swaps have been adopted and are being phased in over time. When these rules take effect with respect to the Funds, if a Fund is deemed to have
material swaps exposure under applicable swap regulations, it will be required to post initial margin in addition to variation margin.
Cleared swaps.
Certain standardized swaps are subject to mandatory central clearing and exchange-trading. The Dodd-Frank Act and implementing rules will ultimately require the clearing and exchange-trading of many swaps. Mandatory
exchange-trading and clearing will occur on a phased-in basis based on the type of market participant, CFTC approval of contracts for central clearing and public trading facilities making such cleared swaps available to trade. To date, the CFTC has
designated only certain of the most common types of credit default index swaps and interest rate swaps as subject to mandatory clearing and certain public trading facilities have made certain of those cleared swaps available to trade, but it is
expected that additional categories of swaps will in the future be designated as subject to mandatory clearing and trade execution requirements. Central clearing is intended to reduce counterparty credit risk and increase liquidity, but central
clearing does not eliminate these risks and may involve additional costs and risks not involved with uncleared swaps. For more information, see “Risks of cleared swaps” below.
In a cleared swap, a Fund’s
ultimate counterparty is a central clearinghouse rather than a brokerage firm, bank or other financial institution. Cleared swaps are submitted for clearing through each party’s FCM, which must be a member of the clearinghouse that serves as
the central counterparty. Transactions executed on a swap execution facility may increase market transparency and liquidity but may require a Fund to incur increased expenses to access the same types of swaps that it has used in the past. When a
Fund enters into a cleared swap, it must deliver to the central counterparty (via the FCM) an amount referred to as “initial margin.” Initial margin requirements are determined by the central counterparty, and are typically calculated as
an amount equal to the volatility in market value of the cleared swap over a fixed period, but an FCM may require additional initial margin above the amount required by the central counterparty. During the term of the swap agreement, a
“variation margin” amount may also be required to be paid by a Fund or may be received by a Fund in accordance with margin controls set for such accounts. If the value of the Fund’s cleared swap declines, the Fund will be required
to make additional “variation margin” payments to the FCM to settle the change in value. Conversely, if the market value of a Fund’s position increases, the FCM will post additional “variation margin” to the
Fund’s account. At the conclusion of the term of the swap agreement, if a Fund has a loss equal to or greater than the margin amount, the margin amount is paid to the FCM along with any loss in excess of the margin amount. If a Fund has a loss
of less than the margin amount, the excess margin is returned to a Fund. If a Fund has a gain, the full margin amount and the amount of the gain is paid to a Fund.
Risks of swaps generally.
The use of swap transactions is a highly specialized activity, which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. Whether a Fund will be
successful in using swap agreements to achieve its investment goal depends on the ability of the Adviser to correctly predict which types of investments are likely to produce greater returns. If the Adviser, in using swap agreements, is incorrect in
its forecasts of market values, interest rates, inflation, currency exchange rates or other applicable factors, the investment performance of a Fund will be less than its performance would have been if it had not used the swap agreements. The risk
of loss to a Fund for swap transactions that are entered into on a net basis depends on which party is obligated to pay the net amount to the other party. If the counterparty is obligated to pay the net amount to a Fund, the risk of loss to the Fund
is loss of the entire amount that the Fund is entitled to receive. If a Fund is obligated to pay the net amount, the Fund’s risk of loss is generally limited to that net amount. If the swap agreement involves the exchange of the entire
principal value of a security, the entire principal value of that security is subject to the risk that the other party to the swap will default on its contractual delivery obligations. In addition, a Fund’s risk of loss also includes any
margin at risk in the event of default by the counterparty (in an uncleared swap) or the central counterparty or FCM (in a cleared swap), plus any transaction costs.
Because bilateral swap agreements are
structured as two-party contracts and may have terms of greater than seven days, these swaps may be considered to be illiquid and, therefore, subject to a Fund’s limitation on investments in illiquid securities. If a swap transaction is
particularly large or if the relevant market is illiquid, a Fund may not be able to establish or liquidate a position at an advantageous time or price, which may result in significant losses. Participants in the swap markets are not required to make
continuous markets in the swap contracts they trade. Participants could refuse to quote prices for swap contracts or quote prices with an unusually wide spread between the price at which they are prepared to buy and the price at which they are
prepared to sell. Some swap agreements entail complex terms and may require a greater degree of subjectivity in their valuation. However, the swap markets have grown substantially in recent years, with a large number of financial institutions acting
both as principals and agents, utilizing standardized swap documentation. As a result, the swap markets have become increasingly liquid. In addition, central clearing and the trading of cleared swaps on public facilities are intended to increase
liquidity.
Rafferty, under
the supervision of the Board of Trustees, is responsible for determining and monitoring the liquidity of a Fund’s swap transactions. Rules adopted under the Dodd-Frank Act require centralized reporting of detailed information about many swaps,
whether cleared or uncleared. This information is available to regulators and also, to a more limited extent and on an anonymous basis, to the public. Reporting of swap data is intended to result in greater market transparency. This may be
beneficial to funds that use swaps in their trading strategies. However, public reporting imposes additional recordkeeping burdens on these funds, and the safeguards established to protect anonymity are not yet tested and may not provide protection
of a Fund’s identity as intended. Certain IRS positions may limit a Fund’s ability to use swap agreements in a desired tax strategy. It is possible that developments in the swap markets and/or the laws relating to swap agreements,
including potential government regulation, could adversely affect the Fund’s ability to benefit from using swap agreements, or could have adverse tax consequences. For more information about potentially changing regulation, see
“Developing government regulation of derivatives” below.
Risks of uncleared swaps.
Uncleared swaps are typically executed bilaterally with a swap dealer rather than traded on exchanges. As a result, swap participants may not be as protected as participants on organized exchanges. Performance of a swap
agreement is the responsibility only of the swap counterparty and not of any exchange or clearinghouse. As a result, a Fund is subject to the risk that a counterparty will be unable or will refuse to perform under such agreement, including because
of the counterparty’s bankruptcy or insolvency. A Fund risks the loss of the accrued but unpaid amounts under a swap agreement, which could be substantial, in the event of a default, insolvency or bankruptcy by a swap counterparty. In such an
event, a Fund will have contractual remedies pursuant to the swap agreements, but bankruptcy and insolvency laws could affect the Fund’s rights as a creditor. If the counterparty’s creditworthiness declines, the value of a swap agreement
would likely decline, potentially resulting in losses. The Adviser will only approve a swap agreement counterparty for a Fund if the Adviser deems the counterparty to be creditworthy. However, in unusual or extreme market conditions, a
counterparty’s creditworthiness and ability to perform may deteriorate rapidly, and the availability of suitable replacement counterparties may become limited.
Risks of cleared swaps.
As noted above, under recent financial reforms, certain types of swaps are, and others eventually are expected to be, required to be cleared through a central counterparty, which may affect counterparty risk and other
risks faced by a Fund.
Central clearing is designed to
reduce counterparty credit risk and increase liquidity compared to uncleared swaps because central clearing interposes the central clearinghouse as the counterparty to each participant’s swap, but it does not eliminate those risks completely
and may involve additional costs and risks not involved with uncleared swaps. There is also a risk of loss by a Fund of the initial and variation margin deposits in the event of bankruptcy of the FCM with which a Fund has an open position, or the
central counterparty in a swap contract. The assets of a Fund may not be fully protected in the event of the bankruptcy of the FCM or central counterparty because a Fund might be limited to recovering only a pro rata share of all available funds and
margin segregated on behalf of an FCM’s customers. If the FCM does not provide accurate reporting, a Fund is also subject to the risk that the FCM could use the Fund’s assets, which are held in an omnibus account with assets belonging to
the FCM’s other customers, to satisfy its own financial obligations or the payment obligations of another customer to the central counterparty. Credit risk of cleared swap participants is concentrated in a few clearinghouses, and the
consequences of insolvency of a clearinghouse are not clear.
With cleared swaps, a Fund may not be
able to obtain terms as favorable as it would be able to negotiate for a bilateral, uncleared swap. In addition, an FCM may unilaterally amend the terms of its agreement with the Fund, which may include the imposition of position limits or
additional margin requirements with respect to a Fund’s investment in certain types of swaps. Central counterparties and FCMs can require termination of existing cleared swap transactions upon the occurrence of certain events, and can also
require increases in margin above the margin that is required at the initiation of the swap agreement. Currently, depending on a number of factors, the margin required under the rules of the clearinghouse and FCM may be in excess of the collateral
required to be posted by a Fund to support its obligations under a similar uncleared swap. However, regulators have proposed and are expected to adopt rules imposing certain margin requirements on uncleared swaps in the near future, which are likely
to impose higher margin requirements on uncleared swaps.
Finally, a Fund is subject to the
risk that, after entering into a cleared swap with an executing broker, no FCM or central counterparty is willing or able to clear the transaction. In such an event, a Fund may be required to break the trade and make an early termination payment to
the executing broker.
Developing government regulation of
derivatives.
The regulation of cleared and uncleared swaps, as well as other derivatives, is a rapidly changing area of law and is subject to modification by government and judicial action. In addition, the SEC, CFTC
and the exchanges are authorized to take extraordinary actions in the event of a market emergency, including, for example, the implementation or reduction of speculative position limits, the implementation of higher margin requirements, the
establishment of daily price limits and the suspension of trading. It is not possible to predict fully the effects of current or future regulation. However, it is possible that developments in government regulation of various types of derivative
instruments, such as speculative position limits on certain types of derivatives, or limits or restrictions on the counterparties with which a Fund engages in derivative transactions, may limit or prevent the Fund from using or limit the
Fund’s use of these instruments effectively as a part of its investment strategy, and could adversely affect the Fund’s ability to achieve its investment goal(s). The Adviser will continue to monitor developments in the area,
particularly to the extent regulatory
changes affect a Fund’s ability to enter into
desired swap agreements. New requirements, even if not directly applicable to a Fund, may increase the cost of a Fund’s investments and cost of doing business.
A Fund may also invest in unrated
debt securities. Unrated debt, while not necessarily lower in quality than rated securities, may not have as broad a market. Because of the size and perceived demand for the issue, among other factors, certain issuers may decide not to pay the cost
of getting a rating for their bonds. The creditworthiness of the issuer, as well as any financial institution or other party responsible for payments on the security, will be analyzed to determine whether to purchase unrated bonds.
U.S. Government Securities
A Fund may invest in securities
issued or guaranteed by the U.S. government or its agencies or instrumentalities (“U.S. government securities”) in pursuit of its investment objective, in order to deposit such securities as initial or variation margin, as
“cover” for the investment techniques it employs, as part of a cash reserve or for liquidity purposes.
U.S. government securities are
high-quality instruments issued or guaranteed as to principal or interest by the U.S. Treasury Department (“U.S. Treasury”) or by an agency or instrumentality of the U.S. government. Not all U.S. government securities are backed by the
full faith and credit of the United States. Some are backed by the right of the issuer to borrow from the U.S. Treasury; others are backed by discretionary authority of the U.S. government to purchase the agencies’ obligations; while others
are supported only by the credit of the instrumentality. In the case of securities not backed by the full faith and credit of the United States, the investor must look principally to the agency issuing or guaranteeing the obligation for ultimate
repayment.
Yields on short-,
intermediate- and long-term U.S. government securities are dependent on a variety of factors, including the general conditions of the money and bond markets, the size of a particular offering and the maturity of the obligation. Debt securities with
longer maturities tend to produce higher capital appreciation and depreciation than obligations with shorter maturities and lower yields. The market value of U.S. government securities generally varies inversely with changes in the market interest
rates. An increase in interest rates, therefore, generally would reduce the market value of a Fund’s portfolio investments in U.S. government securities, while a decline in interest rates generally would increase the market value of a
Fund’s portfolio investments in these securities. U.S. government securities include U.S. Treasury obligations, which includes U.S. Treasury Bills (which mature within one year of the date they are issued), U.S. Treasury Notes (which have
maturities of one to ten years) and U.S. Treasury Bonds (which generally have maturities of more than 10 years). All such U.S. Treasury obligations are backed by the full faith and credit of the United States.
U.S. government securities also
include obligations issued by U.S. government agencies and instrumentalities (“GSEs”) that are backed by the full faith and credit of the U.S. government (such as securities issued or guaranteed by the Federal Housing Administration,
Ginnie Mae
®
, the Export-Import Bank of the United States, the General Services Administration and the Maritime Administration and certain securities
issued by the Small Business Administration).
Also, U.S.
government securities include securities that are guaranteed by U.S. government-sponsored entities that are not backed by the full faith and credit of the U.S. government (such as Fannie Mae
®
, Freddie Mac
®
, or the Federal Home Loan Banks).
These U.S. government-sponsored entities, although chartered and sponsored by the U.S. Congress, are not guaranteed, nor insured, by the U.S. government. They are supported only by the credit of the issuing agency, instrumentality or
corporation.
Since 2008, Fannie
Mae
®
and Freddie Mac
®
have been in
conservatorship and have received significant capital support through U.S. Treasury preferred stock purchases, as well as U.S. Treasury and Federal Reserve purchases of their mortgage backed securities (“MBS”). The FHFA and the U.S.
Treasury (through its agreement to purchase Fannie Mae
®
and Freddie Mac
®
preferred stock) have imposed strict limits on the size of their mortgage portfolios. The MBS purchase programs technically ended in 2010 but the U.S.
Treasury has continued its support for the entities’ capital as necessary to prevent a negative net worth through at least 2012 and other governmental entities have provided significant support to Fannie Mae
®
and Freddie Mac
®
. There is no guarantee, however,
that they will continue to do so. An FHFA stress test suggested that in a “severely adverse scenario” additional Treasury support of between $42.1 billion and $77.6 billion (depending on the treatment of deferred tax assets) might be
required. Since then Congress has permanently reduced the corporate income tax rate from 35% to 21% starting January 1, 2018. This reduction could cause a substantial net loss and net worth deficit for the year in which the legislation is enacted.
Should they experience such a net worth deficit, they could be required to draw additional funds from the U.S. Treasury to avoid being placed in receivership. Accordingly, no assurance can be given that Fannie Mae
®
and Freddie Mac
®
will remain successful in
meeting their obligations with respect to the debt and MBSs that they issue.
In addition, the problems faced by
Fannie Mae
®
and Freddie Mac
®
, resulting in
their being placed into federal conservatorship and receiving significant U.S. government support, have sparked serious debate among federal policy makers regarding the continued role of the U.S. government in providing liquidity for mortgage loans.
In December 2011, Congress enacted the Temporary Payroll Tax Cut Continuation Act (“TCCA”) of 2011 which, among other provisions, requires that Fannie
Mae
®
and Freddie Mac
®
increase their single-family
guaranty fees by at least 10 basis points and remit this increase to Treasury with respect to all loans acquired by Fannie Mae
®
or Freddie Mac
®
on or after April 1, 2012 and before January 1, 2022. Nevertheless, discussions among policymakers have continued as to whether Fannie Mae
®
and Freddie Mac
®
should be nationalized,
privatized, restructured, or eliminated altogether. Fannie Mae reported in the third quarter of 2018 that there was “significant uncertainty regarding the future of our company.” Freddie Mac faces similar uncertainty about its future
role. Fannie Mae
®
and Freddie Mac
®
also are the
subject of several continuing legal actions and investigations related to certain accounting, disclosure, or corporate governance matters, which (along with any resulting financial restatements) may continue to have an adverse effect on the
guaranteeing entities. Congress is currently considering several pieces of legislation that would reform GSEs, proposing to address their structure, mission, portfolio limits, and guarantee fees, among other issues.
U.S. Government Sponsored Enterprises
(“GSEs”)
GSE securities are securities
issued by the U.S. government or its agencies or instrumentalities. Some obligations issued by GSEs are supported by the discretionary authority of the U.S. government to purchase certain obligations of the agency or instrumentality and others only
by the credit of the agency or instrumentality. Those securities bear fixed, floating or variable rates of interest. Interest may fluctuate based on generally recognized reference rates or the relationship of rates. While the U.S. government
currently provides financial support to such GSEs or instrumentalities, no assurance can be given that it will always do so, since it is not so obligated by law.
Certain U.S. government debt
securities, such as securities of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury. Others, such as securities issued by Fannie Mae
®
and Freddie Mac
®
, are supported only by the
credit of the corporation. In the case of securities not backed by the full faith and credit of the United States, a fund must look principally to the agency issuing or guaranteeing the obligation in the event the agency or instrumentality does not
meet its commitments. The U.S. government may choose not to provide financial support to GSEs or instrumentalities if it is not legally obligated to do so. A fund will invest in securities of such instrumentalities only when Rafferty is satisfied
that the credit risk with respect to any such instrumentality is comparatively minimal.
A Fund may enter into firm
commitment agreements for the purchase of securities on a specified future date. A Fund may purchase, for example, new issues of fixed-income instruments on a when-issued basis, whereby the payment obligation, or yield to maturity, or coupon rate on
the instruments may not be fixed at the time of transaction. A Fund will not purchase securities on a when-issued basis if, as a result, more than 15% of its net assets would be so invested. If a Fund enters into a firm commitment agreement,
liability for the purchase price and the rights and risks of ownership of the security accrue to a Fund at the time it becomes obligated to purchase such security, although delivery and payment occur at a later date. Accordingly, if the market price
of the security should decline, the effect of such an agreement would be to obligate a Fund to purchase the security at a price above the current market price on the date of delivery and payment. During the time a Fund is obligated to purchase such
a security, it will be required to segregate assets with an approved custodian in an amount sufficient to settle the transaction.
Zero-Coupon, Payment-In-Kind and Strip
Securities
A Fund
may invest in zero-coupon, payment-in-kind and strip securities of any rating or maturity. Zero-coupon securities make no periodic interest payment but are sold at a deep discount from their face value, otherwise known as “original issue
discount” or “OID.” The buyer earns a rate of return determined by the gradual appreciation of the security, which is redeemed at face value on a specified maturity date. The OID varies depending on the time remaining until
maturity, as well as market interest rates, liquidity of the security, and the issuer’s perceived credit quality. If the issuer defaults, a Fund may not receive any return on its investment. Because zero-coupon securities bear no interest and
compound semi-annually at the rate fixed at the time of issuance, their value generally is more volatile than the value of other fixed-income securities. Since zero-coupon security holders do not receive interest payments, when interest rates rise,
zero-coupon securities fall more dramatically in value than securities paying interest on a current basis. When interest rates fall, zero-coupon securities rise more rapidly in value because the securities reflect a fixed rate of return.
Payment-in-kind securities allow the issuer, at its option, to make current interest payments either in cash or in additional debt obligations of the issuer. Both zero-coupon securities and payment-in-kind securities allow an issuer to avoid the
need to generate cash to meet current interest payments.
An investment in zero-coupon
securities and delayed interest securities (which do not make interest payments until after a specified time) may cause a Fund to recognize income and be required to make distributions thereof to shareholders before it receives any cash payments on
its investment. Moreover, even though payment-in-kind securities do not pay current interest in cash, a Fund nonetheless is required to accrue interest income on these investments and to distribute the interest
income at least annually to shareholders. See
“Dividends, Other Distributions and Taxes
–
Income from Zero Coupon and Payment-in-Kind Securities.” Thus, a Fund could be required at times to liquidate
other investments to satisfy distribution requirements.
A Fund may also invest in strips,
which are debt securities whose interest coupons are taken out and traded separately after the securities are issued but otherwise are comparable to zero-coupon securities. Like zero-coupon securities and payment-in-kind securities, strips are
generally more sensitive to interest rate fluctuations than interest paying securities of comparable term and quality.
Other Investment Risks and Practices
Borrowing
. A Fund may borrow money for investment purposes, which is a form of leveraging. Leveraging investments, by purchasing securities with borrowed money, is a
speculative technique that increases investment risk while increasing investment opportunity. Leverage will magnify changes in a Fund’s NAV and on a Fund’s investments. Although the principal of such borrowings will be fixed, a
Fund’s assets may change in value during the time the borrowing is outstanding. Leverage also creates interest expenses for a Fund. To the extent the income derived from securities purchased with borrowed funds exceeds the interest a Fund will
have to pay, that Fund’s net income will be greater than it would be if leverage were not used. Conversely, if the income from the assets obtained with borrowed funds is not sufficient to cover the cost of leveraging, the net income of a Fund
will be less than it would be if leverage were not used, and therefore the amount available for shareholders will be reduced.
A Fund may borrow money to facilitate
management of a Fund’s portfolio by enabling a Fund to meet redemption requests when the liquidation of portfolio instruments would be inconvenient or disadvantageous. Such borrowing is not for investment purposes and will be repaid by the
borrowing Fund promptly.
As
required by the 1940 Act, a Fund must maintain continuous asset coverage (total assets, including assets acquired with borrowed funds, less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If at any time the value of the
required asset coverage declines as a result of market fluctuations or other reasons, a Fund may be required to sell some of its portfolio investments within three days to reduce the amount of its borrowings and restore the 300% asset coverage, even
though it may be disadvantageous from an investment standpoint to sell portfolio instruments at that time.
Under current pronouncements, certain
obligations under futures contracts, forward contracts and swap agreements to the extent that a “covers” its obligations as discussed in the “Futures Contracts, Options, and Other Derivatives Strategies” section will not be
considered a “senior security” and, therefore, will not be subject to the 300% asset coverage requirements otherwise applicable to borrowings.
Portfolio Turnover
. The Trust anticipates that each Fund’s annual portfolio turnover will vary. A Fund’s portfolio turnover rate is calculated by the value of
the securities purchased or securities sold, excluding all securities whose terms-to-maturity at the time of acquisition were less than 397 days, divided by the average monthly value of such securities owned during the year. Based on this
calculation, instruments with remaining terms-to-maturity of less than 397 days are excluded from the portfolio turnover rate. Such instruments generally would include futures contracts and options, since such contracts generally have remaining
terms-to-maturity of less than 397 days. In any given period, all of a Fund’s investments may have remaining terms-to-maturity of less than 397 days; in that case, the portfolio turnover rate for that period would be equal to zero. However,
each Fund’s portfolio turnover rate calculated with all securities whose terms-to-maturity were less than 397 days is anticipated to be unusually high.
High portfolio turnover involves
correspondingly greater expenses to a Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities. Such sales also may result in adverse tax consequences to a
Fund’s shareholders resulting from its distributions of increased net capital gains, if any, recognized as a result of the sales. The trading costs and tax effects associated with portfolio turnover may adversely affect a Fund’s
performance.
For the fiscal
year ended October 31, 2018, the Direxion Daily CSI China Internet Index Bull 2X Shares' portfolio turnover increased significantly from the portfolio turnover for the fiscal year ended October 31, 2017 as the result of increased volatility in
assets.
For the fiscal year
ended October 31, 2018, the Direxion Daily S&P 500
®
Bull 2X Shares, Direxion Daily CSI 300 China A Share Bull 2X Shares, and the Direxion Daily
MSCI European Financials Bull 2X Shares' portfolio turnover decreased significantly due to a decrease in the volatility of the underlying securities held during the fiscal year.
Correlation and Tracking Risk
Several factors may affect a
Fund's ability to obtain its daily leveraged investment objective. Among these factors are: (1) Fund expenses, including brokerage expenses and commissions and financing costs related to derivatives (which may be increased by high portfolio
turnover); (2) less than all of the securities in the underlying index being held by a Fund and securities not included in the underlying index being held by a Fund; (3) an imperfect correlation between the performance
of instruments held by a Fund, such as other
investment companies, including ETFs, futures contracts and options, and the performance of the underlying securities in the cash market comprising an index; (4) bid-ask spreads; (5) a Fund holding instruments that are illiquid or the market for
which becomes disrupted; (6) the need to conform a Fund’s portfolio holdings to comply with the Fund’s investment restrictions or policies, or regulatory or tax law requirements; (7) market movements that run counter to a Fund’s
investments (which will cause divergence between a Fund and its underlying index over time due to the mathematical effects of leveraging); and (8) disruptions and illiquidity in the markets for securities or derivatives held by a Fund.
While index futures and options
contracts closely correlate with the applicable indices over long periods, shorter-term deviation, such as on a daily basis, does occur with these instruments. As a result, a Fund’s short-term performance will reflect such deviation from its
underlying index. A Fund may use a combination of swaps on its underlying index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The
reference ETF may not closely track the performance of its underlying index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that a Fund invests in swaps that use an ETF as a reference asset, a Fund may be subject
to greater correlation risk and may not achieve as high a degree of leveraged or inverse leveraged correlation with its underlying index as it would if a Fund used swaps that utilized an underlying index as the reference asset. Any financing,
borrowing or other costs associated with using derivatives may also reduce a Fund’s return.
Even if there is a perfect
correlation between a Fund and the leveraged return of its underlying index on a daily basis, the symmetry between the changes in the underlying index and the changes in a Fund’s NAV can be altered significantly over time by a compounding
effect. For example, if a Bull Fund achieved a perfect leveraged correlation with its underlying index on every trading day over an extended period and the level of returns of the underlying index significantly increased during that period, a
compounding effect for that period would result, causing an increase in a Bull Fund’s NAV by a percentage that is somewhat greater than the percentage that the underlying index’s returns decreased. Conversely, if a Bear Fund maintained a
perfect inverse leveraged correlation with its underlying index over an extended period and if the level of returns of the underlying index significantly increased over that period, a compounding effect would result, causing a decrease of a Bear
Fund’s NAV by a percentage that would be somewhat less than the percentage that the underlying index returns increased.
Each Fund intends
regularly to use leveraged investment techniques in pursuing its investment objectives. Utilization of leverage involves special risks and should be considered to be speculative. Leverage exists when a Fund achieves the right to a return on a
capital base that exceeds the amount of the Fund’s net assets. Leverage creates the potential for greater gains to shareholders of a Fund during favorable market conditions and the risk of magnified losses during adverse market conditions.
Leverage is likely to cause higher volatility of the NAV of each Fund’s Shares. Leverage may involve the creation of a liability that does not entail any interest costs or the creation of a liability that requires a Fund to pay interest which
would decrease the Fund’s total return to shareholders. If each Fund achieves its investment objective, during adverse market conditions, shareholders should experience a loss greater than they would have incurred had a Fund not been
leveraged.
Special Note
Regarding the Correlation Risks of the Funds
. As discussed in the Prospectus, each Fund is “leveraged” in the sense that it has an investment objective to match 200% or -200% of the performance of its
underlying index on a given day. Each Fund is subject to all of the correlation risks described in the Prospectus. In addition, there is a special form of correlation risk that derives from each Fund’s use of leverage, which is that for
periods greater than one day, the use of leverage tends to cause the performance of a Fund to be either greater than, or less than, 200% or -200% of its underlying index.
A Fund’s return for periods longer
than one day is primarily a function of the following:
a) underlying index performance;
b) underlying index volatility;
c) financing rates associated with
leverage;
d) other fund
expenses;
e) dividends paid by
companies in the underlying index; and
f) period of time.
The fund performance for a Fund can
be estimated given any set of assumptions for the factors described above. Illustrated below is the impact of two factors, underlying index volatility and underlying index performance, on a Fund. Underlying index volatility is a statistical measure
of the magnitude of fluctuations in the returns of an index and is calculated as the standard deviation of the natural logarithms of one plus the index return (calculated daily), multiplied by the square root of the number of trading days per year
(assumed to be 252). The illustration estimates Fund returns for a number of combinations of underlying index performance and underlying index volatility over a one year period and assumes: a) no dividends paid
by the companies included in the underlying index; b)
no fund expenses; and c) borrowing/lending rates (to obtain leverage) of zero percent. If fund expenses were included, a Fund’s performance would be lower than shown.
As shown below, a Bull Fund would be
expected to lose 6.1% and a Bear Fund would be expected to lose 17.1% if the underlying index provided no return over a one year period during which the underlying index experienced annualized volatility of 25%. If the underlying index’s
annualized volatility were to rise to 75%, the hypothetical loss for a one year period widens to approximately 43% for a Bull Fund and 81.5% for a Bear Fund. At higher ranges of volatility, there is a chance of a significant loss of value even if
the underlying index is flat. For instance, if the underlying index’s annualized volatility is 100%, it is likely that a Bull Fund would lose 63.2% of its value, and a Bear Fund would lose approximately 95% of its value, even if the underlying
index’s cumulative return for the year was only 0%. The volatility of ETFs or instruments that reflect the value of the underlying index such as swaps, may differ from the volatility of a Fund's underlying index.
In the tables
below, areas shaded green represent those scenarios where a Fund with the investment objective described will outperform (
i.e.
, return more than) the underlying index’s performance times the stated
multiple in the Fund’s investment objective; conversely areas shaded red represent those scenarios where the Fund will underperform (
i.e.
, return less than) the underlying index’s performance times
the stated multiple in the Fund’s investment objective.
The tables below are intended to
underscore the fact that the Funds are designed as short-term trading vehicles for investors who intend to actively monitor and manage their portfolios. They are not intended to be used by, and are not appropriate for, investors who do not intend to
actively monitor and manage their portfolios. For additional information regarding correlation and volatility risk for the Funds, see “Effects of Compounding and Market Volatility Risk” in the Prospectus.
Bull Fund
One
Year
Index
|
200%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-120%
|
-84.2%
|
-85.0%
|
-87.5%
|
-90.9%
|
-94.1%
|
-50%
|
-100%
|
-75.2%
|
-76.5%
|
-80.5%
|
-85.8%
|
-90.8%
|
-40%
|
-80%
|
-64.4%
|
-66.2%
|
-72.0%
|
-79.5%
|
-86.8%
|
-30%
|
-60%
|
-51.5%
|
-54.0%
|
-61.8%
|
-72.1%
|
-82.0%
|
-20%
|
-40%
|
-36.6%
|
-39.9%
|
-50.2%
|
-63.5%
|
-76.5%
|
-10%
|
-20%
|
-19.8%
|
-23.9%
|
-36.9%
|
-53.8%
|
-70.2%
|
0%
|
0%
|
-1.0%
|
-6.1%
|
-22.1%
|
-43.0%
|
-63.2%
|
10%
|
20%
|
19.8%
|
13.7%
|
-5.8%
|
-31.1%
|
-55.5%
|
20%
|
40%
|
42.6%
|
35.3%
|
12.1%
|
-18.0%
|
-47.0%
|
30%
|
60%
|
67.3%
|
58.8%
|
31.6%
|
-3.7%
|
-37.8%
|
40%
|
80%
|
94.0%
|
84.1%
|
52.6%
|
11.7%
|
-27.9%
|
50%
|
100%
|
122.8%
|
111.4%
|
75.2%
|
28.2%
|
-17.2%
|
60%
|
120%
|
153.5%
|
140.5%
|
99.4%
|
45.9%
|
-5.8%
|
Bear Fund
One
Year
Index
|
-200%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
120%
|
506.5%
|
418.1%
|
195.2%
|
15.6%
|
-68.9%
|
-50%
|
100%
|
288.2%
|
231.6%
|
88.9%
|
-26.0%
|
-80.1%
|
-40%
|
80%
|
169.6%
|
130.3%
|
31.2%
|
-48.6%
|
-86.2%
|
-30%
|
60%
|
98.1%
|
69.2%
|
-3.6%
|
-62.2%
|
-89.8%
|
-20%
|
40%
|
51.6%
|
29.5%
|
-26.2%
|
-71.1%
|
-92.2%
|
-10%
|
20%
|
19.8%
|
2.3%
|
-41.7%
|
-77.2%
|
-93.9%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
-20%
|
-19.8%
|
-31.5%
|
-61.0%
|
-84.7%
|
-95.9%
|
20%
|
-40%
|
-32.6%
|
-42.4%
|
-67.2%
|
-87.2%
|
-96.5%
|
30%
|
-60%
|
-42.6%
|
-50.9%
|
-72.0%
|
-89.1%
|
-97.1%
|
40%
|
-80%
|
-50.5%
|
-57.7%
|
-75.9%
|
-90.6%
|
-97.5%
|
50%
|
-100%
|
-56.9%
|
-63.2%
|
-79.0%
|
-91.8%
|
-97.8%
|
60%
|
-120%
|
-62.1%
|
-67.6%
|
-81.5%
|
-92.8%
|
-98.1%
|
The
foregoing tables are intended to isolate the effect of underlying index volatility and underlying index performance on the return of a Fund. A Fund’s actual returns may be significantly greater or less than the returns shown above as a result
of any of factors discussed above or under “Effects of Compounding and Market Volatility Risk” in the Prospectus.
Since the use of technology has
become more prevalent in the course of business, the Funds may be more susceptible to operational risks through breaches in cybersecurity. A cybersecurity incident may refer to either intentional or unintentional events that allow an unauthorized
party to gain access to fund assets, customer data, or proprietary information, or cause a Fund or a Fund service provider to suffer data corruption or lose operational functionality. A cybersecurity incident could, among other things, result in the
loss or theft of customer data or funds, customers or employees being unable to access electronic systems (“denial of services”), loss or theft of proprietary information or corporate data, physical damage to a computer or network
system, or remediation costs associated with system repairs. Any of these results could have a substantial impact on the Funds. For example, if a cybersecurity incident results in a denial of service, Fund shareholders could lose access to their
electronic accounts for an unknown period of time, and employees could be unable to access electronic systems to perform critical duties for the Funds, such as trading, NAV calculation, shareholder accounting or fulfillment of Fund share purchases
and redemptions. Cybersecurity incidents could cause a Fund or the Funds' Adviser or distributor to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures, or financial loss of a significant
magnitude. They may also cause a Fund to violate applicable privacy and other laws. The Funds' service providers have established risk management systems that seek to reduce the risks associated with cybersecurity, and business continuity plans in
the event there is a cybersecurity breach. However, there is no guarantee that such efforts will succeed, especially since a Fund does not directly control the cybersecurity systems of the issuers of securities in which each Fund invests or the
Funds' third party service providers (including the Funds' transfer agent and custodian).
The Trust, on behalf of each
Fund, has adopted the following investment policies which are fundamental policies that may not be changed without the affirmative vote of a majority of the outstanding voting securities of the Fund. As defined by the 1940 Act, a “vote of a
majority of the outstanding voting securities of the Fund” means the affirmative vote of the lesser of (1) more than 50% of the outstanding shares of the Fund or (2) 67% or more of the shares present at a shareholders’ meeting, if more
than 50% of the outstanding shares are represented at the meeting in person or by proxy.
For purposes of the following
limitations, all percentage limitations apply immediately after a purchase or initial investment. Except with respect to borrowing money, if a percentage limitation is adhered to at the time of the investment, a later increase or decrease in the
percentage resulting from any change in value or net assets will not result in a violation of such restrictions. If at any time a Fund’s borrowings exceed its limitations due to a decline in net assets, such borrowings will be reduced within
three days (not including Sundays and holidays), or such longer period as may be permitted by the 1940 Act, to the extent necessary to comply with the one-third limitation.
Each Fund may not:
1.
|
Borrow money, except to
the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
2.
|
Issue senior securities,
except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
3.
|
Make loans, except to the
extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
4.
|
Purchase or sell real
estate, except that, to the extent permitted by applicable law, each Fund may (a) invest in securities or other instruments directly secured by real estate, and (b) invest in securities or other instruments issued by issuers that invest in real
estate.
|
5.
|
Purchase or sell
commodities or commodity contracts unless acquired as a result of ownership of securities or other instruments issued by persons that purchase or sell commodities or commodities contracts; but this shall not prevent a Fund from purchasing, selling
and entering into financial futures contracts (including futures contracts on indices of securities, interest rates and currencies), and options on financial futures contracts (including futures contracts on indices of securities, interest rates and
currencies), warrants, swaps, forward contracts, foreign currency spot and forward contracts and other financial instruments.
|
6.
|
Underwrite
securities issued by others, except to the extent that a Fund may be considered an underwriter within the meaning of the 1933 Act in the disposition of restricted securities or other investment company securities.
|
The Direxion Daily S&P 500
®
Bull 2X Shares, Direxion Daily Small Cap Bull 2X Shares and the Direxion Daily CSI 300 China A Share Bull 2X Shares may not:
1.
|
Purchase the
securities of any issuer (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities) if, as a result, 25% or more of a Fund’s total assets would be invested in the
|
|
securities of
companies whose principal business activities are in the same industry, however, a Fund, which tracks an underlying index, will concentrate its investment in a particular industry or group of industries to approximately the same extent that its
underlying index is so concentrated.
|
The Direxion Daily
MSCI China A Bull 2X Shares, Direxion Daily High Yield Bear 2X Shares, Direxion Daily MSCI European Financials Bull 2X Shares, Direxion Daily MSCI European Financials Bear 2X Shares, Direxion Daily CSI China Internet Index Bull 2X Shares, Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares, and the Direxion Daily Preferred Stock Bull 2X Shares may not:
1.
|
Except for any Fund
that is “concentrated” in an industry or group of industries within the meaning of the 1940 Act, purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, 25% or more of the Fund’s total assets would be invested in the securities of companies whose principal business activities are in the same industry. However, each Fund that tracks an underlying index will
only concentrate its investment in a particular industry or group of industries to approximately the same extent as its underlying index is so concentrated.
|
Portfolio Transactions and Brokerage
Subject to the general
supervision by the Trustees, Rafferty is responsible for decisions to buy and sell securities for each Fund, the selection of broker-dealers to effect the transactions, and the negotiation of brokerage commissions, if any. Rafferty expects that a
Fund may execute brokerage or other agency transactions through registered broker-dealers, for a commission, in conformity with the 1940 Act, the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.
When selecting a broker or dealer to
execute portfolio transactions, Rafferty considers many factors, including the rate of commission or the size of the broker-dealer’s “spread,” the size and difficulty of the order, the nature of the market for the security,
operational capabilities of the broker-dealer and the research, statistical and economic data furnished by the broker-dealer to Rafferty.
In effecting portfolio transactions
for a Fund, Rafferty seeks to receive the closing prices of securities that are in line with those of the securities included in a Fund's underlying index and seeks to execute trades of such securities at the lowest commission rate reasonably
available. With respect to agency transactions, Rafferty may execute trades at a higher rate of commission if reasonable in relation to brokerage and research services provided to a Fund or Rafferty. Such services may include the following:
information as to the availability of securities for purchase or sale; statistical or factual information or opinions pertaining to investment; wire services; and appraisals or evaluations of portfolio securities. Each Fund believes that the
requirement to always seek the lowest possible commission cost could impede effective portfolio management and preclude a Fund and Rafferty from obtaining a high quality of brokerage and research services. In seeking to determine the reasonableness
of brokerage commissions paid in any transaction, Rafferty relies upon its experience and knowledge regarding commissions generally charged by various brokers and on its judgment in evaluating the brokerage and research services received from the
broker effecting the transaction.
Rafferty may use research and
services provided to it by brokers in servicing a Fund; however, not all such services may be used by Rafferty in connection with a Fund. While the receipt of such information and services is useful in varying degrees and may reduce the amount of
research or services otherwise provided to a Fund by Rafferty, the receipt of such information and these services does not reduce the investment advisory fee paid by a Fund.
Purchases and sales of U.S.
government securities normally are transacted through issuers, underwriters or major dealers in U.S. government securities acting as principals. Such transactions are made on a net basis and do not involve payment of brokerage commissions. The cost
of securities purchased from an underwriter usually includes a commission paid by the issuer to the underwriters; transactions with dealers normally reflect the spread between bid and asked prices.
Aggregate brokerage commissions paid by
the following operational Funds for the fiscal periods shown are set forth in the tables below:
Direxion
Daily S&P 500
®
Bull 2X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$273
|
Year
Ended October 31, 2017
|
$1,492
|
Year
Ended October 31, 2016
|
$4,312
|
Direxion
Daily Small Cap Bull 2X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$122
|
Year
Ended October 31, 2017
|
$3,432
|
Year
Ended October 31, 2016
|
$3,094
|
Direxion
Daily CSI 300 China A Share Bull 2X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$104,853
|
Year
Ended October 31, 2017
|
$72,582
|
Year
Ended October 31, 2016
|
$124,677
|
Direxion
Daily MSCI European Financials Bull 2X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$8,277
|
Year
Ended October 31, 2017
|
$13,960
|
July
27, 2016* - October 31, 2016
|
$2,630
|
*
|
Commencement of Operations
|
|
|
Direxion
Daily CSI China Internet Index Bull 2X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$194,225
|
November
2, 2016* - October 31, 2017
|
$43,764
|
*
|
Commencement of Operations
|
Direxion
Daily High Yield Bear 2X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$2,062
|
Year
Ended October 31, 2017
|
$5,218
|
June
16, 2016* - October 31, 2016
|
$1,912
|
*
|
Commencement of Operations
|
For the fiscal
year ended October 31, 2018, the brokerage commissions for the Direxion Daily CSI China Internet Index Bull 2X Shares increased significantly from the brokerage commission from the fiscal year ended October 31, 2017 as a result of higher average net
assets and increased volatility in net assets.
For the fiscal year ended October
31, 2018, the brokerage commissions for the Direxion Daily High Yield Bear 2X Shares decreased significantly from the brokerage commissions from the fiscal year ended October 31, 2017 as a result of lower average net assets and less volatility in
assets.
Portfolio Holdings Information
A Fund’s
portfolio holdings are, or will be upon commencement of operations, disclosed on the Funds' website at www.direxioninvestments.com each day the Funds are open for business. In addition, disclosure of a Fund’s complete holdings is required to
be made quarterly within 60 days of the end of each fiscal quarter in the Annual Report and Semi-Annual Report to Fund shareholders and in the quarterly holdings report on Form N-Q. These reports are available, free of charge, on the EDGAR database
on the SEC’s website at www.sec.gov.
The portfolio composition file
(“PCF”), which contains portfolio holdings information and the IOPV, which contains certain pricing information related to a Fund’s portfolio holdings, are also made available daily, including to the Funds' service providers to
facilitate the provision of services to the Funds and to certain other entities as necessary for transactions in Creation Units. Such entities include: (i) National Securities Clearing Corporation (“NSCC”) members; (ii) subscribers to
various fee-based services, including entities that publish and/or analyze such information in connection with the process of purchasing or redeeming Creation Units or trading shares of Funds in the secondary market; (iii) investors that have
entered into an “Authorized Participant Agreement” with the Distributor and the transfer agent or purchase Creation Units through a dealer that has entered into such an agreement (“Authorized Participants”); and (iv) certain
personnel of service providers that are involved in portfolio management and providing administrative, operational, or other support to portfolio management including personnel of the Adviser and the Funds' distributor, administrator, custodian and
fund accountant who are involved in functions which may require such information to conduct business in the ordinary course.
In addition, the Funds' Chief
Compliance Officer (“CCO”) may grant exceptions to permit additional disclosure of the complete portfolio holdings information at differing times and with differing lag times to rating agencies and to the parties noted above, provided
that (1) a Fund has a legitimate business purpose for doing so; (2) it is in the best interests of shareholders; (3) the recipient is subject to a confidentiality agreement; and (4) the recipient is subject to a duty not to trade on the nonpublic
information. In this regard, from time to time, rating and ranking organizations such as Standard & Poor’s
®
and Morningstar
®
, Inc. may request such information. The CCO shall report any disclosures made pursuant to this exception to the Board.
The Board of Trustees
The Trust is governed by its Board
of Trustees (the “Board”). The Board is responsible for and oversees the overall management and operations of the Trust and the Funds, which includes the general oversight and review of the Funds' investment activities, in accordance
with federal law and the law of the State of Delaware, as well as the stated policies of the Funds. The Board oversees the Trust’s officers and service providers, including Rafferty, which is responsible for the management of the day-to-day
operations of the Funds based on policies and agreements reviewed and approved by the Board. In carrying out these responsibilities, the Board regularly interacts with and receives reports from senior personnel of service providers, including
personnel from Rafferty and U.S. Bancorp Fund Services, LLC (“USBFS”). The Board also is assisted by the Trust’s independent auditor (who reports directly to the Trust’s Audit Committee), independent counsel and other
professionals as appropriate.
Risk
Oversight
Consistent with
its responsibility for oversight of the Trust and the Funds, the Board oversees the management of risks relating to the administration and operation of the Trust and the Funds. Rafferty, as part of its responsibilities for the day-to-day operations
of the Funds, is responsible for day-to-day risk management for the Funds. The Board, in the exercise of its reasonable business judgment performs its risk management oversight directly and, as to certain matters, through its committees (described
below) and through the Board members who are not “interested persons” of the Funds as defined in Section 2(a)(19) of the 1940 Act (“Independent Trustees.”) The following provides an overview of the principal, but not all,
aspects of the Board’s oversight of risk management for the Trust and the Funds.
The Board has adopted, and
periodically reviews, policies and procedures designed to address risks to the Trust and the Funds. In addition, under the general oversight of the Board, Rafferty and other service providers to the Funds have themselves adopted a variety of
policies, procedures and controls designed to address particular risks to the Funds. Different processes, procedures and controls are employed with respect to different types of risks.
The Board also oversees risk
management for the Trust and the Funds through review of regular reports, presentations and other information from officers of the Trust and other persons. The Trust’s CCO and senior officers of Rafferty regularly report to the Board on a
range of matters, including those relating to risk management. The Board also regularly receives reports from Rafferty and USBFS with respect to the Funds' investments. In addition to regular reports from these parties, the Board also receives
reports regarding other service providers to the Trust, either directly or through Rafferty, USBFS or the CCO, on a periodic or regular basis. At least annually, the Board receives a report from the CCO regarding the effectiveness of the Funds'
compliance program. Also, on an annual basis, the Board receives reports, presentations and other information from Rafferty in connection with the Board’s consideration of the renewal of each of the Trust’s agreements with Rafferty and
the Trust’s distribution plan under Rule 12b-1 under the 1940 Act.
The CCO reports regularly to the
Board on Fund valuation matters. The Audit Committee receives regular reports from the Trust’s independent registered public accounting firm on internal control and financial reporting matters. On at least a quarterly basis, the Independent
Trustees meet with the CCO to discuss matters relating to the Funds' compliance program.
Board Structure and Related Matters
Independent Trustees constitute
two-thirds of the Board. The Trustees discharge their responsibilities collectively as a Board, as well as through Board committees, each of which operates pursuant to a charter approved by the Board that delineates the specific responsibilities of
that committee. The Board has established three standing committees: the Audit Committee, the Nominating and Governance Committee and the Qualified Legal Compliance Committee. For example, the Audit Committee is responsible for specific matters
related to oversight of the Funds' independent auditors, subject to approval of the Audit Committee’s recommendations by the Board. The members and responsibilities of each Board committee are summarized below.
The Board
periodically evaluates its structure and composition as well as various aspects of its operations. The Chairman of the Board is not an Independent Trustee and the Board has chosen not to have a lead Independent Trustee. However, the Board believes
that its leadership structure, including its Independent Trustees and Board committees, is appropriate for the Trust in light of, among other factors, the asset size and nature of the Funds, the number of series overseen by the Board, the
arrangements for the conduct of the Funds' operations, the number of Trustees, and the Board’s responsibilities. On an annual basis, the Board conducts a self-evaluation that considers, among other matters, whether the Board and its committees
are functioning effectively and whether, given the size and composition of the Board and each of its committees, the Trustees are able to oversee effectively the number of series in the complex.
The Trust is part of the Direxion
Family of Investment Companies, which is comprised of the 120 portfolios within the Trust, 15 portfolios within the Direxion Funds and no portfolios within the Direxion Insurance Trust. The same persons who constitute the Board also constitute the
Board of Trustees of the Direxion Funds and the Direxion Insurance Trust.
The Board holds four regularly
scheduled in-person meetings each year. The Board may hold special meetings, as needed, either in person or by telephone, to address matters arising between regular meetings. During a portion of each in-person
meeting, the Independent Trustees meet outside of
management’s presence. The Independent Trustees may hold special meetings, as needed, either in person or by telephone.
The Trustees of
the Trust are identified in the tables below, which provide information regarding their age, business address and principal occupation during the past five years including any affiliation with Rafferty, the length of service to the Trust, and the
position, if any, that they hold on the board of directors of companies other than the Trust as of the date of this SAI. Each of the Trustees of the Trust also serve on the Board of the Direxion Funds and Direxion Insurance Trust, the other
registered investment companies in the Direxion mutual fund complex. Rafferty is also the sole owner of Direxion Advisors, LLC ("Direxion"), investment adviser to certain series of the Trust. Unless otherwise noted, an individual’s business
address is 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019.
Interested Trustee
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(2)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
Daniel
D. O’Neill
(1)
Age: 50
|
Chairman
of the Board of Trustees
|
Lifetime
of Trust until removal or resignation;
Since 2008
|
Managing
Director of Rafferty Asset Management, LLC, January 1999 –
January 2019 and Direxion Advisors, LLC, November 2017
–
January 2019.
|
135
|
None.
|
Independent Trustees
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(3)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
Gerald
E. Shanley III
Age: 75
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2008
|
Retired,
since 2002; Business Consultant, 1985-present; Trustee of Trust Under Will of Charles S. Payson, 1987-present; C.P.A., 1979-present.
|
135
|
None.
|
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(3)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
John
A. Weisser
Age: 77
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2008
|
Retired,
since 1995; Salomon Brothers, Inc., 1971-1995, most recently as Managing Director.
|
135
|
Director
until December 2016: The MainStay Funds Trust, The MainStay Funds, MainStay VP Fund Series, Mainstay Defined Term Municipal Opportunities Fund; Private Advisors Alternative Strategy Fund; Private Advisors Alternative Strategies Master Fund.
|
David
L. Driscoll
Age: 49
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2014
|
Partner,
King Associates, LLP, since 2004; Board Advisor, University Common Real Estate, since 2012; Principal, Grey Oaks LLP since 2003; Member, Kendrick LLC, since 2006.
|
135
|
None.
|
Jacob
C. Gaffey
Age: 71
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2014
|
Managing
Director of Loomis & Co. since 2012; Partner, Bay Capital Advisors, LLC
2008
–
2012.
|
135
|
None.
|
Henry
W. Mulholland
Age: 55
|
Trustee
|
Lifetime
of Trust until removal or resignation; Since 2017
|
Grove
Hill Partners LLC, since 2016 as Managing Partner; Bank of America Merrill Lynch, 1990-2015, most recently as Managing Director and Head of Equities for Americas.
|
135
|
None.
|
(1)
|
Mr. O’Neill is
affiliated with Rafferty and Direxion. Mr. O’Neill owns a beneficial interest in Rafferty.
|
(2)
|
The Direxion Family of
Investment Companies consists of the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 93 of the 120 funds registered with the SEC, the Direxion Funds which, as of the date of this SAI, offers for sale to the
public 15 funds registered with the SEC and the Direxion Insurance Trust which, as of the date of this SAI, does not have any funds registered with the SEC.
|
In addition to the information set
forth in the tables above and other relevant qualifications, experience, attributes or skills applicable to a particular Trustee, the following provides further information about the qualifications and experience of each Trustee.
Daniel D.
O’Neill: Mr. O’Neill has extensive experience in the investment management business, including as managing director of Rafferty and Direxion. Mr. O’Neill was the Managing Director of Rafferty from 1999 through January 2019 and
Managing Director of Direxion from its inception in November 2017 through January 2019.
Gerald E. Shanley III: Mr. Shanley
has extensive audit experience and spent ten years in the tax practice of an international public accounting firm. He is a certified public accountant and has a JD degree. He has extensive business experience as the president of a closely held
manufacturing company, a director of several closely held companies, a business and tax consultant and a trustee of a private investment trust. He has served on the boards of several charitable and not for profit organizations. He also has multiple
years of service as a Trustee.
John A. Weisser: Mr. Weisser has
extensive experience in the investment management business, including as managing director of an investment bank and a director of other registered investment companies. He also has multiple years of service as a Trustee.
David L. Driscoll: Mr. Driscoll has
extensive experience with risk assessment and strategic planning as a partner and manager of various real estate partnerships and companies.
Jacob C. Gaffey: Mr. Gaffey has
extensive experience with providing investment banking and valuation services to various companies. Mr. Gaffey has been a director and a member of an audit committee of a public company since 2011.
Henry W. Mulholland: Mr. Mulholland has
extensive experience with equity trading, risk management, equity market structure as well as managing regulatory and compliance matters.
Board Committees
The Trust has an
Audit Committee, consisting of Messrs. Weisser, Shanley, Driscoll, Gaffey and Mulholland. The members of the Audit Committee are Independent Trustees. The primary responsibilities of the Trust’s Audit Committee are, as set forth in its
charter, to make recommendations to the Board Members as to: the engagement or discharge of the Trust’s independent registered public accounting firm (including the audit fees charged by the auditors); the supervision of investigations into
matters relating to audit matters; the review with the independent registered public accounting firm of the results of audits; and addressing any other matters regarding audits. The Audit Committee met three times during the Trust’s most
recent fiscal year.
The Trust also has a Nominating and
Governance Committee, consisting of Messrs. Weisser, Shanley, Driscoll, Gaffey and Mulholland each of whom is an Independent Trustee. The primary responsibilities of the Nominating and Governance Committee are to make recommendations to the Board on
issues related to the composition and operation of the Board, and communicate with management on those issues. The Nominating and Governance Committee also evaluates and nominates Board member candidates. The Nominating and Governance Committee will
consider nominees recommended by shareholders. Such recommendations should be in writing and addressed to a Fund with attention to the Nominating and Governance Committee Chair. The recommendations must include the following Preliminary Information
regarding the nominee: (1) name; (2) date of birth; (3) education; (4) business professional or other relevant experience and areas of expertise; (5) current business and home addresses and contact information; (6) other board positions or prior
experience; and (7) any knowledge and experience relating to investment companies and investment company governance. The Nominating and Governance Committee met three times during the Trust’s most recent fiscal year.
The Trust has a Qualified Legal
Compliance Committee, consisting of Messrs. Weisser, Shanley, Driscoll, Gaffey and Mulholland. The members of the Qualified Legal Compliance Committee are Independent Trustees of the Trust. The primary responsibility of the Trust’s Qualified
Legal Compliance Committee is to receive, review and take appropriate action with respect to any report (“Report”) made or referred to the Committee by an attorney of evidence of a material violation of applicable U.S. federal or state
securities law, material breach of a fiduciary duty under U.S. federal or state law or a similar material violation by the Trust or by any officer, director, employee or agent of the Trust. The Qualified Legal Compliance Committee did not meet
during the Trust’s most recent fiscal year.
Principal Officers of the Trust
The officers of the Trust conduct
and supervise its daily business. Unless otherwise noted, an individual’s business address is 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019. As of the date of this SAI, the officers of the Trust, their ages,
their business address and their principal occupations during the past five years are as follows:
Name,
Address
and Age
|
Position(s)
Held with
Fund
|
Term
of
Office and
Length of
Time Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in the
Direxion
Family of
Investment
Companies
Overseen
by Trustee
(1)
|
Other
Trusteeships/
Directorships Held
by Trustee During
Past Five Years
|
Robert
D. Nestor
Age: 50
|
President
|
One
Year;
Since 2018
|
President,
Rafferty Asset Management, LLC and Direxion Advisors, LLC, since April 2018; Blackrock, Inc. (May 2007-April 2018), most recently as Managing Director.
|
N/A
|
N/A
|
Patrick
J. Rudnick
Age: 45
|
Principal
Executive
Officer
Principal Financial
Officer
|
One
Year;
Since 2018
One Year;
Since 2010
|
Senior
Vice President, since March 2013, Rafferty Asset Management, LLC; Senior Vice President, since November 2017, Direxion Advisors, LLC.
|
N/A
|
N/A
|
Angela
Brickl
Age: 42
|
Chief
Compliance
Officer
Secretary
|
One
Year;
Since 2018
One Year;
Since 2011
|
General
Counsel, Rafferty Asset Management LLC, since October 2010 and Direxion Advisors, LLC, since November 2017; Chief Compliance Officer, Rafferty Asset Management, LLC, since September 2012 and Direxion Advisors, LLC, since November 2017.
|
N/A
|
N/A
|
(1)
|
The Direxion Family of
Investment Companies consists of the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 93 of the 120 funds registered with the SEC, the Direxion Funds which, as of the date of this SAI, offers for sale to the
public 15 funds registered with the SEC and the Direxion Insurance Trust which, as of the date of this SAI, does not have any funds registered with the SEC.
|
The following table shows the amount
of equity securities owned in each of the following operational Funds and the Direxion Family of Investment Companies by the Trustees as of the calendar year ended December 31, 2018:
Dollar
Range of Equity Securities Owned:
|
Interested
Trustee:
|
Independent
Trustees:
|
|
Daniel
D.
O’Neill
|
Gerald
E.
Shanley III
|
John
Weisser
|
David
L.
Driscoll
|
Jacob
C.
Gaffey
|
Henry
W.
Mulholland
|
Direxion
Daily S&P 500
®
Bull 2X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Small Cap Bull 2X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily CSI 300 China A Share Bull 2X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily CSI China Internet Index Bull 2X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily High Yield Bear 2X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily MSCI European Financials Bull 2X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Aggregate
Dollar Range of Equity Securities in the Direxion Family of Investment Companies
(1)
|
Over
$100,000
|
$0
|
$1-$10,000
|
$0
|
$0
|
$0
|
(1)
|
The Direxion Family of
Investment Companies consists of the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 93 of the 120 funds registered with the SEC, the Direxion Funds which, as of the date of this SAI, offers for sale to the
public 15 funds registered with the SEC and the Direxion Insurance Trust which, as of the date of this SAI, does not have any funds registered with the SEC.
|
The Trust’s Trust Instrument
provides that the Trustees will not be liable for errors of judgment or mistakes of fact or law. However, they are not protected against any liability to which they would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of their office.
No officer,
director or employee of Rafferty receives any compensation from the Funds for acting as a Trustee or officer of the Trust. The following table shows the compensation earned by each Trustee for the Trust’s fiscal year ended October 31,
2018:
Name
of Person,
Position
|
Aggregate
Compensation
From the
Trust
(1)
|
Pension
or
Retirement Benefits
Accrued As Part of
the Trust’s
Expenses
|
Estimated
Annual Benefits
Upon Retirement
|
Aggregate
Compensation
From the Direxion
Family of
Investment
Companies Paid
to the Trustees
(2)
|
Interested
Trustee
|
Daniel
D. O’Neill
|
$0
|
$0
|
$0
|
$0
|
Independent
Trustees
|
Gerald
E. Shanley III
|
$93,438
|
$0
|
$0
|
$124,583
|
John
A. Weisser
|
$93,438
|
$0
|
$0
|
$124,583
|
David
L. Driscoll
|
$92,188
|
$0
|
$0
|
$122,917
|
Jacob
C. Gaffey
|
$92,188
|
$0
|
$0
|
$122,917
|
Henry
W. Mulholland
(3)
|
$85,938
|
$0
|
$0
|
$114,583
|
(1)
Trustee compensation is
allocated across the operational Funds of the Trust based on the proportion of the Fund’s net assets to the total net assets of the operational Funds of the Trust.
(2)
For the fiscal year ended
October 31, 2018, Trustees’ fees and expenses in the amount of $457,190 were incurred by the Trust.
(3)
Mr. Mulholland was
elected as a Trustee December 1, 2017.
Principal Shareholders, Control Persons and
Management Ownership
A principal shareholder is any
person who owns of record or beneficially 5% or more of the outstanding shares of a Fund. A control person is a shareholder that owns beneficially or through controlled companies more than 25% of the voting securities of a company or acknowledges
the existence of control. Shareholders owning voting securities in excess of 25% may determine the outcome of any matter affecting and voted on by shareholders of a Fund.
As of February 1,
2019, the following shareholders were considered to be either a principal shareholder or control person of the following operational Funds:
Direxion Daily S&P 500
®
Bull 2X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
19.47%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
18.46%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
15.00%
|
Record
|
National
Bank Financial
130 King Street West Suite 3200
Toronto, Ontario M5X 1J9
|
N/A
|
N/A
|
7.15%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
5.73%
|
Record
|
Mizuho
Trust & Banking
111 River Street
Hoboken, NJ 07030
|
N/A
|
N/A
|
5.51%
|
Record
|
Direxion Daily Small Cap Bull 2X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Mizuho
Trust & Banking
111 River Street
Hoboken, NJ 07030
|
Mizuho
Financial Group.
|
Japan
|
51.92%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
Merrill
Lynch & Co., Inc.
|
DE
|
25.92%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
5.57%
|
Record
|
Direxion Daily CSI 300 China A Share Bull
2X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Interactive
Brokers
8 Greenwich Office Park 2nd Floor
Greenwich, CT 06831
|
N/A
|
N/A
|
16.62%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
15.70%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
13.42%
|
Record
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
6.77%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
6.39%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
5.08%
|
Record
|
Direxion Daily MSCI European Financials
Bull 2X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
COR
Clearing LLC
9300 Underwood Avenue Suite 400
Omaha, NE 68114
|
COR
Securities Holdings Inc.
|
DE
|
67.58%
|
Record
|
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
J.P.
Morgan Chase Bank
14201 Dallas Parkway
Dallas, TX 75254
|
N/A
|
N/A
|
8.30%
|
Record
|
Goldman
Sachs & Co.
30 Hudson Street
Jersey City, NJ 07302
|
N/A
|
N/A
|
6.68%
|
Record
|
Direxion Daily CSI Internet China A Shares
Bull 2X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
19.22%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
17.18%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
16.40%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
9.76%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
5.73%
|
Record
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
5.65%
|
Record
|
Pershing
LLC
1 Pershing Plaza
Jersey City, NJ 07399
|
N/A
|
N/A
|
5.07%
|
Record
|
Direxion Daily High Yield Bear 2X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Brown
Brothers Harriman & Co.
50 Milk Street
Boston, MA 02109
|
Limited
Partnership
|
DE
|
26.50%
|
Record
|
Goldman
Sachs & Co.
30 Hudson Street
Jersey City, NJ 07302
|
N/A
|
N/A
|
18.46%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
12.76%
|
Record
|
J.P.
Morgan Chase Bank
14201 Dallas Parkway
Dallas, TX 75254
|
N/A
|
N/A
|
7.24%
|
Record
|
UBS
Securities LLC
480 Washington Blvd
Jersey City, NJ 07310
|
N/A
|
N/A
|
6.99%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
6.20%
|
Record
|
Interactive
Brokers
8 Greenwich Office Park 2nd Floor
Greenwich, CT 06831
|
N/A
|
N/A
|
5.79%
|
Record
|
In addition,
as of February 1, 2019, the Trustees and Officers as a group owned less than 1% of the outstanding shares of each operational Fund.
Rafferty, 1301 Avenue of the
Americas (6th Avenue), 28th Floor, New York, New York 10019, provides investment advice to the Funds. Rafferty was organized as a New York limited liability company in June 1997. Lawrence C. Rafferty controls Rafferty through his ownership in
Rafferty Holdings, LLC and Daniel D. O'Neill controls Rafferty through his ownership in Minakian Partners, LLC.
Under an Investment Advisory
Agreement (“Advisory Agreement”) between Rafferty and the Trust, on behalf of each Fund dated August 13, 2008, Rafferty provides a continuous investment program for each Fund’s assets in accordance with its investment objectives,
policies and limitations, and oversees the day-to-day operations of each Fund, subject to the supervision of the Trustees. Rafferty bears all costs associated with providing these advisory services and the expenses of the Trustees who are affiliated
with or interested persons of Rafferty. The Trust bears all other expenses that are not assumed by Rafferty as described in the Prospectus. The Trust also is liable for nonrecurring expenses as may arise, including litigation to which a Fund may be
a party. The Trust also may have an obligation to indemnify its Trustees and officers with respect to any such litigation.
The Advisory
Agreement was initially approved by the Trustees (including all Independent Trustees) and Rafferty, as sole shareholder of each Fund in compliance with the 1940 Act. After an initial approval period of two years, the Advisory Agreement is renewable
at least annually with respect to each Fund, so long as its continuance is approved (1) by the vote, cast in person at a meeting called for that purpose, of a majority of the Independent Trustees of the Trust; and (2) by the majority vote of either
the full Board or the vote of a majority of the outstanding shares of a Fund. The Advisory Agreement automatically terminates on assignment and is terminable upon a 60-day written notice either by the Trust or Rafferty.
Pursuant to the Advisory Agreement, each
Fund pays Rafferty the following fee at an annualized rate based on a percentage of each Fund's average daily net assets:
Fund
|
Advisory
Fee Charged
|
Direxion
Daily S&P 500
®
Bull 2X Shares
|
0.50%
|
Direxion
Daily Small Cap Bull 2X Shares
|
0.50%
|
Direxion
Daily CSI 300 China A Share Bull 2X Shares
|
0.75%
|
Direxion
Daily MSCI China A Bull 2X Shares
|
0.75%
|
Direxion
Daily CSI China Internet Index Bull 2X Shares
|
0.75%
|
Direxion
Daily High Yield Bear 2X Shares
|
0.60%
|
Direxion
Daily MSCI European Financials Bull 2X Shares
|
0.60%
|
Direxion
Daily MSCI European Financials Bear 2X Shares
|
0.60%
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares
|
0.60%
|
Direxion
Daily Preferred Stock Bull 2X Shares
|
0.60%
|
The tables
below show the advisory fees incurred by the following operational Funds and the amount of fees waived and/or reimbursed by Rafferty for the fiscal years ended October 31.
Direxion
Daily S&P 500
®
Bull 2X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$30,216
|
$66,023
|
$(35,807)
|
Year
Ended October 31, 2017
|
$17,670
|
$36,806
|
$(19,136)
|
Year
Ended October 31, 2016
|
$26,184
|
$36,297
|
$(10,113)
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $2,012.
|
Direxion
Daily Small Cap Bull 2X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$18,140
|
$69,648
|
$(51,508)
|
Year
Ended October 31, 2017
|
$14,092
|
$59,002
|
$(44,910)
|
Year
Ended October 31, 2016
|
$9,834
|
$55,941
|
$(46,107)
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $2,281.
|
Direxion
Daily CSI 300 China A Share Bull 2X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$523,971
|
$
2,021
|
$521,950
|
Year
Ended October 31, 2017
(2)
|
$440,640
|
$13,658
|
$426,982
|
Year
Ended October 31, 2016
(3)
|
$457,084
|
$35,637
|
$421,447
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $13,405.
|
(2)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $4,769
|
(3)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $3,185.
|
Direxion
Daily MSCI European Financials Bull 2X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$35,571
|
$22,170
|
$13,401
|
Year
Ended October 31, 2017
|
$33,510
|
$26,726
|
$6,784
|
July
27, 2016
(2)
- October 31, 2016
|
$4,706
|
$19,735
|
$(15,029)
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $2,088.
|
(2)
|
Commencement of Operations
|
Direxion
Daily CSI China Internet Index Bull 2X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$802,636
|
$
-
|
$802,636
|
November
2, 2017 - October 31, 2017
(2,3)
|
$142,544
|
$31,553
|
$110,991
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $31,145.
|
(2)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $408.
|
(3)
|
Commencement of Operations
|
Direxion
Daily High Yield Bear 2X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$22,444
|
$46,972
|
$(24,528)
|
Year
Ended October 31, 2017
|
$25,231
|
$53,191
|
$(27,960)
|
June
16, 2016
(2)
- October 31, 2016
|
$12,533
|
$31,818
|
$(19,285)
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $2,282.
|
(2)
|
Commencement of Operations
|
Pursuant to
a separate Management Services Agreement, Rafferty performs certain administrative services on behalf of the Funds, such as negotiating, coordinating and implementing the Trust’s contractual obligations with the Funds' service providers;
monitoring, overseeing and reviewing the performance of such service providers to ensure adherence to applicable contractual obligations; and preparing or coordinating reports and presentations to the Board of Trustees with respect to such service
providers as requested or as deemed necessary; and other services that are described in the Management Services Agreement. For these services, the Trust pays to Rafferty a fee at the annual rate of 0.026% on the first $10 billion of the aggregate
average daily net assets of the Funds in the Trust and 0.024% on the aggregate net assets above $10 billion. This Management Services Fee may be waived under the Operating Expense Limitation Agreement that Rafferty has entered into with each Fund.
This arrangement may be terminated at any time by the Board.
Each Fund is responsible for its own
operating expenses. Rafferty has entered into an Operating Expense Limitation Agreement with each Fund. Under this Operating Expense Limitation Agreement, Rafferty has contractually agreed to cap all or a portion of its advisory and management
services fees and/or reimburse each Fund for Other Expenses (excluding, as applicable, among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses,
brokerage commissions and extraordinary expenses) through September 1, 2020 to the extent that each Fund’s Total Annual Fund Operating Expenses exceed the amount listed in the table below of each Fund’s average daily net assets. Any
expense waiver or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the
time. This agreement may be terminated or revised at any time at the discretion of the Board upon notice to the Adviser and without the approval of Fund shareholders.
Fund
|
Expense
Cap
|
Direxion
Daily S&P 500
®
Bull 2X Shares
|
0.60%
|
Direxion
Daily Small Cap Bull 2X Shares
|
0.60%
|
Fund
|
Expense
Cap
|
Direxion
Daily CSI 300 China A Share Bull 2X Shares
|
0.95%
|
Direxion
Daily MSCI China A Bull 2X Shares
|
0.95%
|
Direxion
Daily CSI China Internet Index Bull 2X Shares
|
0.95%
|
Direxion
Daily High Yield Bear 2X Shares
|
0.80%
|
Direxion
Daily MSCI European Financials Bull 2X Shares
|
0.80%
|
Direxion
Daily MSCI European Financials Bear 2X Shares
|
0.80%
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares
|
0.80%
|
Direxion
Daily Preferred Stock Bull 2X Shares
|
0.80%
|
Rafferty
shall not be liable to the Trust or any Fund for anything done or omitted by it, except acts or omissions involving willful misfeasance, bad faith, negligence or reckless disregard of the duties imposed upon it by its agreement with the Trust or for
any losses that may be sustained in the purchase, holding or sale of any security.
Pursuant to Section 17(j) of the 1940
Act and Rule 17j-1 thereunder, the Trust, Rafferty and the Funds' distributor have adopted Codes of Ethics. These codes permit portfolio managers and other access persons of a Fund to invest in securities that may be owned by a Fund, subject to
certain restrictions.
Paul Brigandi and
Tony Ng are jointly and primarily responsible for the day-to-day management of the Funds. An investment trading team of Rafferty employees assists Mr. Brigandi and Mr. Ng in the day-to-day management of the Funds subject to their primary
responsibility and oversight. The Portfolio Managers work with the investment trading team to decide the target allocation of each Fund’s investments and on a day-to-day basis, an individual portfolio trader executes transactions for the Funds
consistent with the target allocation. The members of the investment trading team rotate periodically among the various series of the Trust, including the Funds, so that no single individual is assigned to a specific Fund for extended periods of
time.
In addition to the Funds,
Mr. Brigandi and Mr. Ng manage the following other accounts as of October 31, 2018:
Accounts
|
Total
Number
of Accounts
|
Total
Assets
(In Billions)
|
Total
Number of
Accounts with
Performance
Based Fees
|
Total
Assets
of Accounts
with Performance
Based Fees
|
Registered
Investment Companies
|
81
|
$12.7
|
0
|
$0
|
Other
Pooled Investment Vehicles
|
0
|
$
0
|
0
|
$0
|
Other
Accounts
|
0
|
$
0
|
0
|
$0
|
Rafferty
manages no other accounts with investment objectives similar to those of the Funds. In addition, two or more funds advised by Rafferty may invest in the same securities but the nature of each investment (long or short) may be opposite and in
different proportions. Generally, due to the nature of the various Funds advised by Rafferty, if a Fund with a leveraged investment objective increases in value, the performance of a Fund with an inverse or an inverse leveraged investment objective
will decrease in value and vice versa. Rafferty ordinarily executes transactions for a Fund “market-on-close,” in which funds purchasing or selling the same security receive the same closing price.
Rafferty has not identified any
additional material conflicts between a Fund and other accounts managed by the investment team. However, other actual or apparent conflicts of interest may arise in connection with the day-to-day management of a Fund and other accounts. The
management of a Fund and other accounts may result in unequal time and attention being devoted to a Fund and other accounts. Rafferty’s management fees for the services it provides to other accounts varies and may be higher or lower than the
advisory fees it receives from a Fund. This could create potential conflicts of interest in which the portfolio manager may appear to favor one investment vehicle over another resulting in an account paying higher fees or one investment vehicle out
performing another.
The
investment team’s compensation is paid by Rafferty. Their compensation primarily consists of a fixed base salary and a bonus. The investment team’s salary is reviewed annually and increases are determined by factors such as performance
and seniority. Bonuses are determined by the individual performance of an employee including factors such as attention to detail, process, and efficiency, and are impacted by the overall performance of the firm. The investment team’s salary
and bonus are not based on a Fund’s performance and as a result, no benchmarks are used. Along with all other employees of Rafferty, the investment team may participate in the firm’s 401(k) retirement plan where Rafferty may make
matching contributions up to a defined percentage of their salary.
Mr. Brigandi and Mr.
Ng did not own any shares of the Funds as of October 31, 2018.
Proxy Voting Policies and Procedures
The Board has
adopted policies and procedures with respect to voting proxies (the “Proxy Policy”) related to portfolio securities of the Funds. Pursuant to these policies and procedures the Board of the Trust has delegated responsibility for voting
such proxies to the Adviser, subject to the Board’s continuing oversight.
The Proxy Policy is intended to
protect shareholder interests and comply with applicable state and federal corporate and securities laws. It applies to any voting rights with respect to securities held in accounts of the Funds. To assist the Adviser in its responsibility for
voting proxies and administering the overall proxy voting process, the Adviser has retained Institutional Shareholder Services (“ISS”) as an expert in the proxy voting and corporate governance area. ISS is a subsidiary of Vestar Capital
Partners VI, L.P.; a leading U.S. middle market private equity firm. The services provided by ISS include in-depth research, global issuer analysis, and voting recommendations as well as vote execution, reporting and record keeping. ISS issues
monthly reports which are reviewed by the Adviser to assure proxies are being voted properly. The Adviser and ISS also perform checks on a quarterly basis to match the voting activity with available shareholder meeting information. ISS’
management meets on a regular basis to discuss its approach to new developments and amendments to existing proxy voting guidelines (the “Guidelines”). Information on such developments and amendments are then provided to the
Adviser.
The Guidelines are
maintained and implemented by ISS and are an extensive list of common proxy voting issues with recommended voting actions based on the overall goal of achieving maximum shareholder value and protection of shareholder interests and rights. Generally,
proxies are voted in accordance with the voting recommendations contained in the Guidelines. If necessary, the Adviser will be consulted by ISS on non-routine issues. Proxy issues and factors considered when resolving proxy issues in the Guidelines
include, but are not limited to:
•
|
Election of Directors
–
considering all factors such as director qualifications, term of office and age limits.
|
•
|
Proxy Contests
–
considering factors such as voting nominees in contested elections and reimbursement of expenses.
|
•
|
Election of Auditors
–
considering factors such as independence and reputation of the auditing firm.
|
•
|
Proxy Contest Defenses
–
considering factors such as board structure and cumulative voting.
|
•
|
Tender Offer Defenses
–
considering factors such as poison pills (stock purchase rights plans) and fair price provisions.
|
•
|
Miscellaneous Governance
Issues
–
considering factors such as confidential voting and equal access.
|
•
|
Capital Structure
–
considering factors such as common stock authorization and stock distributions.
|
•
|
Executive and Director
Compensation
–
considering factors such as performance goals and employee stock purchase plans.
|
•
|
State of Incorporation
–
considering factors such as state takeover statutes and voting on reincorporation proposals.
|
•
|
Mergers and Corporate
Restructuring
–
considering factors such as spin-offs and asset sales.
|
•
|
Mutual Fund Proxy Voting
–
considering factors such as election of directors and proxy contests.
|
•
|
Social
and Corporate Responsibility Issues
–
considering factors such as social, environmental, and labor issues.
|
A full description of the Guidelines and
voting policy is maintain by the Adviser, and a complete copy of the Guidelines is available without charge, upon request by calling the Adviser at 866-476-7523.
Conflicts
of Interest
From time
to time, proxy issues may pose a material conflict of interest between the Funds' shareholders and the Adviser, the Distributor or any affiliates thereof. Due to the limited nature of the Adviser’s activities
(
e.g.
, no underwriting business, no publicly-traded affiliates, no investment banking activities, and no research recommendations), conflicts of interest are likely to be infrequent. Nevertheless, it shall be
the duty of the Adviser to monitor potential conflicts of interest. In the event a conflict of interest arises, the Adviser will direct ISS to use its independent judgment to vote affected proxies in accordance with approved guidelines.
Proxy
Voting Recordkeeping
The Adviser, with the assistance of
ISS, maintains for a period of at least five years, a record of each proxy statement received and materials that were considered when the proxy was voted during the calendar year. Information on how the Funds voted proxies relating to portfolio
securities for the 12-month (or shorter) period ended June 30 is available without charge, upon request, by calling the Adviser at 866-476-7523 or on the SEC’s website at
http://www.sec.gov
.
Fund Administrator, Fund Accounting Agent, Transfer
Agent and Custodian
U.S. Bancorp Fund Services, LLC,
615 East Michigan Street, Milwaukee, Wisconsin 53202, serves as the Funds' administrator. The Bank of New York Mellon, 101 Barclay Street, New York, New York 10286, serves as the Funds' transfer agent, and custodian. Rafferty also performs certain
administrative services for the Funds.
Pursuant to a Fund Administration
Servicing Agreement between the Trust and USBFS, USBFS provides the Trust with administrative and management services (other than investment advisory services). As compensation for these services, the Trust pays
USBFS a fee based on the Trust’s total average
daily net assets. USBFS also is entitled to certain out-of-pocket expenses. The amount of fees paid by the Trust to USBFS pursuant to the Fund Administration Servicing Agreement for the fiscal years indicated is set forth in the table below.
|
Fees
paid to the Administrator
|
Year
Ended October 31, 2018
|
$2,046,515
|
Year
Ended October 31, 2017
|
$2,402,024
|
Year
Ended October 31, 2016
|
$2,302,972
|
Pursuant to a Fund Accounting
Agreement between the Trust and BNYM, BNYM provides the Trust with accounting services, including portfolio accounting services, tax accounting services and furnishing financial reports. As compensation for these accounting services, the Trust pays
BNYM a fee based on the Trust’s total average daily net assets and a minimum annual per fund fee, subject to certain negotiated fee waivers. BNYM also is entitled to certain out-of-pocket expenses for the services mentioned above, including
pricing expenses. The amount of fees paid by the Trust pursuant to the Fund Accounting Agreement for the fiscal years indicated is set forth in the table below.
|
Fees
paid to the Fund Accounting Agent
|
Year
Ended October 31, 2018
|
$1,876,840
|
Year
Ended October 31, 2017
|
$1,629,992
|
Year
Ended October 31, 2016
|
$1,651,529
|
Pursuant to a Custody Agreement, BNYM
serves as the custodian of a Fund’s assets. The custodian holds and administers the assets in a Fund’s portfolios. Pursuant to the Custody Agreement, the custodian receives an annual fee based on the Trust’s total average daily net
assets and certain settlement charges. The custodian also is entitled to certain out-of-pocket expenses. The amount of fees paid by the Trust pursuant to the Custody Agreement for the fiscal years indicated is set forth in the table below.
|
Fees
paid to the Custodian
|
Year
Ended October 31, 2018
|
$1,132,612
|
Year
Ended October 31, 2017
|
$1,016,661
|
Year
Ended October 31, 2016
|
$1,057,934
|
Pursuant to a Transfer Agency and
Service Agreement between the Trust and BNYM, BNYM provides the Trust with transfer agency services, which includes Creation and Redemption Unit order processing. As compensation for these transfer agency services, the Trust pays BNYM a fee based on
the Trust’s total average daily net assets and a minimum annual complex fee. BNYM also is entitled to certain out-of-pocket expenses for the services mentioned above. The amount of fees paid by the Trust pursuant to the Transfer Agency and
Service Agreement for the fiscal years indicated is set forth in the table below.
|
Fees
paid to the Transfer Agent
|
Year
Ended October 31, 2018
|
$1,171,567
|
Year
Ended October 31, 2017
|
$1,116,750
|
Year
Ended October 31, 2016
|
$1,136,219
|
Effective August 25, 2017, each Fund
has entered into a Securities Lending Authorization Agreement with BNYM (the “Securities Lending Agreement”) whereby BNYM will be the Lending Agent for each Fund. Each Fund retains a portion of the securities lending income and remits
the remaining portion to BNYM as compensation for its services as securities lending agent. Securities lending income is generally equal to the net income earned from the reinvestment of cash collateral after payment of cash collateral fees, and any
fees or other payments from borrowers of securities.
BNYM acts as agent to the Trust to
lend available securities with any person on its list of approved borrowers. BNYM determines whether a loan shall be made and negotiates and establishes the terms and conditions of the loan with the borrower. BNYM ensures that all substitute
interest, dividends, and other distributions paid with respect to loan securities is credited to a Fund’s relevant account on the date such amounts are delivered by the borrower to BNYM. BNYM receives and holds, on a Fund’s behalf,
collateral from borrowers to secure obligations of borrowers with respect to any loan of available securities. BNYM marks loaned securities and collateral to their market value each business day based upon the market value of the collateral and
loaned securities at the close of business employing the most recently available pricing information and receives and delivers collateral in order to maintain the value of the collateral at no less than 102% of the market value of the loaned
securities. At the termination of the loan, BNYM returns the collateral to the borrower upon the return of the loaned securities to BNYM. BNYM invests cash collateral in accordance with the Securities Lending Agreement. BNYM
maintains such records as are reasonably necessary
to account for loans that are made and the income derived therefrom and makes available to a Fund a monthly statement describing the loans made, and the income derived from the loans, during the period. Each Fund shall receive the net securities
lending revenue based on the securities lent from its holdings. A Fund may also pay custodial fees and other expenses associated with a loan.
As of October 31, 2018, the dollar
amounts of gross and net income from securities lending activities received and the related fees and/or compensation paid by each operational Fund were as follows:
Fees
and/or Compensation for Securities Lending Activities and Related Services
|
Fund
Name
|
Gross
Income
from
Securities
Lending
Activities
|
Fees
Paid
to
Securities
Lending
Agent
from the
Revenue
Split
|
Fees
Paid for
any Cash
Collateral
Manage-
ment
Service
(Including
Fees
Deducted
from a
Pooled
Cash
Collateral
Reinvest-
ment
Vehicle)
that are
not
Included
in the
Revenue
Split
|
Admin-
istrative
Fees not
Included
in the
Revenue
Split
|
Indem-
nification
Fees
not
Included
in the
Revenue
Split
|
Borrower
Rebates
|
Other
Fees not
Included
in the
Revenue
Split
(specify)
|
Aggregate
Fees/
Comp-
ensation
for Securities
Lending
Activities
|
Net
Income
from
Securities
Lending
Activities
|
Direxion
Daily S&P 500
®
Bull 2X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily Small Cap Bull 2X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily CSI 300 China A Share Bull 2X Shares
|
$273,676
|
$82,077
|
$-
|
$-
|
$-
|
$-
|
$-
|
$82,077
|
$191,599
|
Direxion
Daily CSI China Internet Index Bull 2X Shares
|
$69,401
|
$20,820
|
$-
|
$-
|
$-
|
$-
|
$-
|
$20,820
|
$48,581
|
Direxion
Daily High Yield Bear 2X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily MSCI European Financials Bull 2X Shares
|
$2,233
|
$670
|
$-
|
$-
|
$-
|
$-
|
$-
|
$670
|
$1,563
|
Foreside Fund
Services, LLC, located at 3 Canal Plaza, Suite 100, Portland, Maine 04101, serves as the distributor (“Distributor”) in connection with the continuous offering of each Fund’s shares. The Distributor is a broker-dealer registered
with the SEC under the Securities Exchange Act of 1934 and a member of the Financial Industry Regulatory Authority. The Trust offers Shares of the Funds for sale through the Distributor in Creation Units, as described below. The Distributor will not
sell or redeem Shares in quantities less than Creation Units. The Distributor will deliver a Prospectus to persons purchasing Creation Units and will maintain records of Creation Unit orders placed and confirmations furnished by it. Pursuant to a
written agreement, the Adviser pays the Distributor for distribution-related services. For the fiscal year ended October 31, 2018, the Distributor received $1,046,468 as compensation from Rafferty for distribution services provided to the Trust,
including the operational Funds. For the fiscal year ended October 31, 2018, Foreside did not receive any underwriting commission or discounts, compensation on redemptions and repurchases, or brokerage commissions from the Funds.
The Adviser may pay certain
broker-dealers, banks and other financial intermediaries for participating in activities that are designed to make registered representatives and other professionals more knowledgeable about exchange traded products, including each Fund, or for
other activities such as participating in marketing activities and presentations, educational training programs, conferences, the development of technology platforms and reporting systems. The Adviser had arrangements to make payments based on an
annual fee for its services, as well as based on the average daily assets held by Schwab customers in certain funds managed by the Adviser, for services other than for the educational programs and marketing activities described above, only to
Charles Schwab & Co., Inc. (“Schwab”). Pursuant to the arrangement with Schwab, Schwab has agreed to promote select funds managed by the Adviser, to Schwab’s customers and not to charge certain of its customers any commissions
when those customers purchase or sell shares of those funds. Payments to a broker-dealer or intermediary may create potential conflicts of interest between the broker-dealer or intermediary and its clients. These amounts, which may be significant,
are paid by the Adviser from its own resources and not from the assets of funds managed by the Adviser. Although a portion of the Adviser’s revenue comes directly or indirectly in part from fees paid by each Fund, other ETFs
advised by the Adviser or other exchange-traded
products, these payments do not increase the price paid by investors for the purchase of shares of, or the cost of owning, a Fund or other funds managed by the Adviser.
Rule 12b-1 under the 1940 Act, as
amended, (the “Rule”) provides that an investment company may bear expenses of distributing its shares only pursuant to a plan adopted in accordance with the Rule. The Trustees have adopted a Rule 12b-1 Distribution Plan (“Rule
12b-1 Plan”) pursuant to which each Fund may pay certain expenses incurred in the distribution of its shares and the servicing and maintenance of existing shareholder accounts. The Distributor, as the Funds' principal underwriter, and Rafferty
may have a direct or indirect financial interest in the Rule 12b-1 Plan or any related agreement. Pursuant to the Rule 12b-1 Plan, each Fund may pay a fee of up to 0.25% of the Fund’s average daily net assets. No Rule 12b-1 fee is currently
being charged to the Funds.
The
Rule 12b-1 Plan was approved by the Board, including a majority of the Independent Trustees of the Funds. In approving the Rule 12b-1 Plan, the Trustees determined that there is a reasonable likelihood that the Rule 12b-1 Plan will benefit each Fund
and its shareholders. The Trustees will review quarterly and annually a written report provided by the Treasurer of the amounts expended under the Rule 12b-1 Plan and the purpose for which such expenditures were made.
The Rule 12b-1 Plan permits payments
to be made by each Fund to the Distributor or other third parties for expenditures incurred in connection with the distribution of Fund shares to investors and the provision of certain shareholder services. The Distributor or other third parties are
authorized to engage in advertising, the preparation and distribution of sales literature and other promotional activities on behalf of each Fund. In addition, the Rule 12b-1 Plan authorizes payments by each Fund to the Distributor or other third
parties for the cost related to selling or servicing efforts, preparing, printing and distributing Fund prospectuses, statements of additional information, and shareholder reports to investors.
Independent Registered Public Accounting Firm
Ernst & Young
LLP (“EY”), 220 South Sixth Street, Suite 1400, Minneapolis, Minnesota 55402, is the independent registered public accounting firm for the Trust. The Financial Statements of the Funds for the fiscal year ended October 31, 2018 (that had
commenced operations by that date), audited by EY, have been included in reliance on their report given on their authority as experts in accounting and auditing.
The Trust has selected K&L Gates
LLP, 1601 K Street, N.W., Washington, DC 20006, as its legal counsel.
Determination of Net Asset Value
A fund’s share price is
known as its NAV. Each Fund’s share price (other than the Fixed Income Funds) is calculated as of the close of regular trading on the NYSE, usually 4:00 p.m. Eastern Time (“Valuation Time”), each day the NYSE is open for business
(“Business Day”). The NYSE is open for business Monday through Friday, except in observation of the following holidays: New Year’s Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. In addition to these holidays, the Bond Market is not open on Columbus Day and Veterans’ Day. The NYSE may close early on the business day before each of these holidays and on the day after
Thanksgiving Day. NYSE holiday schedules are subject to change without notice.
Each Fixed Income Fund also
calculates its NAV as of the close of regular trading on the NYSE, usually 4:00 p.m. Eastern Time each Business Day. However, on days that the bond markets close all day, which currently includes the following holidays: New Year's Day, Martin Luther
King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day (a “Bond Market Holiday”), the Fixed Income Funds do not calculate their NAVs, even if
the NYSE is open for business. On such days, orders for purchase or redemption will receive the NAV next calculated on the following Business Day that is not a Bond Market Holiday. Similarly, on days that the bond markets close early but the NYSE
does not (usually at 2 p.m. Eastern Time, and which currently include the Friday before Memorial Day and New Year’s Eve), the Fixed Income Funds treat the portion of the day that the bond markets are closed as a Bond Market Holiday and
calculates their NAVs as of the recommended closing time for the bond markets, which may be before 4:00 p.m. Eastern Time, subject to the discretion of the Adviser. In such instances, orders for purchase or redemption that are received prior to the
close of bond markets will receive the NAV calculated at the time of the bond markets closure, whereas orders for purchase or redemption that are received thereafter will receive the NAV next calculated on the following Business Day that is not a
Bond Market Holiday.
If the
exchange or market on which a Fund’s investments are primarily traded closes early, the NAV may be calculated prior to its normal calculation time. Creation/redemption transaction order time cutoffs would also be accelerated. The value
of a Fund’s assets that trade in markets outside
the United States or in currencies other than the U.S. Dollar may fluctuate when foreign markets are open but a Fund is not open for business.
A security listed
or traded on an exchange, domestic or foreign, is valued at its last sales price or settlement price on the principal exchange on which it is traded prior to the time when assets are valued. If no sale is reported at that time, the mean of the last
bid and asked prices is used. Securities primarily traded on the NASDAQ Global Market
®
(“NASDAQ
®
”) for which market quotations are readily available shall be valued using the NASDAQ
®
Official Closing Price (“NOCP”) provided by NASDAQ
®
each Business Day. The NOCP is the most recently reported price as of 4:00:02 p.m. Eastern Time, unless that price is outside the range of the
“inside” bid and asked prices’ in that case, NASDAQ
®
will adjust the price to equal the inside bid or asked price, whichever is
closer. If the NOCP is not available, such securities shall be valued at the last sale price on the day of valuation, or if there has been no sale on such day, at the mean between the bid and asked prices.
For purposes of determining NAV per
share of a Fund, options and futures contracts are valued based on market quotations, the last sales or settlement price of the exchange on which an asset trades. The value of a futures contract equals the unrealized gain or loss on the contract
that is determined by marking the contract to the last sale price for a like contract acquired on the day on which the futures contract is being valued. The value of options on futures contracts is determined based upon the last sale price for a
like option acquired on the day on which the option is being valued. A last sale price may not be used for the foregoing purposes if the market makes a limited move with respect to a particular instrument.
For valuation purposes, quotations of
foreign securities or other assets denominated in foreign currencies are translated to U.S. Dollar equivalents using the net foreign exchange rate in effect at the close of the stock exchange in the country where the security is issued. Short-term
debt instruments having a maturity of 60 days or less are valued at amortized cost, which approximates market value. If the Board determines that the amortized cost method does not represent the fair value of the short-term debt instrument, the
investment will be valued at fair value as determined by procedures as adopted by the Board. U.S. government securities are valued at the mean between the closing bid and asked price provided by an independent third party pricing service
(“Pricing Service”).
OTC securities held by a Fund will be
valued at the last sales price or, if no sales price is reported, the mean of the last bid and asked price is used. The portfolio securities of a Fund that are listed on national exchanges are valued at the last sales price of such securities; if no
sales price is reported, the mean of the last bid and asked price is used.
Swaps are valued based upon prices from
third party vendor models or quotations from market makers to the extent available.
Dividend income and other distributions
are recorded on the ex-distribution date.
Illiquid securities, securities for
which reliable quotations or pricing services are not readily available, all other assets not valued in accordance with the foregoing principles or for which pricing information is deemed unreliable, or to the Adviser’s knowledge, does not
reflect a significant event occurring in the market, the security or asset will be valued at their respective fair value as determined in good faith by, or under procedures established by, the Trustees, which procedures may include the delegation of
certain responsibilities regarding valuation to Rafferty or the officers of the Trust. The officers of the Trust report, as necessary, to the Trustees regarding portfolio valuation determinations. The Trustees, from time to time, will review these
methods of valuation and will recommend changes that may be necessary to assure that the investments of a Fund are valued at fair value.
Additional Information Concerning Shares
Organization and Description of
Shares of Beneficial Interest
The Trust is a Delaware statutory
trust and registered investment company. The Trust was organized on April 23, 2008, and has authorized capital of unlimited Shares of beneficial interest of no par value which may be issued in more than one class or series. Currently, the Trust
consists of multiple separately managed series. The Board may designate additional series of beneficial interest and classify Shares of a particular series into one or more classes of that series.
All Shares of the Trust are freely
transferable. The Shares do not have preemptive rights or cumulative voting rights, and none of the Shares have any preference to conversion, exchange, dividends, retirements, liquidation, redemption, or any other feature. Shares have equal voting
rights, except that, in a matter affecting a particular series or class of Shares, only Shares of that series of class may be entitled to vote on the matter. Trust shareholders are entitled to require the Trust to redeem Creation Units of their
Shares. The Trust Instrument confers upon the Broad of Trustees the power, by resolution, to alter the number of Shares constituting a Creation Unit or to specify that Shares of the Trust may be individually redeemable. The Trust reserves the right
to adjust the stock prices of Shares of the Trust to maintain convenient trading ranges for investors. Any such adjustments would be accomplished through stock splits or reverse stock splits which would have no effect on the net assets of the
applicable Fund.
Under Delaware
law, the Trust is not required to hold an annual shareholders meeting if the 1940 Act does not require such a meeting. Generally, there will not be annual meetings of Trust shareholders. Trust shareholders may remove Trustees from office by votes
cast at a meeting of Trust shareholders or by written consent. If requested by shareholders of at least
10% of the outstanding Shares of the Trust, the Trust
will call a meeting of a Fund’s shareholders for the purpose of voting upon the question of removal of a Trustee of the Trust and will assist in communications with other Trust shareholders.
The Trust Instrument disclaims
liability of the shareholders of the officers of the Trust for acts or obligations of the Trust which are binding only on the assets and property of the Trust. The Trust Instrument provides for indemnification from the Trust’s property for all
loss and expense of any Fund shareholder held personally liable for the obligations of the Trust. The risk of a Trust shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Funds would not
be able to meet the Trust’s obligations and this risk, thus, should be considered remote.
If a Fund does not grow to a size to
permit it to be economically viable, the Fund may cease operations. In such an event, investors may be required to liquidate or transfer their investments at an inopportune time.
Book Entry Only System
The Depository Trust Company
(“DTC”) acts as securities depositary for the Shares. Shares of each Fund are represented by global securities registered in the name of DTC or its nominee and deposited with, or on behalf of, DTC. Except as provided below, certificates
will not be issued for Shares.
DTC has advised the Trust as follows:
it is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing
agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities of its participants (“DTC Participants”) and to facilitate the clearance and settlement of securities transactions
among the DTC Participants in such securities through electronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the NYSE, the AMEX and the
Financial Industry Regulatory Authority. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or
indirectly (“Indirect Participants”). DTC agrees with and represents to DTC Participants that it will administer its book-entry system in accordance with its rules and by-laws and requirements of law. Beneficial ownership of Shares is
limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in Shares (owners of such beneficial interests are referred to herein as
“Beneficial owners”) is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and
Beneficial owners that are not DTC Participants). Beneficial owners will receive from or through the DTC Participant a written confirmation relating to their purchase of Shares. The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such laws may impair the ability of certain investors to acquire beneficial interests in Shares.
Beneficial owners of Shares are not
entitled to have Shares registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive form and are not considered the registered holder thereof. Accordingly, each Beneficial owner must rely on
the procedures of DTC, the DTC Participant and any Indirect Participant through which such Beneficial owner holds its interests, to exercise any rights of a holder of Shares. The Trust understands that under existing industry practice, in the event
the Trust requests any action of holders of Shares, or a Beneficial owner desires to take any action that DTC, as the record owner of all outstanding Shares, is entitled to take, DTC would authorize the DTC Participants to take such action and that
the DTC Participants would authorize the Indirect Participants and Beneficial owners acting through such DTC Participants to take such action and would otherwise act upon the instructions of Beneficial owners owning through them. As described above,
the Trust recognizes DTC or its nominee as the owner of all Shares for all purposes. Conveyance of all notices, statements and other communications to Beneficial owners is effected as follows. Pursuant to the Depositary Agreement between the Trust
and DTC, DTC is required to make available to the Trust upon request and for a fee to be charged to the Trust a listing of Share holdings of each DTC Participant. The Trust shall inquire of each such DTC Participant as to the number of Beneficial
owners holding Shares, directly or indirectly, through such DTC Participant. The Trust shall provide each such DTC Participant with copies of such notice, statement or other communication, in such form, number and at such place as such DTC
Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or indirectly, to such Beneficial owners. In addition, the Trust shall pay to each such DTC Participant a
fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements.
Distributions of Shares shall be
made to DTC or its nominee, Cede & Co., as the registered holder of all Shares. DTC or its nominee, upon receipt of any such distributions, shall credit immediately DTC Participants’ accounts with payments in amounts proportionate to their
respective beneficial interests in Shares as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial owners of Shares held through such DTC Participants will be governed by standing
instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in a “street name,” and will be the responsibility of such DTC Participants. The Trust has no
responsibility or liability for any aspects of the records relating to or notices to Beneficial owners, or payments made on account of beneficial ownership interests in such Shares, or for maintaining, supervising or reviewing any records
relating
to such beneficial ownership interests or for any
other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants and the Indirect Participants and Beneficial owners owning through such DTC Participants.
DTC may determine to discontinue
providing its service with respect to Shares at any time by giving reasonable notice to the Trust and discharging its responsibilities with respect thereto under applicable law. Under such circumstances, the Trust shall take action either to find a
replacement for DTC to perform its functions at a comparable cost or, if such a replacement is unavailable, to issue and deliver printed certificates representing ownership of Shares, unless the Trust makes other arrangements with respect thereto
satisfactory to the Exchange. The Trust will not make the DTC book-entry Dividend Reinvestment Service available for use by Beneficial Owners for reinvestment of their cash proceeds but certain brokers may make a dividend reinvestment service
available to their clients. Brokers offering such services may require investors to adhere to specific procedures and timetables in order to participate. Investors interested in such a service should contact their broker for availability and other
necessary details.
Purchases and Redemptions
The Trust issues
and redeems Shares of each Fund only in aggregations of Creation Units. The number of Shares of a Fund that constitute a Creation Unit for each Fund and the value of such Creation Unit as of each Fund’s inception were 50,000 and $1,250,000,
respectively, for the Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares, Direxion Daily Preferred Stock Bull 2X Shares, Direxion Daily MSCI European Financials Bull 2X Shares and the Direxion Daily MSCI European
Financials Bear 2X Shares and 50,000 and $2,000,000, respectively, for the remainder of the Funds.
See “Purchase and Issuance of
Creation Units” and “Redemption of Creation Units” below. The Board reserves the right to declare a split or a consolidation in the number of Shares outstanding of any Fund, and may make a corresponding change in the number of
Shares constituting a Creation Unit, in the event that the per Shares price in the secondary market rises (or declines) to an amount that falls outside the range deemed desirable by the Board for any other reason.
Purchase and Issuance of Creation
Units
The Trust issues and sells
Shares only in Creation Units on a continuous basis through the Distributor, without a sales load, at their NAV next determined after receipt, on any Business Day (as defined above), of an order in proper form.
Creation Units of Shares may be
purchased only by or through an Authorized Participant by depositing a basket of securities and/or cash for a Bull Fund. The consideration for purchase of a Creation Unit of Shares of a Bull Fund consists of either cash or the securities and cash
that are held by a Bull Fund (“Deposit Securities”), the Balancing Amount, and the appropriate transaction fee (collectively, the “Portfolio Deposit”). The Balancing Amount will be the amount equal to the differential, if
any, between the total aggregate market value of the Deposit Securities and the NAV of the Creation Unit(s) being purchased and will be paid to, or received from, the Trust after the NAV has been calculated. Creation Units for the Bear Funds will be
sold only for cash equal to the NAV of the Shares being purchased plus the transaction fee described below (“Cash Purchase Amount”).
BNYM or Rafferty makes available
through the National Securities Clearing Corporation (“NSCC”) on each Business Day, either immediately prior to the opening of business on the Exchange or the night before, the list of the names and the required number of shares of each
security (“Deposit Securities”) to be included in the current Portfolio Deposit (based on information at the end of the previous Business Day) for each Bull Fund. The identity and number of shares of the Deposit Securities required for a
Creation Unit will change from time to time. Each Bull Fund reserves the right to permit or require the substitution of an amount of cash
–
i.e.
, a “cash in lieu” amount
–
to be added to the Balancing Amount to replace any Deposit Security that may not be
available in sufficient quantity for delivery, eligible for transfer through the clearing process (discussed below) or the Federal Reserve System or eligible for trading by an Authorized Participant or the investor for which it is acting. For such
custom orders, “cash in lieu” may be added to the Balancing Amount. You must also pay a Transaction Fee, as described in the Prospectus, in cash.
The identity and number of shares of
the Deposit Securities required for a Fund changes as rebalancing adjustments and corporate action events are reflected from time to time by Rafferty with a view to the investment objective of a Fund. The composition of the Deposit Securities may
also change in response to adjustments to the weighting or composition of the securities constituting the relevant securities index or may be a representative sample of the securities in a Fund's underlying index. In addition, the Trust reserves the
right to permit or require the substitution of an amount of cash (
i.e
., a “cash in lieu” amount) to be added to the Balancing Amount to replace any Deposit Security which may not be available in
sufficient quantity for delivery or for other similar reasons. The adjustments described above will reflect changes, known to Rafferty on the date of announcement to be in effect by the time of delivery of the Portfolio Deposit, in the composition
of the subject index being tracked by a Fund, or resulting from stock splits and other corporate actions. In addition to the list of names and numbers of securities constituting the current Deposit Securities of a Creation Unit, on each Business
Day, the Balancing Amount effective through and including the previous Business Day, per outstanding Share of a Fund, will be made available.
Such Portfolio Deposit is applicable,
subject to any adjustments as described below, in order to effect purchases of Creation Units of Shares of a Bull Fund until such time as the next-announced Portfolio Deposit made available.
An Authorized Participant will agree
pursuant to the terms of such Authorized Participant Agreement on behalf of itself or any investor on whose behalf it will act, as the case may be, to certain conditions, including that such Authorized Participant will make available an amount of
cash sufficient to pay the Balancing Amount and the Transaction Fee described in the Prospectus. The Authorized Participant may require the investor to enter into an agreement with such Authorized Participant with respect to certain matters,
including payment of the Balancing Amount. Investors who are not Authorized Participants must make appropriate arrangements with an Authorized Participant. Investors should be aware that their particular broker may not be a DTC Participant or may
not have executed an Authorized Participant Agreement, and that therefore orders to purchase Creation Units of Shares may have to be placed by the investor’s broker through an Authorized Participant. As a result, purchase orders placed through
an Authorized Participant may result in additional charges to such investor. An Authorized Participant may place an order to purchase (or redeem) Creation Units (i) through the Continuous Net Settlement clearing processes of NSCC as such processes
have been enhanced to effect purchases (and redemptions) of Creation Units, such processes being referred to herein as the “Enhanced Clearing Process,” or (ii) outside the Enhanced Clearing Process, being referred to herein as the Manual
Clearing Process.
A purchase
order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent’s automated system, telephone, facsimile or other means permitted under the Authorized Participant
Agreement, in order to receive that day's NAV per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day.
All questions as to the number of
shares of each security in the Deposit Securities and the validity, form, eligibility and acceptance for deposit of any securities to be delivered shall be determined by the Trust, and the Trust’s determination shall be final and
binding.
Purchases through the
Enhanced Clearing Process
To
purchase or redeem through the Enhanced Clearing Process, an Authorized Participant must be a member of National Securities Clearing Corporation (“NSCC”) that is eligible to use the Continuous Net Settlement system. For purchase orders
placed through the Enhanced Clearing Process, in the Authorized Participant Agreement the Participant authorizes the Transfer Agent to transmit to the NSCC, on behalf of an Authorized Participant, such trade instructions as are necessary to effect
the Authorized Participant’s purchase order. Pursuant to such trade instructions to the NSCC, the Authorized Participant agrees to deliver the Portfolio Deposit or the Cash Purchase Amount and such additional information as may be required by
the Transfer Agent or the Distributor.
Purchases through the Manual Clearing
Process
An Authorized
Participant that wishes to place an order to purchase Creation Units outside the Enhanced Clearing Process must state that it is not using the Enhanced Clearing Process and that the purchase instead will be effected through a transfer of securities
and cash either through the Federal Reserve System (for cash and U.S. government securities) or directly through DTC. Purchases (and redemptions) of Creation Units of the Bull Funds settled outside the Enhanced Clearing Process will be subject to a
higher Transaction Fee than those settled through the Enhanced Clearing Process. Purchase orders effected outside the Enhanced Clearing Process are likely to require transmittal by the Authorized Participant earlier on the Transmittal Date than
orders effected using the Enhanced Clearing Process. Those persons placing orders outside the Enhanced Clearing Process should ascertain the deadlines applicable to DTC and the Federal Reserve System (for cash and U.S. government securities) by
contacting the operations department of the broker or depository institution effectuating such transfer of the Portfolio Deposit (for the Bull Funds), or of the Cash Purchase Amount (for the Bear Funds).
Shares may be issued in advance of
receipt by the Trust of all or a portion of the applicable Deposit Securities as described below. In these circumstances, the initial deposit will have a greater value than the NAV of the Shares on the date the order is placed in proper form since,
in addition to the available Deposit Securities, cash must be deposited in an amount equal to the sum of (i) the Balancing Amount, plus (ii) 115% of the market value of the undelivered Deposit Securities (the “Additional Cash Deposit”).
An additional amount of cash shall be required to be deposited with the Trust, pending delivery of the missing Deposit Securities to the extent necessary to maintain the Additional Cash Deposit with the Trust in an amount at least equal to 115% of
the daily marked to market value of the missing Deposit Securities. The Participation Agreement will permit the Trust to buy the missing Deposit Securities any time. Authorized Participants will be liable to the Trust for the costs incurred by the
Trust in connection with any such purchases. These costs will be deemed to include the amount by which the actual purchase price of the Deposit Securities exceeds the market value of such Deposit Securities on the day the purchase order was deemed
received by the Distributor plus the brokerage and related transaction costs associated with such purchases. The Trust will return any unused portion of the Additional Cash Deposit once all of the missing Deposit Securities have been properly
received by the Custodian Bank or purchased by the Trust and deposited into the Trust. In addition, a transaction fee, as listed below, will be charged in all cases. The delivery of Shares so purchased will occur no later than the third Business Day
following the day on which the purchase order is deemed received by the Distributor. Due to the schedule of holidays in certain countries, however, the delivery of Shares may take longer than two Business Days following the day on which the purchase
order is received. In such cases, the local market settlement procedures will
not commence until the end of local holiday periods. A
list of local holidays in the foreign countries or markets relevant to the international funds is set forth under “Regular Foreign Holidays” below.
Rejection of Purchase Orders
The Trust reserves the absolute
right to reject a purchase order transmitted to it by the Distributor in respect of any Fund if (a) the purchaser or group of purchasers, upon obtaining the shares ordered, would own 80% or more of the currently outstanding Shares of any Fund; (b)
the Deposit Securities delivered are not as specified by Rafferty and Rafferty has not consented to acceptance of an in-kind deposit that varies from the designated Deposit Securities; (c) acceptance of the purchase transaction order would have
certain adverse tax consequences to a Fund; (d) the acceptance of the purchase transaction order would, in the opinion of counsel, be unlawful; (e) the acceptance of the purchase transaction order would otherwise, in the discretion of the Trust or
Rafferty, have an adverse effect on the Trust or the rights of beneficial owners; (f) the value of a Cash Purchase Amount, or the value of the Balancing Amount to accompany an in-kind deposit exceed a purchase authorization limit extended to an
Authorized Participant by the custodian and the Authorized Participant has not deposited an amount in excess of such purchase authorization with the custodian by 4:00 p.m. Eastern Time on the Transmittal Date; or (g) in the event that circumstances
outside the control of the Trust, the Distributor and Rafferty make it impractical to process purchase orders. The Trust shall notify a prospective purchaser of its rejection of the order of such person. The Trust and the Distributor are under no
duty, however, to give notification of any defects or irregularities in the delivery of purchase transaction orders nor shall either of them incur any liability for the failure to give any such notification.
Redemption of Creation Units
Shares may be redeemed only in
Creation Units at their NAV next determined after receipt of a redemption request in proper form by the Distributor on any Business Day. The Trust will not redeem Shares in amounts less than Creation Units. Beneficial owners also may sell Shares in
the secondary market, but must accumulate enough Shares to constitute a Creation Unit in order to have such Shares redeemed by the Trust. There can be no assurance, however, that there will be sufficient liquidity in the public trading market at any
time to permit assembly of a Creation Unit of Shares. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of Shares to constitute a redeemable Creation Unit.
Generally, Creation Units of Shares
are redeemed by or through an Authorized Participant. Such Authorized Participant will agree pursuant to the terms of such Authorized Participant Agreement on behalf of itself or any investor on whose behalf it will act, as the case may be, to
certain conditions, including that such Authorized Participant will make available an amount of cash sufficient to pay the Balancing Amount and the Transaction Fee described above. The Authorized Participant may require the investor to enter into an
agreement with such Authorized Participant with respect to certain matters, including payment of the Balancing Amount. Investors who are not Authorized Participants must make appropriate arrangements with an Authorized Participant. Investors should
be aware that their particular broker may not be a DTC Participant or may not have executed an Authorized Participant Agreement, and that therefore orders to purchase Creation Units of Shares may have to be placed by the investor’s broker
through an Authorized Participant. As a result, redemption orders placed through an Authorized Participant may result in additional charges to such investor.
In certain instances, Authorized
Participants may create and redeem Creation Unit aggregations of the same Fund on the same trade date. In this instance, the Trust reserves the right to settle these transactions on a net basis.
With respect to each Bull Fund, the
redemption proceeds for a Creation Unit may consist of cash and/or securities. Rafferty makes available through the NSCC immediately prior to the opening of business on the Exchange on each day that the Exchange is open for business the Portfolio
Securities that will be applicable (subject to possible amendment or correction) to redemption requests received in proper form (as defined below) on that day (“Redemption Securities”) plus the Balancing Amount. These securities may, at
times, not be identical to Deposit Securities which are applicable to a purchase of Creation Units. The redemption transaction fee described below is deducted from such redemption proceeds.
For the Bull Funds, a Fund may in its
discretion exercise its option to redeem such Shares in cash, and the redeeming shareholder will be required to receive its redemption proceeds in cash. In addition, an investor may request a redemption in cash which a Fund may, in its sole
discretion, permit. The Fund may also, in its sole discretion, upon request of a shareholder, provide such redeemer a portfolio of securities which differs from the exact composition of the securities held by a Fund but does not differ in NAV.
The redemption proceeds for a
Creation Unit of a Bear Fund will consist solely of cash in an amount equal to the NAV of the Shares being redeemed, as next determined after a receipt of a request in proper form, less the redemption transaction fee described below (“Cash
Redemption Amount”).
A
redemption order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent's automated system, telephone, facsimile or other means permitted under the Authorized
Participant Agreement, in order to receive that day's NAV per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day.
The right of redemption may be
suspended or the date of payment postponed with respect to any Fund (1) for any period during which the NYSE is closed (other than customary weekend and holiday closings); (2) for any period during which
trading on the NYSE is suspended or restricted; (3)
for any period during which an emergency exists as a result of which disposal of the shares of the Fund’s portfolio securities or determination of its NAV is not reasonably practicable; or (4) in such other circumstance as is permitted by the
SEC.
Placement of Redemption Orders
Using Enhanced Clearing Process
Orders to redeem Creation Units of
the Funds through the Enhanced Clearing Process must be delivered through an Authorized Participant that is a member of NSCC that is eligible to use the Continuous Net Settlement System. A redemption order must be received in good order by the
transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent's automated system, telephone, facsimile or other means permitted under the Authorized Participant Agreement, in order to receive that day’s NAV
per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day.
Placement of Redemption Orders Outside the
Enhanced Clearing Process
Orders to redeem
Creation Units of the Funds outside the Clearing Process must be delivered through a DTC Participant that has executed the Authorized Participant Agreement , and, for the Fixed Income Funds, has the ability to transact through the Federal Reserve
System. A DTC Participant who wishes to place an order for redemption of Creation Units of a Fund to be effected outside the Clearing Process need not be an Authorized Participant, but such orders must state that the DTC Participant is not using the
Clearing Process and that redemption of Creation Units will instead be effected through transfer of Shares directly through DTC or the Federal Reserve System (for cash and U.S. government securities). The order must be accompanied or preceded by the
requisite number of Shares of the Funds specified in such order, which delivery must be made through DTC or the Federal Reserve System to the Custodian by the third Business Day following such Transmittal Date (“DTC Cut-Off Time”); and
(iii) all other procedures set forth in the Authorized Participant Agreement must be properly followed.
After the Transfer Agent has deemed
an order for redemption of a Bull Fund’s shares outside the Clearing Process received, the Transfer Agent will initiate procedures to transfer the requisite Redemption Securities, which are expected to be delivered within two Business Days,
and the Balancing Amount minus the Transaction Fee. In addition, with respect to Bull Fund redemptions honored in cash, the redeeming party will receive the Cash Redemption Amount by the third Business Day following the Transmittal Date on which
such redemption order is deemed received by the Transfer Agent. Due to the schedule of holidays in certain countries, however, the receipt of the Cash Redemption Amount may take longer than two Business Days following the Transmittal Date. In such
cases, the local market settlement procedures will not commence until the end of local holiday periods. See below for a list of local holidays in the foreign country relevant to the international funds.
Each Fund generally intends to
effect deliveries of Creation Units and portfolio securities on a basis of “T” plus two Business Days (
i.e.
, days on which the national securities exchange is open). A Fund may effect deliveries of
Creation Units and portfolio securities on a basis other than T plus two in order to accommodate local holiday schedules, to account for different treatment among foreign and U.S. markets of dividend record dates and ex-dividend dates or under
certain other circumstances. The ability of the Trust to effect in-kind creations and redemptions within two Business Days of receipt of an order in good form is subject, among other things, to the condition that, within the time period from the
date of the order to the date of delivery of the securities, there are no days that are holidays in the applicable foreign market. For every occurrence of one or more intervening holidays in the applicable foreign market that are not holidays
observed in the U.S. equity market, the redemption settlement cycle will be extended by the number of such intervening holidays. In addition to holidays, other unforeseeable closings in a foreign market due to emergencies may also prevent the Trust
from delivering securities within normal settlement periods. The securities delivery cycles currently practicable for transferring portfolio securities to redeeming Authorized Participants, coupled with foreign market holiday schedules, will require
a delivery process longer than seven calendar days for the international funds, in certain circumstances. The applicable holidays for certain foreign markets are listed in the table below. The proclamation of new holidays, the treatment by market
participants of certain days as “informal holidays” (
e.g.
, days on which no or limited securities transactions occur, as a result of substantially shortened trading hours), the elimination of
existing holidays or changes in local securities delivery practices could affect the information set forth herein at some time in the future.
The dates from
January 1, 2019 to December 31, 2019 in which the regular holidays affecting the relevant securities markets of the below listed countries are as follows:
Australia
|
|
Austria
|
|
Belgium
|
|
Brazil
|
|
Canada
|
|
Chile
|
|
China
|
January
1
January 28
April 19
April 22
April 25
June 10
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
May 1
June 10
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
May 1
May 30
June 10
August 15
November 1
December 24
December 25
December 26
December 31
|
|
January
1
January 25
March 4
March 5
March 6
April 19
May 1
June 20
July 9
November 15
November 20
December 25
|
|
January
1
January 2
February 18
April 19
May 20
June 24
July 1
August 5
September 2
October 14
November 11
December 25
December 26
|
|
January
1
April 19
May 1
May 21
July 16
August 15
September 18
September 19
September 20
October 31
November 1
December 25
December 31
|
|
January
1
January 21
February 4
February 5
February 6
February 7
February 8
February 18
April 5
April 19
April 22
May 1
May 13
May 27
June 7
July 1
July 4
September 2
September 13
October 1
October 2
October 3
October 4
October 7
October 14
November 11
November 28
December 25
December 26
|
Colombia
|
|
Czech
Republic
|
|
Denmark
|
|
Egypt
|
|
Finland
|
|
France
|
|
Germany
|
January
1
January 7
March 25
April 18
April 19
May 1
June 3
June 24
July 1
August 7
August 19
October 14
November 4
November 11
December 25
|
|
January
1
April 19
April 22
May 1
May 8
July 5
October 28
December 24
December 25
December 26
|
|
January
1
April 18
April 19
April 22
May 1
May 17
May 30
May 31
June 5
June 10
December 24
December 25
December 26
December 31
|
|
January
1
January 7
April 25
April 28
April 29
May 1
June 4
June 5
July 1
July 23
August 11
August 12
October 6
|
|
January
1
April 19
April 22
May 1
May 30
June 21
December 6
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
May 1
May 30
June 10
August 15
November 1
November 11
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
May 1
May 30
June 10
June 20
August 15
October 3
October 31
November 1
November 20
December 24
December 25
December 26
December 31
|
Greece
|
|
Hong
Kong
|
|
Hungary
|
|
India
|
|
Indonesia
|
|
Ireland
|
|
Israel
|
January
1
March 11
March 25
April 19
April 22
April 26
April 29
May 1
June 17
August 15
October 28
December 24
December 25
December 26
|
|
January
1
February 4
February 5
February 6
February 7
April 5
April 19
April 22
May 1
May 13
June 7
July 1
October 1
October 7
December 24
December 25
December 26
December 31
|
|
January
1
March 15
April 19
April 22
May 1
June 10
August 10
August 19
August 20
October 23
November 1
December 7
December 14
December 24
December 25
December 26
December 27
December 31
|
|
February
19
March 4
March 21
April 1
April 17
April 19
May 1
June 5
August 12
August 15
September 2
September 10
October 2
October 8
October 28
November 12
December 25
|
|
January
1
February 5
March 7
April 3
April 19
May 1
May 30
June 3
June 4
June 5
June 6
June 7
December 24
December 25
December 31
|
|
January
1
January 21
February 18
March 18
April 19
April 22
May 1
May 6
May 27
June 3
July 4
August 5
August 26
September 2
October 14
October 28
November 11
November 28
December
24
December 25
December 26
December 31
|
|
March
21
April 21
April 22
April 23
April 24
April 25
April 26
May 8
May 9
June 9
August 11
September 29
September 30
October 1
October 8
October 9
October 13
October 14
October
15
October 16
October 17
October 20
October 21
|
Italy
|
|
Japan
|
|
Korea
|
|
Malaysia
|
|
Mexico
|
|
Morocco
|
|
The
Netherlands
|
January
1
April 19
April 22
May 1
August 15
December 24
December 25
December 26
December 31
|
|
January
1
January 2
January 3
January 14
February 11
March 21
April 29
April 30
May 1
May 2
May 3
May 6
July 15
August 12
September 16
September 23
October 14
October 22
November 4
December 31
|
|
January
1
February 4
February 5
February 6
March 1
May 1
May 6
June 6
August 15
September 12
September 13
October 3
October 9
December 25
December 31
|
|
January
1
January 21
February 1
February 4
February 5
February 6
May 1
May 20
May 22
June 4
June 5
June 6
August 12
September 2
September 9
September 16
October 28
December 25
|
|
January
1
February 4
March 18
April 18
April 19
May 1
September 16
November 18
December 12
December 25
|
|
January
1
January 11
May 1
June 4
June 5
July 30
August 12
August 13
August 14
August 20
August 21
September 2
November 6
November 11
November 12
November 18
|
|
January
1
April 19
April 22
May 1
May 30
June 10
November 1
December 24
December 25
December 26
December 31
|
New
Zealand
|
|
Norway
|
|
Peru
|
|
Philippines
|
|
Poland
|
|
Portugal
|
|
Russia
|
January
1
January 2
January 21
January 28
February 6
April 19
April 22
April 25
June 3
October 28
December 25
December 26
|
|
January
1
April 17
April 18
April 19
April 22
May 1
May 17
May 30
June 10
December 24
December 25
December 26
December 31
|
|
January
1
April 18
April 19
May 1
July 29
August 30
October 8
November 1
December 25
|
|
January
1
February 5
February 25
April 9
April 18
April 19
May 1
June 12
August 21
August 26
November 1
December 24
December 25
December 30
December 31
|
|
January
1
April 19
April 22
May 1
May 3
June 20
August 15
November 1
November 11
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
April 25
May 1
June 10
June 13
June 20
August 15
November 1
December 25
December 26
|
|
January
1
January 2
January 3
January 4
January 7
January 8
March 8
May 1
May 2
May 3
May 9
May 10
June 12
November 4
|
Singapore
|
|
South
Africa
|
|
Spain
|
|
Sweden
|
|
Switzerland
|
|
Taiwan
|
|
Thailand
|
January
1
February 4
February 5
February 6
April 19
May 1
May 20
June 5
August 9
August 12
October 28
December 25
|
|
January
1
March 21
April 19
April 22
May 1
June 17
August 9
September 24
December 16
December 25
December 26
|
|
January
1
March 19
April 18
April 19
April 22
May 1
August 15
November 1
December 6
December 25
December 26
|
|
January
1
April 18
April 19
April 22
April 30
May 1
May 29
May 30
November 1
December 24
December 25
December 26
December 31
|
|
January
1
January 2
April 8
April 19
April 22
May 1
May 30
June 10
August 1
September 9
December 24
December 25
December 26
December 31
|
|
January
1
January 31
February 1
February 4
February 5
February 6
February 7
February 8
February 28
March 1
April 4
April 5
May 1
June 7
September 13
October 10
October 11
|
|
January
1
February 19
April 8
April 15
April 16
May 1
May 20
July 16
July 29
August 12
October 14
October 23
December 5
December 10
December 31
|
Turkey
|
|
United
Kingdom
|
January
1
April 23
May 1
June 3
June 4
June 5
June 6
July 15
August 12
August 13
August 14
August 30
October 28
October 29
|
|
January
1
January 21
February 18
April 19
April 22
May 1
May 6
May 27
July 4
August 26
September 2
October 14
November 11
November 28
December 24
December 25
December 26
December 31
|
The longest redemption cycle for a Fund
is a function of the redemption cycles of the countries whose stocks are held by the Fund.
Transaction fees are imposed as
set forth in the table in the Prospectus. Transaction Fees payable to the Trust are imposed to compensate the Trust for the transfer and other transaction costs of a Fund associated with the issuance and redemption of Creation Units of Shares. There
is a fixed and a variable component to the total Transaction Fee. A fixed Transaction Fee is applicable to each creation or redemption transaction, regardless of the number of Creation Units purchased or redeemed. In addition, a variable Transaction
Fee based upon the value of each Creation Unit also is applicable to each redemption transaction. The Transaction Fee applicable to the redemption of Creation Units will not exceed 2% of the value of the redemption proceeds.
Purchasers of Creation Units of a
Fund for cash may be required to pay an additional charge to compensate the Fund for brokerage and market impact expenses relating to investing in portfolios securities. Where the Trust permits an in-kind purchaser to substitute cash in lieu of
depositing a portion of the Deposit Securities, the purchaser may be assessed an additional charge for cash purchases.
Purchasers of Shares in Creation
Units are responsible for the costs of transferring the securities constituting the Deposit Securities to the account of the Trust. Investors will also bear the costs of transferring securities from a Fund to their account or on their order.
Investors who use the services of a broker or other such intermediary may be charged a fee for such services. In addition, Rafferty may, from time to time, at its own expense, compensate purchasers of Creation Units who have purchased substantial
amounts of Creation Units and other financial institutions for administrative or marketing services.
The method by which Creation
Units of Shares are created and traded may raise certain issues under applicable securities laws. Because new Creation Units of Shares are issued and sold by the Trust on an ongoing basis, at any point a “distribution,” as such term is
used in the Securities Act, may occur. Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants in a distribution in a manner which could render
them statutory underwriters and subject them to the prospectus delivery and liability provisions of the Securities Act. For example, a broker-dealer firm or its client may be deemed a statutory underwriter if it takes Creation Units after placing an
order with the Distributor, breaks them down into constituent Shares, and sells some or all of the Shares comprising such Creation Units directly to its customers; or if it chooses to couple the creation of a supply of new Shares with an active
selling effort involving solicitation of secondary market demand for Shares. A determination of whether a person is an underwriter for the purposes of the Securities Act depends upon all the facts and circumstances pertaining to that person’s
activities. Thus, the examples mentioned above should not be considered a complete description of all the activities that could lead to a categorization as an underwriter. Broker-dealer firms should also note that dealers who are effecting
transactions in Shares, whether or not participating in the distribution of Shares, are generally required to deliver a prospectus. This is because the prospectus delivery exemption in Section 4(3) of the Securities Act is not available in respect
of such transactions as a result of Section 24(d) of the 1940 Act. Broker-dealer firms should note that dealers who are not “underwriters” but are participating in a distribution (as contrasted to ordinary secondary market transaction),
and thus dealing with Shares that are part of an “unsold allotment” within the meaning of section 4(3)(C) of the Securities Act, would be unable to take advantage of the prospectus delivery exemption provided by section 4(3) of the
Securities Act. Firms that incur a prospectus-delivery obligation with respect to Shares are reminded that under Securities Act Rule 153 a prospectus delivery obligation under Section 5(b)(2) of the Securities Act owed to a national securities
exchange member in connection with a sale on the national securities exchange is satisfied by the fact that the Fund’s prospectus is available at the national securities exchange on which the Shares of such Fund trade upon request. The
prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions on a national securities exchange and not with respect to “upstairs” transactions.
Dividends, Other Distributions and Taxes
The Tax Cuts and
Jobs Act (the “Tax Act”) makes significant changes to the U.S. Federal income tax rules for taxation of individuals and corporations, generally effective for taxable years beginning after December 31, 2017. Many of the changes applicable
to individuals are not permanent and only apply to taxable years beginning after December 31, 2017 and before January 1, 2026. While there are minor changes to the RIC rules, the Tax Act makes changes to the tax rules affecting shareholders and each
Fund, including various investments that each Fund may make. Potential investors are urged to consult their own tax advisors for more detailed information.
Dividends and other Distributions
As stated in the Prospectus, each
Fund declares and distributes dividends to its shareholders from its net investment income at least annually; for these purposes, net investment income includes dividends, accrued interest, and accretion of OID and market discount, less amortization
of market premium and estimated expenses, and is calculated immediately prior to the determination of a Fund’s NAV per share. Each Fund also distributes the excess of its net short-term capital gain over net long-term capital loss
(“short-term gain”), if any, annually but may make more frequent distributions thereof if necessary to avoid federal income or excise taxes. Each Fund may realize net capital gain (
i.e.
, the excess
of net long-term capital gain over net short-term capital loss) and thus anticipates making annual distributions thereof. The Trustees may revise this distribution policy, or postpone the payment of distributions, if a Fund has or anticipates any
large unexpected expense, loss or fluctuation in net assets that, in the Trustees’ opinion, might have a significant adverse effect on its shareholders.
Investors should be aware that if
shares are purchased shortly before the record date for any dividend or capital gain distribution, the shareholder will pay full price for the shares and receive some portion of the purchase price back as a taxable distribution (with the tax
consequences described in the Prospectus).
Taxes
Regulated Investment Company Status
. Each Fund is treated as a separate entity for federal tax purposes and intends to qualify, or to continue to qualify, for treatment as a
RIC. If a Fund so qualifies and satisfies the Distribution Requirement (defined below) for a taxable year, it will not be subject to federal income tax on the part of its investment company taxable income (generally consisting of net investment
income, short-term gain, and net gains and losses from certain foreign currency transactions, all determined without regard to any deduction for dividends paid) and net capital gain it distributes to its shareholders for that year.
To qualify for treatment as a RIC, a
Fund must distribute to its shareholders for each taxable year at least the sum of 90% of its investment company taxable income (“Distribution Requirement”) and 90% of its net exempt interest income and
must meet several
additional requirements. For each Fund, these requirements include the following: (1) the Fund must derive at least 90% of its gross income each taxable year from the following sources (collectively, “Qualifying Income”): (a) dividends,
interest, payments with respect to certain securities loans, and gains from the sale or other disposition of securities or foreign currencies, or other income (including gains from options, futures, or forward contracts) derived with respect to its
business of investing in securities or those currencies, and (b) net income from an interest in a “qualified publicly traded partnership” (“QPTP”) (“Income Requirement”); and (2) at the close of each quarter of
the Fund’s taxable year, (a) at least 50% of the value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with those other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the value of the Fund’s total assets and that does not represent more than 10% of the issuer’s outstanding voting securities (equity securities of QPTPs being considered voting
securities for these purposes), and (b) not more than 25% of the value of its total assets may be invested in (i) securities (other than U.S. government securities or the securities of other RICs) of any one issuer, (ii) securities (other than
securities of other RICs) of two or more issuers the Fund controls that are determined to be engaged in the same, similar or related trades or businesses, or (iii) securities of one or more QPTPs (collectively, “Diversification
Requirements”). The Internal Revenue Service (“Service”) has ruled that income from a derivative contract on a commodity index generally is not Qualifying Income.
Although each Fund intends to
satisfy, or to continue to satisfy, all the foregoing requirements, there is no assurance that a Fund will be able to do so. The investment by a Fund primarily in options and futures positions entails some risk that it might fail to satisfy one or
both of the Diversification Requirements. There is some uncertainty regarding the valuation of such positions for purposes of those requirements; accordingly, it is possible that the method of valuation a Fund uses, pursuant to which each of them
would expect to be treated as satisfying the Diversification Requirements, would not be accepted in an audit by the Service, which might apply a different method resulting in disqualification of one or more funds.
If a Fund failed to qualify for
treatment as a RIC for any taxable year, (1) its taxable income, including net capital gain, would be taxed at corporate income tax rates (up to 21%), (2) it would not receive a deduction for the distributions it makes to its shareholders, and (3)
the shareholders would treat all those distributions, including distributions of net capital gain, as dividends (that is, ordinary income, except for the part of those dividends that is “qualified dividend income” (described in the
Prospectus) (“QDI”)) if certain holding period and other requirements are met) to the extent of the Fund’s earnings and profits; those dividends would be eligible for the dividends-received deduction available to corporations under
certain circumstances. In addition, the Fund would be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying for RIC treatment. However, the Regulated Investment Company
Modernization Act of 2010 (“RIC Mod Act”) provides certain savings provisions that enable a RIC to cure a failure to satisfy any of the Income and Diversification Requirements as long as the failure “is due to reasonable cause and
not due to willful neglect” and the RIC pays a deductible tax calculated in accordance with those provisions and meets certain other requirements.
Excise Tax
. Each Fund will be subject to a nondeductible 4% excise tax (“Excise Tax”) to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net income for the one-year period ending on October 31 of that year, plus certain other amounts.
Income from Foreign Securities
. Dividends and interest a Fund receives, and gains it realizes, on foreign securities may be subject to income, withholding, or other taxes
imposed by foreign countries and U.S. possessions that would reduce the yield and/or total return on its securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by foreign investors.
Gains or losses (1) from the
disposition of foreign currencies, including forward currency contracts, (2) on the disposition of each foreign-currency-denominated debt security that are attributable to fluctuations in the value of the foreign currency between the dates of
acquisition and disposition of the security, and (3) that are attributable to fluctuations in exchange rates that occur between the time a Fund accrues dividends, interest, or other receivables, or expenses or other liabilities, denominated in a
foreign currency and the time the Fund actually collects the receivables or pays the liabilities, generally will be treated as ordinary income or loss. These gains or losses will increase or decrease the amount of a Fund’s investment company
taxable income to be distributed to its shareholders.
Each Fund may invest in the stock of
“passive foreign investment companies” (“PFICs”). A PFIC is any foreign corporation (with certain exceptions) that, in general, meets either of the following tests for a taxable year: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held for the production of, passive income. Under certain circumstances, a Fund will be subject to federal income tax on a portion of any “excess distribution” it
receives on the stock of a PFIC or of any gain on its disposition of the stock (collectively, “PFIC income”), plus interest thereon, even if the Fund distributes the PFIC income as a dividend to its shareholders. The balance of the PFIC
income will be included in the Fund’s investment company taxable income and, accordingly, will not be taxable to it to the extent it distributes that income to its shareholders. Fund distributions thereof will not be eligible for the maximum
federal income tax rates applicable to QDI.
If a Fund invests in a PFIC and
elects to treat the PFIC as a “qualified electing fund” (“QEF”), then, in lieu of the foregoing tax and interest obligation, the Fund would be required to include in income each taxable year its pro rata share of the
QEF’s annual ordinary earnings and net capital gain -- which the Fund probably would have to distribute to satisfy the Distribution Requirement and avoid imposition of the Excise Tax -- even if the Fund did not receive those earnings and gain
from the QEF. In most instances it will be very difficult, if not impossible, to make this election because of certain requirements thereof.
Each Fund may elect to “mark to
market” its stock in any PFIC. “Marking-to-market,” in this context, means including in gross income each taxable year (and treating as ordinary income) the excess, if any, of the fair market value of the PFIC’s stock over a
Fund’s adjusted basis therein as of the end of that year. Pursuant to the election, a Fund also would be allowed to deduct (as an ordinary, not a capital, loss) the excess, if any, of its adjusted basis in PFIC stock over the fair market value
thereof as of the taxable year-end, but only to the extent of any net mark-to-market gains with respect to that stock the Fund included in income for prior taxable years under the election. A Fund’s adjusted basis in each PFIC’s stock
with respect to which it makes this election would be adjusted to reflect the amounts of income included and deductions taken thereunder.
Derivatives Strategies
. The use of derivatives strategies, such as writing (selling) and purchasing options and futures contracts and entering into forward contracts,
involves complex rules that will determine for income tax purposes the amount, character, and timing of recognition of the gains and losses a Fund realizes in connection therewith. Gains from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and gains from options, futures, and forward contracts a Fund derives with respect to its business of investing in securities or foreign currencies, will be treated as Qualifying Income.
Each Fund will monitor its transactions, make appropriate tax elections, and make appropriate entries in its books and records when it acquires any foreign currency, option, futures contract, forward contract, or hedged investment to mitigate the
effect of these rules, seek to prevent its disqualification as a RIC, and minimize the imposition of federal income and excise taxes.
Some futures contracts, foreign
currency contracts that are traded in the interbank market, and “nonequity” options (
i.e.
, certain listed options, such as those on a “broad-based” securities index)
—
except any “securities futures contract” that is not a “dealer securities futures contract” (both as defined in the Code) and any interest rate
swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement
—
in
which a Fund invests may be subject to Code section 1256 (collectively “section 1256 contracts”). Section 1256 contracts that a Fund holds at the end of its taxable year must be “marked to market” (that is, treated as having
been sold at that time for their fair market value) for federal income tax purposes, with the result that unrealized gains or losses will be treated as though they were realized. Sixty percent of any net gain or loss recognized on these deemed
sales, and 60% of any net realized gain or loss from any actual sales of section 1256 contracts, will be treated as long-term capital gain or loss, and the balance will be treated as short-term capital gain or loss. These rules may operate to
increase the amount that a Fund must distribute to satisfy the Distribution Requirement (
i.e.
, with respect to the portion treated as short-term capital gain), which will be taxable to its shareholders as
ordinary income when distributed to them, and to increase the net capital gain a Fund recognizes, without in either case increasing the cash available to it. A Fund may elect not to have the foregoing rules apply to any “mixed straddle”
(that is, a straddle, which the Fund clearly identifies in accordance with applicable regulations, at least one (but not all) of the positions of which are section 1256 contracts), although doing so may have the effect of increasing the relative
proportion of short-term capital gain (taxable as ordinary income) and thus increasing the amount of dividends it must distribute. Section 1256 contracts also may be marked-to-market for purposes of the Excise Tax.
Code section 1092
(dealing with straddles) also may affect the taxation of options, futures, and forward contracts in which a Fund may invest. That section defines a “straddle” as offsetting positions with respect to actively traded personal property; for
these purposes, options, futures, and forward contracts are positions in personal property. Under that section, any loss from the disposition of a position in a straddle may be deducted only to the extent the loss exceeds the unrecognized gain on
the offsetting position(s) of the straddle. In addition, these rules may postpone the recognition of loss that otherwise would be recognized under the mark-to-market rules discussed above. The regulations under section 1092 also provide certain
“wash sale” rules, which apply to transactions where a position is sold at a loss and a new offsetting position is acquired within a prescribed period, and “short sale” rules applicable to straddles. If a Fund makes certain
elections, the amount, character, and timing of recognition of gains and losses from the affected straddle positions would be determined under rules that vary according to the elections made. Because only a few of the regulations implementing the
straddle rules have been promulgated, the tax consequences to a Fund of straddle transactions are not entirely clear.
If a call option written by a Fund
lapses (
i.e.
, terminates without being exercised), the amount of the premium it received for the option will be short-term capital gain. If a Fund enters into a closing purchase transaction with respect to a
written call option, it will have a short-term capital gain or loss based on the difference between the premium it received for the option it wrote and the premium it pays for the option it buys. If such an option is exercised and a Fund thus sells
the securities or futures contract subject to the option, the premium the Fund received will be added to the exercise price to determine the gain or loss on the sale. If a call option purchased by a Fund lapses, it will realize short-term or
long-term capital loss, depending on its holding period for the option. If a Fund exercises a purchased call option, the premium it paid for the option will be added to the basis in the subject securities or futures contract.
If a Fund has an “appreciated
financial position” - generally, an interest (including an interest through an option, futures, or forward contract or short sale) with respect to any stock, debt instrument (other than “straight debt”), or partnership interest the
fair market value of which exceeds its adjusted basis - and enters into a “constructive sale” of the position, the Fund will be treated as having made an actual sale thereof, with the result that it will recognize gain at that time. A
constructive sale generally consists of a short sale, an offsetting notional principal contract, or a futures or forward contract a Fund or a related person enters into with respect to the same or substantially identical property. In addition, if
the appreciated financial position is itself a short sale or such a contract, acquisition of the underlying property or substantially identical property will be deemed a constructive sale. The foregoing will not apply, however, to a Fund’s
transaction during any taxable year that otherwise would be treated as a constructive sale if the transaction is closed within 30 days after the end of that year and the Fund holds the appreciated financial position unhedged for 60 days after that
closing (
i.e.
, at no time during that 60-day period is the Fund’s risk of loss regarding that position reduced by reason of certain specified transactions with respect to substantially identical or
related property, such as having an option to sell, being contractually obligated to sell, making a short sale, or granting an option to buy substantially identical stock or securities).
Income from Zero-Coupon and Payment-in-Kind Securities
. A Fund may acquire zero-coupon or other securities (such as strips) issued with OID. As a holder of those securities,
a Fund must include in its gross income the OID that accrues on the securities during the taxable year, even if it receives no corresponding payment on them during the year. Similarly, a Fund must include in its gross income securities it receives
as “interest” on payment-in-kind securities. With respect to “market discount bonds” (
i.e.
, bonds purchased at a price less than their issue price plus the portion of OID previously
accrued thereon), a Fund may elect to accrue and include in income each taxable year a portion of the bonds’ market discount. Because each Fund annually must distribute substantially all of its investment company taxable income, including any
accrued OID and other non-cash income, to satisfy the Distribution Requirement and avoid imposition of the Excise Tax, a Fund may be required in a particular year to distribute as a dividend an amount that is greater than the total amount of cash it
actually receives. Those distributions will be made from a Fund’s cash assets or from the proceeds of sales of portfolio securities, if necessary. A Fund may realize capital gains or losses from those sales, which would increase or decrease
its investment company taxable income and/or net capital gain.
Income from REITs
. A Fund may invest in REITs that (1) hold residual interests in real estate mortgage investment conduits (“REMICs”) or (2) engage in mortgage
securitization transactions that cause the REITs to be taxable mortgage pools (“TMPs”) or have a qualified REIT subsidiary that is a TMP. A portion of the net income allocable to REMIC residual interest holders may be an “excess
inclusion.” The Code authorizes the issuance of regulations dealing with the taxation and reporting of excess inclusion income of REITs and RICs that hold residual REMIC interests and of REITs, or qualified REIT subsidiaries that are TMPs.
Although those regulations have not yet been issued, the U.S. Treasury Department and the Service issued a notice in 2006 (“Notice”) announcing that, pending the issuance of further guidance, the Service would apply the principles in the
following paragraphs to all excess inclusion income, whether from REMIC residual interests or TMPs.
The Notice provides that a REIT must
(1) determine whether it or its qualified REIT subsidiary (or a part of either) is a TMP and, if so, calculate the TMP’s excess inclusion income under a “reasonable method,” (2) allocate its excess inclusion income to its
shareholders generally in proportion to dividends paid, (3) inform shareholders that are not “disqualified organizations” (
i.e.
, governmental units and tax-exempt entities that are not subject to
the unrelated business income tax) of the amount and character of the excess inclusion income allocated thereto, (4) pay tax (at the highest federal income tax rate imposed on corporations) on the excess inclusion income allocable to its
shareholders that are disqualified organizations, and (5) apply the withholding tax provisions with respect to the excess inclusion part of dividends paid to foreign persons without regard to any treaty exception or reduction in tax rate. Excess
inclusion income allocated to certain tax-exempt entities (including qualified retirement plans, individual retirement accounts, and public charities) constitutes unrelated business taxable income to them.
A RIC with excess inclusion income is
subject to rules identical to those in clauses (2) through (5) (substituting “who are nominees” for “that are not ‘disqualified organizations’” in clause (3) and inserting “record” after
“its” in clause (4)). The Notice further provides that a RIC is not required to report the amount and character of the excess inclusion income allocated to its shareholders that are not nominees, except that (1) a RIC with excess
inclusion income from all sources that exceeds 1% of its gross income must do so and (2) any other RIC must do so by taking into account only excess inclusion income allocated to the RIC from a REIT the excess inclusion income of which exceeded 3%
of the REIT’s dividends. A Fund will not invest directly in REMIC residual interests, and does not intend to invest in REITs that, to its knowledge, invest in those interests or are TMPs or have a qualified REIT subsidiary that is a TMP.
Each Fund may
invest in REITs. REIT dividends and capital gain distributions are generally effective for taxable years beginning after December 31, 2017, the Code generally allows individuals and certain other non-corporate entities a deduction for 20% of (1)
qualified REIT dividends and (2) qualified publicly traded partnership income. Recently issued proposed regulations allow a RIC to pass the character of its qualified REIT dividends through to its shareholders provided certain holding period
requirements are met. As a result, an investor who invests directly in REITs will be able to receive the benefit of such deductions, while a shareholder in a Fund that invests in REITs will not.
Taxation
of Shareholders
.
Basis Election and Reporting
. A shareholder’s basis in Shares of a Fund that he or she acquires after December 31, 2011 (“Covered Shares”), will be determined in accordance with the Fund’s default method, which is average
basis, unless the shareholder affirmatively elects in writing (which may be electronic) to use a different acceptable basis determination method, such as a specific identification method. The basis determination method a Fund shareholder elects (or
the default method) may not be changed with respect to a redemption of Covered Shares after the settlement date of the redemption.
In addition to the requirement to
report the gross proceeds from redemptions of shares, each Fund (or its administrative agent) must report to the Service and furnish to its shareholders the basis information for Covered Shares and indicate whether they had a short-term (one year or
less) or long-term (more than one year) holding period. Fund shareholders should consult with their tax advisers to decide the best Service-accepted basis determination method for their tax situation and to obtain more information about how the
basis reporting law applies to them.
Foreign Account
Tax Compliance Act (“FATCA”)
. As mentioned in the Prospectus, under FATCA “foreign financial institutions” (“FFIs”) or “non-financial foreign entities”
(“NFFEs”) that are Fund shareholders may be subject to a generally nonrefundable 30% withholding tax on income dividends. That withholding tax generally can be avoided, however, as discussed below.
An FFI can avoid FATCA withholding by
becoming a “participating FFI,” which requires the FFI to enter into a tax compliance agreement with the Service. Under such an agreement, a participating FFI agrees to (1) verify and document whether it has U.S. accountholders, (2)
report certain information regarding their accounts to the Service, and (3) meet certain other specified requirements.
The U.S. Treasury has negotiated
intergovernmental agreements (“IGAs”) with certain countries and is in various stages of negotiations with other foreign countries with respect to one or more alternative approaches to implement FATCA; entities in those countries may be
required to comply with the terms of the IGA instead of Treasury regulations. An FFI resident in a country that has entered into a Model I IGA with the United States must report to that country’s government (pursuant to the terms of the
applicable IGA and applicable law), which will, in turn, report to the Service. An FFI resident in a Model II IGA country generally must comply with U.S. regulatory requirements, with certain exceptions, including the treatment of recalcitrant
accountholders. An FFI resident in one of those countries that complies with whichever of the foregoing applies will be exempt from FATCA withholding.
An NFFE that is the beneficial owner
of a payment from a Fund can avoid FATCA withholding generally by certifying its status as such and, in certain circumstances that it does not have any substantial U.S. owners or by providing the name, address, and taxpayer identification number of
each such owner. The NFFE will report to the Fund or other applicable withholding agent, which will, in turn, report information to the Service.
Those non-U.S. shareholders also may
fall into certain exempt, excepted, or deemed compliant categories established by Treasury regulations, IGAs, and other guidance regarding FATCA. An FFI or NFFE that invests in a Fund will need to provide the Fund with documentation properly
certifying the entity’s status under FATCA to avoid FATCA withholding. The requirements imposed by FATCA are different from, and in addition to, the tax certification rules to avoid backup withholding described above. Foreign investors are
urged to consult their tax advisers regarding the application of these requirements to their own situation and the impact thereof on their investment in a Fund.
* * * * *
The foregoing is only a general
summary of some of the important federal tax considerations generally affecting the Funds. No attempt is made to present a complete explanation of the federal tax treatment of the Funds’ activities, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors are urged to consult their own tax advisers for more detailed information and for information regarding any state, local, or foreign taxes applicable to a Fund and to
distributions therefrom.
Capital Loss Carryforwards
. As of October 31, 2018, the following operational Funds had capital loss carryforwards available to offset future capital gains in the respective
amounts, through the year indicated below:
|
Utilized
in
Current Year
|
Expiring
October 31, 2019
|
Unlimited
Short-Term
|
Unlimited
Long-Term
|
Funds
|
|
|
|
|
Direxion
Daily CSI 300 China A Share Bull 2X Shares
|
$4,871,759
|
$—
|
$13,952,760
|
$—
|
Direxion
Daily CSI China Internet Index Bull 2X Shares
|
$—
|
$—
|
$27,513,478
|
$—
|
Direxion
Daily High Yield Bear 2X Shares
|
$—
|
$—
|
$1,418,080
|
$—
|
Direxion
Daily MSCI European Financials Bull 2X Shares
|
$—
|
$—
|
$798,092
|
$—
|
Direxion
Daily S&P 500
®
Bull 2X Shares
|
$—
|
$—
|
$—
|
$—
|
Direxion
Daily Small Cap Bull 2X Shares
|
$—
|
$—
|
$—
|
$—
|
For federal income tax purposes, a
Fund is generally permitted to carry forward a net capital loss in any year to offset net capital gains, if any, during its taxable years following the year of the loss. The carryforward of capital losses realized in
taxable years beginning prior to December 23, 2010,
however, is limited to an eight-year period following the year of realization. Thereafter, capital losses carried forward will retain their character as either short-term or long-term capital losses rather than being considered all short-term as
under previous law. A Fund must use losses that do not expire before it uses losses that do expire and a Fund’s ability to utilize capital losses in a given year or in total may be limited. To the extent subsequent net capital gains are offset
by such losses, they would not result in federal income tax liability to a Fund and as noted above, would not be distributed as such to shareholders.
The Funds' financial
statements for the fiscal year ended October 31, 2018, are incorporated herein by reference from the Funds' Annual Report to Shareholders dated October 31, 2018.
To receive a copy of the Prospectus or
Annual or Semi-Annual Report to shareholders, without charge, write to or call the Trust at the contact information listed below:
Write
to:
|
Direxion
Shares ETF Trust
1301 Avenue of the Americas (6th Avenue), 28th Floor
New York, New York 10019
|
Call:
|
866-476-7523
|
By
Internet:
|
www.direxioninvestments.com
|
APPENDIX A
Description of Corporate Bond Ratings
Moody’s
Investors Service and S&P Global Ratings are two prominent independent rating agencies that rate the quality of bonds. Following are expanded explanations of the ratings shown in the Prospectus and this SAI.
Moody’s Investors Service
–
Global Long-Term Ratings
Ratings assigned
on Moody’s global long-term rating scale are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and
public sector entities. Long-term ratings are assigned to issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a default or impairment on contractual financial obligations and the expected
financial loss suffered in the event of default or impairment. Such ratings have been published by Moody’s Investors Service, Inc. and Moody’s Analytics Inc.
Aaa
:
Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
Aa
:
Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A
:
Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
Baa
:
Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.
Ba
:
Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
B
:
Obligations rated B are considered speculative and are subject to high credit risk.
Caa
:
Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
Ca
:
Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C
:
Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody’s appends numerical
modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of that generic rating category. Additionally, a “(hyb)” indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms.*
* By their terms, hybrid securities
allow for the omission of scheduled dividends, interest, or principal payments, which can potentially result in impairment if such an omission occurs. Hybrid securities may also be subject to contractually allowable write-downs of principal that
could result in impairment. Together with the hybrid indicator, the long-term obligation rating assigned to a hybrid security is an expression of the relative credit risk associated with that security.
Moody’s Investors Service
–
National Scale Long-Term Ratings
Moody’ s long-term National
Scale Ratings (NSRs) are opinions of the relative creditworthiness of issuers and financial obligations within a particular country. NSRs are not designed to be compared among countries; rather, they address relative credit risk within a given
country. Moody’s assigns national scale ratings in certain local capital markets in which investors have found the global rating scale provides inadequate differentiation among credits or is inconsistent with a rating scale already in common
use in the country. In each specific country, the last two characters of the rating indicate the country in which the issuer is located (
e.g.
, Aaa.br for Brazil).
Aaa.n
:
Issuers or issues rated Aaa.n demonstrate the strongest creditworthiness relative to other domestic issuers.
Aa.n
:
Issuers or issues rated Aa.n demonstrate very strong creditworthiness relative to other domestic issuers.
A.n
:
Issuers or issues rated A.n present above-average creditworthiness relative to other domestic issuers.
Baa.n
:
Issuers or issues rated Baa.n represent average creditworthiness relative to other domestic issuers.
Ba.n
:
Issuers or issues rated Ba.n demonstrate below-average creditworthiness relative to other domestic issuers.
B.n
:
Issuers or issues rated B.n demonstrate weak creditworthiness relative to other domestic issuers.
Caa.n
:
Issuers or issues rated Caa.n demonstrate very weak creditworthiness relative to other domestic issuers.
Ca.n
:
Issuers or issues rated Ca.n demonstrate extremely weak creditworthiness relative to other domestic issuers.
C.n
:
Issuers or issues rated C.n demonstrate the weakest creditworthiness relative to other domestic issuers.
Note: Moody’s appends numerical
modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of that generic rating category. National scale long-term ratings of D.ar and E.ar may also be applied to Argentine obligations.
S&P Global Ratings
–
Long-Term Issue Credit Ratings*
An S&P Global Ratings issue
credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note
programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The
opinion reflects S&P Global Ratings' view of the obligor's capacity and willingness to meet its financial commitments as they come due, and this opinion may assess terms, such as collateral security and subordination, which could affect ultimate
payment in the event of default. Issue credit ratings can be either long-term or short-term. Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. Short-term ratings are also used to indicate
the creditworthiness of an obligor with respect to put features on long-term obligations. Medium-term notes are assigned long-term ratings.
Issue credit ratings are based, in
varying degrees, on S&P Global Ratings' analysis of the following considerations:
•
|
The likelihood of
payment--the capacity and willingness of the obligor to meet its financial commitments on an obligation in accordance with the terms of the obligation;
|
•
|
The nature and provisions
of the financial obligation, and the promise we impute; and
|
•
|
The
protection afforded by, and relative position of, the financial obligation in the event of a bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
|
Issue ratings are an assessment of
default risk, but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above.
(Such differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)
AAA
: An obligation rated 'AAA' has the highest rating assigned by S&P Global Ratings. The obligor's capacity to meet its financial commitments on the obligation is extremely strong.
AA
: An
obligation rated 'AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitments on the obligation is very strong.
A
: An
obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitments on the
obligation is still strong.
BBB
: An
obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments on the obligation.
BB; B; CCC; CC; and C
: Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposure to adverse conditions.
BB
:
An obligation rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to the obligor's inadequate
capacity to meet its financial commitments on the obligation.
B
: An
obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitments on the obligation. Adverse business, financial, or economic conditions will likely impair
the obligor's capacity or willingness to meet its financial commitments on the obligation.
CCC
:
An obligation rated 'CCC' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation. In the event of adverse business,
financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitments on the obligation.
CC
: An
obligation rated 'CC' is currently highly vulnerable to nonpayment. The 'CC' rating is used when a default has not yet occurred, but S&P Global Ratings expects default to be a virtual certainty, regardless of the anticipated time to
default.
C
: An obligation rated 'C' is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared with obligations that are rated
higher.
D
: An obligation rated 'D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the 'D' rating category is used when payments on an obligation are not made on the date due, unless S&P
Global Ratings believes that such payments will be made within five business days in the absence of a stated grace period or within the earlier of the stated grace period or 30 calendar days. The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligation's rating is lowered to 'D' if it is subject to a distressed exchange
offer.
NR
: This
indicates that no rating has been requested, or that there is insufficient information on which to base a rating, or that S&P Global Ratings does not rate a particular obligation as a matter of policy.
*The ratings from 'AA' to 'CCC' may be
modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
Moody’s Investors Service
–
Short Term Obligation Ratings
The Municipal Investment Grade (MIG)
scale is used to rate US municipal bond anticipation notes of up to three years maturity. Municipal notes rated on the MIG scale may be secured by either pledged revenues or proceeds of a take-out financing received prior to note maturity. MIG
ratings expire at the maturity of the obligation, and the issuer’s long-term rating is only one consideration in assigning the MIG rating. MIG ratings are divided into three levels
—
MIG 1 through MIG 3
—
while speculative grade short-term obligations are designated SG.
MIG 1
:
This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
MIG 2
:
This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
MIG 3
:
This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.
SG
: This
designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
S&P Global Ratings
–
Municipal Short-Term Note Ratings
An S&P Global
Ratings U.S. municipal note rating reflects S&P Global Ratings opinion about the liquidity factors and market access risks unique to the notes. Notes due in three years or less will likely receive a note rating. Notes with an original maturity
of more than three years will most likely receive a long-term debt rating. In determining which type of rating, if any, to assign, S&P Global Ratings analysis will review the following considerations:
•
|
Amortization
schedule--the larger the final maturity relative to other maturities, the more likely it will be treated as a note; and
|
•
|
Source
of payment--the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
|
SP-1
:
Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.
SP-2
:
Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
SP-3
:
Speculative capacity to pay principal and interest.
Moody’s Investors Service
–
Global Short Term Rating Scale
Ratings assigned
on Moody’s global short-term rating scale are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and
public sector entities. Short-term ratings are assigned to obligations with an original maturity of thirteen months or less and reflect both on the likelihood of a default or impairment on contractual financial obligations and the expected financial
loss suffered in the event of default or impairment.
P-1
:
Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
P-2
:
Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
P-3
:
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
NP
:
Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
S&P Global Ratings
–
Short-Term Issue Credit Ratings
A-1
:
A short-term obligation rated 'A-1' is rated in the highest category by S&P Global Ratings. The obligor's capacity to meet its financial commitments on the obligation is strong. Within this category, certain obligations are designated with a
plus sign (+). This indicates that the obligor's capacity to meet its financial commitments on these obligations is extremely strong.
A-2
:
A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial
commitments on the obligation is satisfactory.
A-3
: A
short-term obligation rated 'A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments on the
obligation.
B
: A
short-term obligation rated 'B' is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties that could lead to the
obligor's inadequate capacity to meet its financial commitments.
C
: A
short-term obligation rated 'C' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation.
D
: A
short-term obligation rated 'D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the 'D' rating category is used when payments on an obligation are not made on the date due, unless S&P Global Ratings believes
that such payments will be made within any stated grace period. However, any stated grace period longer than five business days will be treated as five business days. The 'D' rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action and where default on an obligation is a virtual certainty, for example, due to automatic stay provisions. An obligation’s rating is lowered to ‘D’ if it is subject to a distressed exchange
offer.
Dual ratings may
be assigned to debt issues that have a put option or demand feature. The first component of the rating addresses the likelihood of repayment of principal and interest as due, and the second component of the rating addresses only the demand feature.
The first component of the rating can relate to either a short-term or long-term transaction and accordingly use either short-term or long-term rating symbols. The second component of the rating relates to the put option and is assigned a short-term
rating symbol (for example, 'AAA/A-1+' or 'A-1+/A-1'). With U.S. municipal short-term demand debt, the U.S. municipal short-term note rating symbols are used for the first component of the rating (for example, 'SP-1+/A-1+').
Direxion Shares ETF Trust
1301
Avenue of the Americas (6th Avenue), 28th Floor
|
New York,
New York 10019
|
866-476-7523
|
www.direxioninvestments.com
3X
Bull Funds
|
3X Bear Funds
|
Direxion
Daily Mid Cap Bull 3X Shares (MIDU)
|
Direxion
Daily Mid Cap Bear 3X Shares (MIDZ)
|
Direxion
Daily S&P 500
®
Bull 3X Shares (SPXL)
|
Direxion
Daily S&P 500
®
Bear 3X Shares (SPXS)
|
Direxion
Daily Small Cap Bull 3X Shares (TNA)
|
Direxion
Daily Small Cap Bear 3X Shares (TZA)
|
Direxion
Daily Dow 30 Bull 3X Shares
|
Direxion
Daily Dow 30 Bear 3X Shares
|
Direxion
Daily MSCI Brazil Bull 3X Shares (BRZU)
|
|
Direxion
Daily MSCI Canada Bull 3X Shares
|
Direxion
Daily MSCI Canada Bear 3X Shares
|
Direxion
Daily FTSE China Bull 3X Shares (YINN)
|
Direxion
Daily FTSE China Bear 3X Shares (YANG)
|
Direxion
Daily MSCI Developed Markets Bull 3X Shares (DZK)
|
Direxion
Daily MSCI Developed Markets Bear 3X Shares (DPK)
|
Direxion
Daily MSCI Emerging Markets Bull 3X Shares (EDC)
|
Direxion
Daily MSCI Emerging Markets Bear 3X Shares (EDZ)
|
Direxion
Daily FTSE Europe Bull 3X Shares (EURL)
|
|
Direxion
Daily MSCI India Bull 3X Shares (INDL)
|
|
Direxion
Daily MSCI Italy Bull 3X Shares
|
Direxion
Daily MSCI Italy Bear 3X Shares
|
Direxion
Daily MSCI Japan Bull 3X Shares (JPNL)
|
|
Direxion
Daily Latin America Bull 3X Shares (LBJ)
|
|
Direxion
Daily MSCI Mexico Bull 3X Shares (MEXX)
|
Direxion
Daily MSCI Mexico Bear 3X Shares
|
Direxion
Daily Russia Bull 3X Shares (RUSL)
|
Direxion
Daily Russia Bear 3X Shares (RUSS)
|
Direxion
Daily MSCI South Korea Bull 3X Shares (KORU)
|
|
Direxion
Daily EURO STOXX 50
®
Bull 3X Shares (EUXL)
|
Direxion
Daily EURO STOXX 50
®
Bear 3X Shares
|
Direxion
Daily Aerospace & Defense Bull 3X Shares (DFEN)
|
Direxion
Daily Aerospace & Defense Bear 3X Shares
|
Direxion
Daily S&P Biotech Bull 3X Shares (LABU)
|
Direxion
Daily S&P Biotech Bear 3X Shares (LABD)
|
Direxion
Daily Communication Services Index Bull 3X Shares (TAWK)
|
Direxion
Daily Communication Services Index Bear 3X Shares (MUTE)
|
Direxion
Daily Consumer Discretionary Bull 3X Shares (WANT)
|
Direxion
Daily Consumer Discretionary Bear 3X Shares (PASS)
|
Direxion
Daily Consumer Staples Bull 3X Shares (NEED)
|
Direxion
Daily Consumer Staples Bear 3X Shares (LACK)
|
Direxion
Daily Energy Bull 3X Shares (ERX)
|
Direxion
Daily Energy Bear 3X Shares (ERY)
|
Direxion
Daily Financial Bull 3X Shares (FAS)
|
Direxion
Daily Financial Bear 3X Shares (FAZ)
|
Direxion
Daily Gold Miners Index Bull 3X Shares (NUGT)
|
Direxion
Daily Gold Miners Index Bear 3X Shares (DUST)
|
Direxion
Daily Healthcare Bull 3X Shares (CURE)
|
|
Direxion
Daily Homebuilders & Supplies Bull 3X Shares (NAIL)
|
|
Direxion
Daily Industrials Bull 3X Shares (DUSL)
|
Direxion
Daily Industrials Bear 3X Shares
|
Direxion
Daily Junior Gold Miners Index Bull 3X Shares (JNUG)
|
Direxion
Daily Junior Gold Miners Index Bear 3X Shares (JDST)
|
Direxion
Daily Metals & Mining Bull 3X Shares
|
Direxion
Daily Metals & Mining Bear 3X Shares
|
Direxion
Daily Natural Gas Related Bull 3X Shares (GASL)
|
Direxion
Daily Natural Gas Related Bear 3X Shares (GASX)
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares (GUSH)
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares (DRIP)
|
Direxion
Daily Pharmaceutical & Medical Bull 3X Shares (PILL)
|
Direxion
Daily Pharmaceutical & Medical Bear 3X Shares
|
Direxion
Daily Preferred Stock Bull 3X Shares
|
|
Direxion
Daily MSCI Real Estate Bull 3X Shares (DRN)
|
Direxion
Daily MSCI Real Estate Bear 3X Shares (DRV)
|
Direxion
Daily Regional Banks Bull 3X Shares (DPST)
|
Direxion
Daily Regional Banks Bear 3X Shares (WDRW)
|
Direxion
Daily Retail Bull 3X Shares (RETL)
|
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares (UBOT)
|
|
3X
Bull Funds
|
3X Bear Funds
|
Direxion
Daily Semiconductor Bull 3X Shares (SOXL)
|
Direxion
Daily Semiconductor Bear 3X Shares (SOXS)
|
Direxion
Daily Technology Bull 3X Shares (TECL)
|
Direxion
Daily Technology Bear 3X Shares (TECS)
|
Direxion
Daily Transportation Bull 3X Shares (TPOR)
|
Direxion
Daily Transportation Bear 3X Shares
|
Direxion
Daily Utilities Bull 3X Shares (UTSL)
|
Direxion
Daily Utilities Bear 3X Shares
|
Direxion
Daily 7-10 Year Treasury Bull 3X Shares (TYD)
|
Direxion
Daily 7-10 Year Treasury Bear 3X Shares (TYO)
|
Direxion
Daily 20+ Year Treasury Bull 3X Shares (TMF)
|
Direxion
Daily 20+ Year Treasury Bear 3X Shares (TMV)
|
February 28, 2019
The shares offered in this prospectus (each a “Fund”
and collectively the “Funds”) are, or upon commencement of operations will be, listed and traded on the NYSE Arca, Inc.
The Funds seek
daily
leveraged
investment results and are intended to be used as short-term trading vehicles. The Funds with “Bull” in their names attempt to provide daily investment results that correspond to three times the performance of an
underlying index and are collectively referred to as the “Bull Funds.” The Funds with “Bear” in their names attempt to provide daily investment results that correspond to three times the inverse (or opposite) of the
performance of an underlying index and are collectively referred to as the “Bear Funds.”
The Funds are not intended to be used by, and are not
appropriate for, investors who do not intend to actively monitor and manage their portfolios. The Funds are very different from most mutual funds and exchange-traded funds. Investors should note that:
(1)
|
The Funds pursue
daily leveraged
investment objectives, which means that the Funds are riskier than alternatives that do not use leverage because the Funds magnify the performance of their underlying index.
|
(2)
|
Each Bear Fund pursues a
daily leveraged
investment objective that is
inverse
to the performance of its underlying index, a result opposite of most mutual funds and exchange-traded funds.
|
(3)
|
The
pursuit of daily investment objectives means that the return of a Fund for a period longer than a full trading day will be the product of a series of daily leveraged returns for each trading day during the relevant period. As a consequence,
especially in periods of market volatility, the volatility of the underlying index may affect a Fund’s return as much as, or more than, the return of the underlying index. Further, the return for investors that invest for periods less than a
full trading day will not be the product of the return of a Fund’s stated daily leveraged investment objective and the performance of the underlying index for the full trading day. During periods of high volatility, the Funds may not perform
as expected and the Funds may have losses when an investor may have expected gains if the Funds are held for a period that is different than one trading day.
|
The Funds are not suitable for all investors. The Funds are
designed to be utilized only by sophisticated investors, such as traders and active investors employing dynamic strategies. Investors in the Funds should:
(a)
|
understand the risks
associated with the use of leverage;
|
(b)
|
understand the consequences
of seeking daily leveraged investment results;
|
(c)
|
for a Bear Fund, understand
the risk of shorting; and
|
(d)
|
intend
to actively monitor and manage their investments.
|
Investors who do not understand the Funds, or do not intend to
actively manage their funds and monitor their investments, should not buy the Funds.
There is no assurance that any Fund will achieve its investment
objective and an investment in a Fund could lose money. No single Fund is a complete investment program.
If a Fund’s underlying index moves
more than 30% on a given trading day in a direction adverse to the Fund, the Fund’s investors would lose all of their money. The Funds’ investment adviser, Rafferty Asset Management, LLC, will attempt to position each Fund’s
portfolio to ensure that a Fund does not gain or lose more than 90% of its net asset value on a given trading day. As a consequence, a Fund’s portfolio should not be responsive to underlying index movements beyond 30% on a given trading day,
whether that movement is favorable or adverse to the Fund. For example, if a Bull Fund’s underlying index was to gain 35% on a given trading day, that Fund should be limited to a gain of 90% for that day, which corresponds to 300% of an
underlying index gain of 30%, rather than 300% of an underlying index gain of 35%.
IMPORTANT NOTE: Beginning on January 1, 2021, as permitted
by regulations adopted by the Securities and Exchange Commission, paper copies of each Fund’s annual and semi-annual shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the shareholder reports
from your financial intermediary, such as a broker-dealer or bank. Instead, annual and semi-annual shareholder reports will be available on a website, and you will be notified by mail each time a report is posted and provided with a website link to
access the report.
You may elect to receive all future annual
and semi-annual shareholder reports in paper free of charge. To elect to continue to receive paper copies of shareholder reports through the mail or to otherwise change your delivery method, contact your financial intermediary or follow the
instructions included with this disclosure. Your election to receive shareholder reports in paper will apply to all funds that you hold through the financial intermediary. If you already elected to receive shareholder reports electronically, you
will not be affected by this change and you need not take any action.
These securities have not been approved or disapproved by
the U.S. Securities and Exchange Commission (“SEC”) or the U.S. Commodity Futures Trading Commission (“CFTC”), nor have the SEC or CFTC passed upon the adequacy of this Prospectus. Any representation to the contrary is a
criminal offense.
Direxion Daily
Mid Cap Bull 3X Shares
Important
Information Regarding the Fund
The Direxion Daily Mid Cap Bull 3X
Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier than alternatives
that do not use leverage because the Fund’s objective is to magnify the daily performance of the S&P MidCap 400
®
Index (the
“Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index
for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index
may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.23%
|
Acquired
Fund Fees and Expenses
(1)
|
0.11%
|
Total
Annual Fund Operating Expenses
|
1.09%
|
Expense
Cap/Reimbursement
(2)
|
-0.03%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.06%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$108
|
$344
|
$598
|
$1,326
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 39% of the average
value of its portfolio. However, this portfolio turnover rate
1
|
Direxion Shares ETF
Trust Prospectus
|
is calculated without regard to cash instruments or
derivative transactions. If the Fund's extensive use of derivatives was reflected, the Fund's portfolio turnover rate would be significantly higher.
Principal Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index measures the performance of
400 mid-sized companies in the United States. The Index is a float-adjusted market capitalization weighted index composed of liquid common stocks. As of December 31, 2018 the Index constituents had a median total market capitalization of $3.5
billion, total market capitalizations ranging from $962 million to $11.9 billion and were concentrated in the information technology, financials and industrials sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements
during the day will affect whether the Fund’s
portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has fallen on a given day, net
assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and “trading day,”
refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated
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given any set of assumptions for the following
factors: a) Index volatility; b) Index performance; c) period of time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below
illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated Fund returns for a number of combinations of Index volatility and Index performance over a one-year period.
Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses
and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 14.07%. The Index’s highest volatility rate for any one calendar year during the five-year period was 16.14% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 6.03%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility
of ETFs or instruments that reflect the value of the
Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no
assurance
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Direxion Shares ETF
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that a security that is deemed liquid when purchased
will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience
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ETF Trust Prospectus
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performance that is
greater than, or less than, the Fund’s stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their
shares may trade at a discount or a premium.
Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not be able to liquidate its holdings in ETFs at an
optimal price or time, which may adversely affect the Fund’s performance.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Industrials Sector Risk
—
Stock prices of issuers in the industrials sector are affected by supply and demand both for their specific product or
service and for industrials sector products in general. Government regulation, world events and economic conditions will also affect the performance of investments in such issuers. Aerospace and defense companies, a component of the industrials
sector, can be significantly affected by government spending policies because companies involved in this industry rely to a significant extent on U.S. and other government demand for their products and services. Thus, the financial condition of, and
investor interest in, aerospace and defense companies are heavily influenced by government defense spending policies which are typically under pressure from efforts to control government spending budgets. Transportation companies, another component
of the industrials sector, are subject to cyclical performance and therefore investment in such companies may experience occasional sharp price movements which may result from changes in the economy, fuel prices, labor agreements and insurance
costs.
Information
Technology Sector Risk
—
The value of stocks of information technology companies and companies that rely heavily on
technology is particularly vulnerable
to rapid changes in technology product cycles, rapid product obsolescence, government regulation and competition,
both domestically and internationally, including competition from competitors with lower production costs. Information technology companies and companies that rely heavily on technology, especially
those of smaller,
less-seasoned companies,
tend to be more volatile than the overall market. Information technology
companies
are heavily dependent
5
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Direxion Shares ETF
Trust Prospectus
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on patent and
intellectual property rights, the loss or impairment of which may adversely affect profitability. Additionally, companies in the information technology sector may face dramatic and often unpredictable changes in growth rates and competition for the
services of qualified personnel.
Small- and/or Mid-Capitalization Company
Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial
resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant institutional ownership and
are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure, which could increase
the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may
be subject to credit risk with respect to the
financial institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and
credit risk related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain
a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or
Direxion Shares
ETF Trust Prospectus
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6
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create or redeem Creation Units, trading spreads and
the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
The performance shown prior to June
29, 2012 reflects the Fund’s previous daily leveraged investment objective, before fees and expenses, of 300% of the Russell MidCap
®
Index.
After June 29, 2012, the Fund began to seek a daily leveraged investment objective, before fees and expenses, of 300% of the S&P MidCap 400
®
Index. If the Fund had continued to seek its previous investment objective, the calendar year performance of the Fund would have varied from that shown.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 43.75% for the quarter ended March 31, 2013 and its lowest calendar quarter return was -52.78% for the quarter ended September 30, 2011. The year-to-date return as
of December 31, 2018 was -38.95%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(1/8/2009)
|
Return
Before Taxes
|
-38.95%
|
8.20%
|
28.05%
|
Return
After Taxes on Distributions
|
-39.09%
|
7.74%
|
25.42%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-23.03%
|
6.32%
|
23.06%
|
S&P
MidCap 400 Index
(reflects no deduction for fees, expenses or taxes)
|
-11.08%
|
6.03%
|
13.65%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the one-year period because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in January 2009
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may
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Direxion Shares ETF
Trust Prospectus
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be taxed later upon withdrawal. Distributions by the
Fund may be significantly higher than those of most other ETFs.
Payments to Broker-Dealers and Other
Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may
create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
Index Information
The “S&P MidCap 400
®
Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard &
Poor’s
®
and S&P
®
are registered
trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones
Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones,
S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P MidCap 400
®
Index.
Direxion Shares
ETF Trust Prospectus
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8
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Direxion
Daily Mid Cap Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily Mid
Cap Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier
than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the S&P MidCap
®
400
Index (the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return
of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility
of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading
day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.69%
|
Acquired
Fund Fees and Expenses
(1)
|
0.14%
|
Total
Annual Fund Operating Expenses
|
1.58%
|
Expense
Cap/Reimbursement
(2)
|
-0.49%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.09%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$111
|
$451
|
$814
|
$1,837
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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Direxion Shares ETF
Trust Prospectus
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the
Fund’s net assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that
have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index measures
the performance of 400 mid-sized companies in the United States. The Index is a float-adjusted market capitalization weighted index composed of liquid common stocks. As of December 31, 2018 the Index constituents had a median total market
capitalization of $3.5 billion, total market capitalizations ranging from $962 million to $11.9 billion and were concentrated in the information technology, financials and industrials sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund
should fall, meaning the Fund’s exposure will
need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the
close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below
Direxion Shares
ETF Trust Prospectus
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10
|
illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 14.07%. The Index’s highest volatility rate for any one calendar year during the five-year period was 16.14% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 6.03%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund,
see “Additional Information Regarding Investment
Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage
Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more
money in market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that
an investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial
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Direxion Shares ETF
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instruments and the Fund's transactions could
exacerbate the price increase of the securities of the Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the
Fund from achieving its inverse leveraged investment
objective, even if the Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions,
netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional
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ETF Trust Prospectus
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index tracking funds. To achieve its daily inverse
investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or index declines. When the Fund shorts securities, including securities of
another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it has sold short and returning that security to the entity that lent the
security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Industrials Sector Risk
—
Stock prices of issuers in the industrials sector are affected by supply and demand both for their specific product or
service and for industrials sector
13
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Direxion Shares ETF
Trust Prospectus
|
products in general. Government regulation, world
events and economic conditions will also affect the performance of investments in such issuers. Aerospace and defense companies, a component of the industrials sector, can be significantly affected by government spending policies because companies
involved in this industry rely to a significant extent on U.S. and other government demand for their products and services. Thus, the financial condition of, and investor interest in, aerospace and defense companies are heavily influenced by
government defense spending policies which are typically under pressure from efforts to control government spending budgets. Transportation companies, another component of the industrials sector, are subject to cyclical performance and therefore
investment in such companies may experience occasional sharp price movements which may result from changes in the economy, fuel prices, labor agreements and insurance costs.
Information
Technology Sector Risk
—
The value of stocks of information technology companies and companies that rely heavily on
technology is particularly vulnerable
to rapid changes in technology product cycles, rapid product obsolescence, government regulation and competition,
both domestically and internationally, including competition from competitors with lower production costs. Information technology companies and companies that rely heavily on technology, especially
those of smaller,
less-seasoned companies,
tend to be more volatile than the overall market. Information technology companies are
heavily dependent on patent and intellectual property rights, the loss or impairment of which may adversely affect profitability. Additionally, companies in the information technology sector may face dramatic and often unpredictable changes in
growth
rates and competition for the services of qualified personnel.
Small- and/or Mid-Capitalization Company
Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial
resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant institutional ownership and
are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure, which could increase
the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade
Direxion Shares
ETF Trust Prospectus
|
14
|
at a discount to net asset value. Authorized
Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
The performance shown prior to June
29, 2012 reflects the Fund’s previous daily inverse leveraged investment objective,
before fees and
expenses, of -300% of the Russell MidCap
®
Index. After June 29, 2012, the Fund began to seek a daily inverse leveraged investment objective, before
fees and expenses, of -300% of the S&P MidCap
®
400 Index. If the Fund had continued to seek its previous investment objective, the calendar year
performance of the Fund would have varied from that shown.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 66.60% for the quarter ended December 31, 2018 and its lowest calendar quarter return was -39.05% for the quarter ended December 31, 2011. The year-to-date return
as of December 31, 2018 was 29.95%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(1/8/2009)
|
Return
Before Taxes
|
29.95%
|
-24.79%
|
-45.26%
|
Return
After Taxes on Distributions
|
29.79%
|
-24.81%
|
-45.27%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
17.72%
|
-15.88%
|
-13.33%
|
S&P
MidCap 400 Index
(reflects no deduction for fees, expenses or taxes)
|
-11.08%
|
6.03%
|
13.65%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the five-years and since inception periods because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
15
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Direxion Shares ETF
Trust Prospectus
|
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in January 2009
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “S&P MidCap
®
400 Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard &
Poor’s
®
and S&P
®
are registered
trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones
Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones,
S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P MidCap
®
400 Index.
Direxion Shares
ETF Trust Prospectus
|
16
|
Direxion
Daily S&P 500
®
Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
S&P 500
®
Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment
results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the S&P 500
®
Index (the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading
day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of
compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest
for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.20%
|
Acquired
Fund Fees and Expenses
(1)
|
0.07%
|
Total
Annual Fund Operating Expenses
|
1.02%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other
|
investment companies, including investments in money
market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund, they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that
presented in the Fund's financial highlights included in the Fund's reports to shareholders.
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$104
|
$325
|
$563
|
$1,248
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 95% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
Standard & Poor’s
®
selects the stocks comprising the Index on the basis of market capitalization, financial viability of the company and the public float, liquidity and
price of a company’s shares outstanding. The Index is a float-adjusted, market capitalization-weighted index. As of December 31, 2018, the Index consisted of 505 constituents, which had a median total market capitalization of $18.3 billion,
total market capitalizations ranging from $2.3 billion to $785 billion and were concentrated in the information technology and healthcare sectors.
17
|
Direxion Shares ETF
Trust Prospectus
|
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may
Direxion Shares
ETF Trust Prospectus
|
18
|
be significantly better or worse than the returns
shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 13.23%. The Index’s highest volatility rate for any one calendar year during the five-year period was 17.11% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 8.49%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments
of the market, which may affect the Fund’s
value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide, which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps
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Direxion Shares ETF
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that utilized the Index as the reference asset. Any
financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s
ability to access such collateral, the Fund may not
be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies are stayed or eliminated under
special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries
Direxion Shares
ETF Trust Prospectus
|
20
|
may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the
tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Healthcare Sector Risk
—
The profitability of companies in the healthcare sector may be affected by extensive, costly and uncertain government
regulation, restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient services, limited number
of products,
industry innovation,
changes in technologies and other market
developments.
Many healthcare companies
are heavily dependent on patent protection. The expiration of patents may adversely
affect
the profitability of these companies.
Many healthcare companies are subject to extensive litigation based on product
liability and similar claims. Healthcare companies are subject to competitive forces that may make it difficult to raise prices and, in fact,
may result in price discounting.
Many new products in the healthcare sector may be subject to regulatory approvals. The process of obtaining such approvals may be long and costly with no guarantee that any product will come to
market.
Information
Technology Sector Risk
—
The value of stocks of information technology companies and companies that rely heavily on
technology is particularly vulnerable
to rapid changes in technology product cycles, rapid product obsolescence, government regulation and competition,
both domestically and internationally, including competition from
competitors with lower production costs. Information
technology companies and companies that rely heavily on technology, especially those of smaller, less-seasoned companies, tend to be more volatile than the overall market. Information technology companies are heavily dependent on patent and
intellectual property rights, the loss or impairment of which may adversely affect profitability. Additionally, companies in the information technology sector may face dramatic and often unpredictable changes in growth rates and competition for the
services of qualified personnel.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Mid-Capitalization
Company Risk
-
Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and
financial resources than more established, larger-capitalization companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because
these stocks are not well known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities
compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result,
the performance of mid-capitalization companies can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
21
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Direxion Shares ETF
Trust Prospectus
|
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has
agreed to pay a borrower. These events could also
trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and ten-year periods compare
Direxion Shares
ETF Trust Prospectus
|
22
|
with those of one
or more broad-based market indexes for the same periods. The Fund’s past performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s
website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
The performance shown prior to June
29, 2012 reflects the Fund’s previous daily leveraged investment objective, before fees and expenses, of 300% of the Russell 1000
®
Index.
After June 29, 2012, the Fund began to seek a daily leveraged investment objective, before fees and expenses, of 300% of the S&P 500
®
Index. If
the Fund had continued to seek its previous investment objective, the calendar year performance of the Fund would have varied from that shown.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 51.56% for the quarter ended September 30, 2009 and its lowest calendar quarter return was -43.87% for the quarter ended September 30, 2011. The year-to-date return
as of December 31, 2018 was -24.86%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
10
Years
|
Return
Before Taxes
|
-24.86%
|
16.69%
|
29.45%
|
Return
After Taxes on Distributions
|
-25.08%
|
16.26%
|
28.53%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-14.64%
|
13.39%
|
25.58%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
13.12%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the one-year period because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in November 2008
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “S&P 500
®
Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard &
Poor’s
®
and S&P
®
are registered
trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones
Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones,
S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500
®
Index.
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Direxion Shares ETF
Trust Prospectus
|
Direxion
Daily S&P 500
®
Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
S&P 500
®
Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the
S&P 500
®
Index (the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of
each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase
the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors
that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.20%
|
Acquired
Fund Fees and Expenses
(1)
|
0.13%
|
Total
Annual Fund Operating Expenses
|
1.08%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$110
|
$343
|
$595
|
$1,317
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 1% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the Fund’s net
assets (plus borrowing for investment purposes). In addition, the Fund may invest a portion of its assets in a long position in the Direxion Daily S&P
500
®
Bear 1X Shares (the "Underlying Fund"), another series of the Direxion Shares ETF Trust managed by the Adviser. On a day-to-day basis, the Fund
is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including
U.S. government securities and repurchase agreements.
Standard &
Poor’s
®
selects the stocks comprising the Index on the basis of market capitalization, financial viability of the company and the public
float, liquidity and price of a company’s shares outstanding. The Index is a float-adjusted, market capitalization-weighted index. As of December 31, 2018, the Index consisted of 505 constituents, which had a median total market capitalization
of $18.3 billion, total market capitalizations ranging from $2.3 billion to $785 billion and were concentrated in the information technology and healthcare sectors.
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The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. The Fund may also invest in the Underlying Fund. The Underlying Fund's investment objective is to provide inverse exposure to the Index utilizing an investment strategy and investments that are similar to the Fund. At the close of the
markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s movements during the day will
affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index
has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program.
In addition, the Fund presents risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those
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shaded green (or
light gray) represent those scenarios where the Fund can be expected to return more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance.
The Fund’s actual returns may be significantly better or worse than the returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 13.23%. The Index’s highest volatility rate for any one calendar year during the five-year period was 17.11% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 8.49%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require
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only a limited initial investment, the use of
derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such
as swap agreements
and futures contracts, which will subject the Fund to additional risks that are different from those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to make timely
payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund,
the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are
delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also seek inverse or
“short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of the underlying
short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund may be
required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a
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limited market due
to various factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it
cannot meet its investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or
industries may be different from that of the Index.
In addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Underlying Fund Investment Risk
–
The Fund may invest a portion of its assets in the Underlying Fund, an ETF traded in the secondary market. The
performance of the Fund may be impacted by the performance of the market price of the shares of the Underlying Fund. The Fund’s net asset value is expected to change with a change in the value of the Underlying Fund’s shares, which are
impacted by the value of the Underlying Fund’s investments. An investment in the Fund may entail more fees and expenses. Please also see “Other Investment Companies (including ETFs) Risk” and “Market Price Variance
Risk.” Further, to the extent that the Adviser does not waive fees in an amount equal to the fees it earns from the Fund’s investment in the Underlying Fund, the Adviser is subject to a conflict of interest when investing the
Fund’s assets in the Underlying Fund as it will earn advisory fees from both the Fund and the Underlying Fund.
Healthcare Sector
Risk
—
The profitability of companies in the healthcare sector may be affected by extensive, costly and uncertain
government regulation, restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient services, limited number of products, industry
innovation,
changes in technologies and other market developments.
Many healthcare companies
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are heavily
dependent on patent protection. The expiration of patents may adversely affect the profitability of these companies. Many healthcare companies are subject to extensive litigation based on product liability and similar claims. Healthcare companies
are subject to competitive forces that may make it difficult to raise prices and, in fact, may result in price discounting. Many new products in the healthcare sector may be subject to regulatory approvals. The process of obtaining such approvals
may be long and costly with no guarantee that any product will come to market.
Information Technology Sector Risk
—
The value of stocks of information technology companies and companies that rely heavily on technology is particularly
vulnerable
to rapid changes in technology product cycles, rapid product obsolescence, government regulation and competition,
both
domestically and internationally, including competition from competitors with lower production costs. Information technology companies and companies that rely heavily on technology, especially those of smaller,
less-seasoned companies,
tend to be more volatile than the overall market. Information technology companies are heavily dependent on patent
and intellectual property rights, the loss or impairment of which may adversely affect profitability. Additionally, companies in the information technology sector may face dramatic and often unpredictable changes in growth
rates and competition for the services of qualified personnel.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Mid-Capitalization
Company Risk
-
Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and
financial resources than more established, larger-capitalization companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because
these stocks are not well known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities
compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result,
the performance of mid-capitalization companies can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business
operations, potentially resulting in financial
losses to the Fund. While the Fund has established business continuity plans and risk management systems seeking to address system breaches or failures, these plans and systems are inherently limited. Further, cybersecurity incidents could also
affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
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Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and ten-year periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance,
before and after taxes, is not necessarily an indication of how the Fund
will perform in the future. Updated performance is
available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
The performance
shown prior to June 29, 2012 reflects the Fund’s previous daily inverse leveraged investment objective, before fees and expenses, of -300% of the Russell 1000
®
Index. After June 29, 2012, the Fund began to seek a daily inverse leveraged investment objective, before fees and expenses, of -300% of the S&P
500
®
Index. If the Fund had continued to seek its previous investment objective, the calendar year performance of the Fund would have varied from
that shown.
Total Return
for the Calendar Years Ended December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 44.95% for the quarter ended December 31, 2018 and its lowest calendar quarter return was -43.55% for the quarter ended June 30, 2009. The year-to-date return as of
December 31, 2018 was 3.40%.
Average
Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
10
Years
|
Return
Before Taxes
|
3.40%
|
-28.49%
|
-42.05%
|
Return
After Taxes on Distributions
|
3.12%
|
-28.53%
|
-42.06%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
1.99%
|
-17.58%
|
-13.25%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
13.12%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the five-year and ten-year periods because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Direxion Shares
ETF Trust Prospectus
|
30
|
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in November 2008
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “S&P 500
®
Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard &
Poor’s
®
and S&P
®
are registered
trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones
Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones,
S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500
®
Index.
31
|
Direxion Shares ETF
Trust Prospectus
|
Direxion
Daily Small Cap Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily Small
Cap Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier than
alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the Russell 2000
®
Index (the
“Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index
for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index
may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.22%
|
Acquired
Fund Fees and Expenses
(1)
|
0.19%
|
Total
Annual Fund Operating Expenses
|
1.16%
|
Expense
Cap/Reimbursement
(2)
|
-0.02%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.14%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$116
|
$366
|
$636
|
$1,407
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 51% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
Direxion Shares
ETF Trust Prospectus
|
32
|
reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index measures the performance of
approximately 2,000 small-capitalization companies in the Russell 3000
®
Index, based on a combination of their market capitalization and current
index membership. As of December 31, 2018, the Index consisted of 2,032 holdings, which had an average market capitalization of $1.1 billion, total market capitalizations ranging from $7.8 million to $6.2 billion and were concentrated in the
financial services and healthcare sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs
to be re-positioned. For example, if the Index has
risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure
will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day
to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a)
33
|
Direxion Shares ETF
Trust Prospectus
|
Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 16.43%. The Index’s highest volatility rate for any one calendar year during the five-year period was 18.43% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 4.41%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility
of ETFs or instruments that reflect the value of the
Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no
assurance
Direxion Shares
ETF Trust Prospectus
|
34
|
that a security that is deemed liquid when purchased
will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience
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Direxion Shares ETF
Trust Prospectus
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performance that is
greater than, or less than, the Fund’s stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their
shares may trade at a discount or a premium.
Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not be able to liquidate its holdings in ETFs at an
optimal price or time, which may adversely affect the Fund’s performance.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Healthcare Sector Risk
—
The profitability of companies in the healthcare sector may be affected by extensive, costly and uncertain government
regulation, restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient services, limited number of products, industry innovation, changes in
technologies and other market developments. Many healthcare companies are heavily dependent on patent protection. The expiration of patents may adversely affect the profitability of these companies. Many healthcare companies are subject to extensive
litigation based on product liability and similar claims. Healthcare companies are subject to competitive forces that may make it difficult to raise prices and, in fact, may result in price discounting. Many new products in the healthcare sector may
be subject to regulatory approvals. The process of obtaining such approvals may be long and costly with no guarantee that any product will come to market.
Micro-Capitalization
Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition,
micro-cap companies often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or
mid-capitalization. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
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Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and
credit
risk related to the collateral securing the
repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
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Direxion Shares ETF
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Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and ten-year periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance,
before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund
toll-free at 866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 63.81% for the quarter ended September 30, 2009 and its lowest calendar quarter return was -59.64% for the quarter ended September 30, 2011. The year-to-date return
as of December 31, 2018 was -39.74%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
10
Years
|
Return
Before Taxes
|
-39.74%
|
1.94%
|
18.82%
|
Return
After Taxes on Distributions
|
-39.80%
|
1.86%
|
18.17%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-23.50%
|
1.47%
|
15.77%
|
Russell
2000
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-11.01%
|
4.41%
|
11.97%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax
returns are not relevant
to investors who
hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares" is higher for the one-year period because the
calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in November 2008
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The Russell 2000
®
Index is a trademark of Frank Russell Company (“Russell”) and has been licensed for use by the Trust. The Fund is not sponsored, endorsed,
sold or promoted
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ETF Trust Prospectus
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38
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by Russell. Russell makes no representation regarding
the advisability of investing in the Fund.
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Direxion Shares ETF
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Direxion
Daily Small Cap Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily Small
Cap Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier
than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the Russell 2000
®
Index
(the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the
Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the
Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading
day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.16%
|
Total
Annual Fund Operating Expenses
|
1.12%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.11%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$113
|
$355
|
$616
|
$1,362
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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ETF Trust Prospectus
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40
|
reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the
Fund’s net assets (plus borrowing for investment purposes). In addition, the Fund may invest a portion of its assets in a long position in the Direxion Daily Small Cap Bear 1X Shares (the "Underlying Fund"), another series of the Direxion
Shares ETF Trust managed by the Adviser. On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of
less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index measures
the performance of approximately 2,000 small-capitalization companies in the Russell 3000
®
Index, based on a combination of their market
capitalization and current index membership. As of December 31, 2018, the Index consisted of 2,032 holdings, which had an average market capitalization of $1.1 billion, total market capitalizations ranging from $7.8 million to $6.2 billion and were
concentrated in the financial services and healthcare sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. The Fund may also invest in the Underlying Fund. The Underlying Fund's investment objective is to provide inverse exposure to the Index utilizing an investment strategy and investments that are similar to the Fund. At the close of the
markets each trading day, Rafferty positions the Fund’s portfolio
so that its exposure to the Index is consistent with
the Fund’s inverse leveraged investment objective. The impact of the Index’s movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net
assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This
re-positioning strategy may result in high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the
next trading day.
Because of
daily rebalancing and the compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from
-300% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that
the Fund will lose money over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
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The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 16.43%. The Index’s highest volatility rate for any one calendar year during the five-year period was 18.43% and volatility for a shorter period of time
may have been substantially higher. The Index’s
annualized performance for the five-year period
ended December 31, 2018 was 4.41%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as
swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no
assurance
Direxion Shares
ETF Trust Prospectus
|
42
|
that a security that is deemed liquid when purchased
will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar
|
amount invested in a basket of securities representing
a particular index or an ETF that seeks to track an index.
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions,
netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
43
|
Direxion Shares ETF
Trust Prospectus
|
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance
that is greater than, or less than, the Fund’s
stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their
Direxion Shares
ETF Trust Prospectus
|
44
|
shares may trade
at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not be able to liquidate its
holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Underlying Fund Investment Risk
–
The Fund may invest a portion of its assets in the Underlying Fund, an ETF traded in the secondary market. The
performance of the Fund may be impacted by the performance of the market price of the shares of the Underlying Fund. The Fund’s net asset value is expected to change with a change in the value of the Underlying Fund’s shares, which are
impacted by the value of the Underlying Fund’s investments. An investment in the Fund may entail more fees and expenses. Please also see “Other Investment Companies (including ETFs) Risk” and “Market Price Variance
Risk.” Further, to the extent that the Adviser does not waive fees in an amount equal to the fees it earns from the Fund’s investment in the Underlying Fund, the Adviser is subject to a conflict of interest when investing the
Fund’s assets in the Underlying Fund as it will earn advisory fees from both the Fund and the Underlying Fund.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Healthcare Sector Risk
—
The profitability of companies in the healthcare sector may be affected by extensive, costly and uncertain government
regulation, restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient services, limited number of products, industry innovation, changes in
technologies and other market developments. Many healthcare companies are heavily dependent on patent protection. The expiration of patents may adversely affect the profitability of these companies. Many healthcare companies are subject to extensive
litigation based on product liability and similar claims. Healthcare companies are subject to competitive forces that may make it difficult to raise prices and, in fact,
may result in price discounting. Many new products
in the healthcare sector may be subject to regulatory approvals. The process of obtaining such approvals may be long and costly with no guarantee that any product will come to market.
Micro-Capitalization
Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition,
micro-cap companies often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or
mid-capitalization. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Small- and/or Mid-Capitalization Company
Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial
resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant institutional ownership and
are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure, which could increase
the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
45
|
Direxion Shares ETF
Trust Prospectus
|
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained.
There may, however, be times when the market price
and the net asset value vary significantly. The Fund’s investment results are measured based upon the daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience
the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market
makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and
the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and ten-year periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance,
before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund
toll-free at 866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 81.10% for the quarter ended December 31, 2018 and its lowest calendar quarter return was -55.04% for the quarter ended June 30, 2009. The year-to-date return as of
December 31, 2018 was 24.80%.
Direxion Shares
ETF Trust Prospectus
|
46
|
Average Annual Total
Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
10
Years
|
Return
Before Taxes
|
24.80%
|
-25.74%
|
-48.29%
|
Return
After Taxes on Distributions
|
24.38%
|
-25.78%
|
-48.30%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
14.62%
|
-16.34%
|
-13.33%
|
Russell
2000
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-11.01%
|
4.41%
|
11.97%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the five-year and ten-year periods because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in November 2008
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized
Participants in large blocks, known as creation
units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net
asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The Russell 2000
®
Index is a trademark of Frank Russell Company (“Russell”) and has been licensed for use by the Trust. The Fund is not sponsored, endorsed,
sold or promoted by Russell. Russell makes no representation regarding the advisability of investing in the Fund.
47
|
Direxion Shares ETF
Trust Prospectus
|
Direxion
Daily Dow 30 Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily Dow
30 Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier than
alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the Dow Jones Industrial Average Index (the “Index”). This means that the return of the Fund for a period longer than a
trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the
Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.11%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
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Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
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Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically
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leveraged investment results. On a day-to-day basis,
the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit
profiles, including U.S. government securities and repurchase agreements.
The Index is a price-weighted index
maintained by S&P Dow Jones Indices, LLC (“S&P”). The Index includes 30 large-capitalization U.S. stocks, excluding utility and transportation companies. Components are selected by S&P through a discretionary process with no
predetermined, objective criteria. S&P generally selects components that are “blue chip” U.S. companies that are leaders in their industries, have an excellent reputation, have demonstrated sustained growth and are believed to be of
interest to a large number of investors. Despite its name, the Index is not limited to industrial stocks, but instead is designed to measure the U.S. market as a whole. Changes in the composition of the Index happen infrequently and generally occur
only after corporate acquisitions or other dramatic shifts in a component’s core business.
As of December 31,
2018, the Index was comprised of 30 components which had a median market capitalization of $196.7 billion, market capitalizations ranging from $31.7 billion to $785 billion and were concentrated in the industrials, consumer services, financials, and
healthcare sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning
that the Fund’s exposure will need to be
increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e)
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other Fund expenses; and f) dividends or interest
paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance
shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or
actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 13.26%. The Index’s highest volatility rate for any one calendar year during the five-year period was 17.97% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 9.69%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
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Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
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Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
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If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
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Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery
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of an
asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a
liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction. Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability
of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
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If there is a
significant intra-day market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales
of Shares prior to the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund.
Finally, depending on the demand in the market, the
Fund may not be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Consumer Services Industry Risk
- The success of consumer product manufacturers and retailers (including food and drug retailers, general retailers, media, and travel and leisure) is tied closely to the performance of the domestic
and international economy, interest rates, exchange rates, competition and consumer confidence. The consumer services industry depends heavily on disposable household income and consumer spending. Companies in the consumer services industry may be
subject to severe competition, which may also have an adverse impact on their profitability. Changes in demographics and consumer preferences may affect the success of consumer service providers.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Healthcare Sector Risk
—
The profitability of companies in the healthcare sector may be affected by extensive, costly and uncertain government
regulation, restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient services, limited number of products, industry innovation, changes in
technologies and other market developments. Many healthcare companies are heavily dependent on patent protection. The expiration of patents may adversely affect the profitability of these companies. Many healthcare companies are subject to extensive
litigation based on product liability and similar claims. Healthcare companies are subject to competitive forces that may make it difficult to raise prices and, in fact, may result in price discounting. Many new products in the healthcare sector may
be subject to regulatory approvals. The process of obtaining such approvals may be long and costly with no guarantee that any product will come to market.
Industrials Sector
Risk
—
Stock prices of issuers in the industrials sector are affected by supply and demand both
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for their specific
product or service and for industrials sector products in general. Government regulation, world events and economic conditions will also affect the performance of investments in such issuers. Aerospace and defense companies, a component of the
industrials sector, can be significantly affected by government spending policies because companies involved in this industry rely to a significant extent on U.S. and other government demand for their products and services. Thus, the financial
condition of, and investor interest in, aerospace and defense companies are heavily influenced by government defense spending policies which are typically under pressure from efforts to control government spending budgets.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the
possibility of significantly increased short-term
capital gains (which will be taxable to shareholders as ordinary income when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the
Fund’s trading. As such, if the Fund’s extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will fluctuate in
response to changes
53
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in the value of
the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or less than net asset value (a discount). The Adviser
cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that large discounts or premiums to the net asset value
of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the daily net asset value of the Fund over a period of
time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market
will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading
spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
Dow Jones
®
, Dow Jones Industrial Average
®
and DJIA
®
are trademarks of Dow Jones & Company, Inc. (“Dow Jones
®
”). Dow Jones
®
has no relationship to the
Fund, other than the licensing of those service marks for use in connection with the Fund’s materials. Dow Jones
®
does not sponsor, endorse,
sell or promote any of the Funds.
Direxion Shares
ETF Trust Prospectus
|
54
|
Direxion
Daily Dow 30 Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily Dow
30 Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier
than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the Dow Jones Industrials Average Index (the “Index”). This means that the return of the Fund for a period
longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher
volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the
return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.11%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the Fund’s net
assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity
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Direxion Shares ETF
Trust Prospectus
|
of less than 397 days and exhibit high quality
credit profiles, including U.S. government securities and repurchase agreements.
The Index is a price-weighted index
maintained by S&P Dow Jones Indices, LLC (“S&P”). The Index includes 30 large-capitalization U.S. stocks, excluding utility and transportation companies. Components are selected by S&P through a discretionary process with no
predetermined, objective criteria. S&P generally selects components that are “blue chip” U.S. companies that are leaders in their industries, have an excellent reputation, have demonstrated sustained growth and are believed to be of
interest to a large number of investors. Despite its name, the Index is not limited to industrial stocks, but instead is designed to measure the U.S. market as a whole. Changes in the composition of the Index happen infrequently and generally occur
only after corporate acquisitions or other dramatic shifts in a component’s core business.
As of December 31,
2018, the Index was comprised of 30 components which had a median market capitalization of $196.7 billion, market capitalizations ranging from $31.7 billion to $785 billion and were concentrated in the industrials, consumer services, financials, and
healthcare sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be
reduced. This re-positioning strategy may result in
high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility
Direxion Shares
ETF Trust Prospectus
|
56
|
and Index performance
–
on Fund performance. The chart shows estimated Fund returns for a number of combinations of Index volatility and Index performance over a one-year period.
Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund
expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 13.26%. The Index’s highest volatility rate for any one calendar year during the five-year period was 17.97% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 9.69%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment
Techniques and Policies” in the Fund’s
statutory prospectus, and “Special Note Regarding the Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate
57
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Direxion Shares ETF
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the price increase of the securities of the Index.
Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment
objective, even if the Index later reverses all or a
portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions,
netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment
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objective, the Fund may enter into short positions,
which are designed to provide the Fund gains when the price of a particular security, basket of securities or index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or
investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that
is the opposite from traditional index funds. There
is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the
Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is
volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Consumer Services
Industry Risk
-
The success of consumer product manufacturers and retailers
(including food and drug retailers, general retailers,
media,
and travel and leisure)
is tied closely to the performance of the domestic and international economy,
interest rates, exchange rates,
competition and consumer confidence.
The consumer services industry depends heavily on disposable household income and
consumer spending. Companies in the consumer services industry may be subject to severe competition,
which may also have an adverse impact on
their profitability. Changes in
demographics and consumer preferences may affect the success of consumer service providers.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse
consequences
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for financial companies, including effects that are
not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector as a whole cannot be predicted. The financials
sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Healthcare Sector Risk
—
The profitability of companies in the healthcare sector may be affected by extensive, costly and uncertain government
regulation, restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient services, limited number of products, industry innovation, changes in
technologies and other market developments. Many healthcare companies are heavily dependent on patent protection. The expiration of patents may adversely affect the profitability of these companies. Many healthcare companies are subject to extensive
litigation based on product liability and similar claims. Healthcare companies are subject to competitive forces that may make it difficult to raise prices and, in fact, may result in price discounting. Many new products in the healthcare sector may
be subject to regulatory approvals. The process of obtaining such approvals may be long and costly with no guarantee that any product will come to market.
Industrials Sector
Risk
—
Stock prices of issuers in the industrials sector are affected by supply and demand both for their specific
product or service
and for industrials sector products in general.
Government regulation, world events and economic conditions will
also affect the performance of investments in such issuers. Aerospace and defense companies, a component of the industrials sector, can be significantly affected by government spending policies because companies involved in this
industry
rely to a significant
extent on U.S. and other government demand for their
products and services.
Thus, the financial condition of, and investor interest in, aerospace and defense companies are heavily influenced by government defense spending policies which are
typically under pressure
from efforts to control
government spending budgets.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect
issuers of securities in which the Fund invests,
leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a
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limited number of securities. Its net asset value
and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they
trade, and the listing requirements may be amended from
time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
Dow Jones
®
, Dow Jones Industrial Average
®
and DJIA
®
are trademarks of Dow Jones & Company, Inc. (“Dow Jones
®
”). Dow Jones
®
has no relationship to the
Fund, other
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than the licensing of those service marks for use in
connection with the Fund’s materials. Dow Jones
®
does not sponsor, endorse, sell or promote any of the Funds.
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Direxion
Daily MSCI Brazil Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
MSCI Brazil Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier
than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the MSCI Brazil 25/50 Index (the “Index”). This means that the return of the Fund for a period longer than a trading day
will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and
greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further,
the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage and are willing to
monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will lose money if
the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.19%
|
Acquired
Fund Fees and Expenses
(1)
|
0.41%
|
Total
Annual Fund Operating Expenses
|
1.35%
|
Expense
Cap/Reimbursement
(2,3)
|
0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.36%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
(3)
|
For the fiscal year ended
October 31, 2018, as a result of a portion of the Adviser's management fee and/or a previous reimbursement of Other Expenses, the Adviser recouped fees in the amount of 0.01%.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$138
|
$429
|
$740
|
$1,625
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 133% of the average
value of its portfolio. However, this portfolio turnover rate
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is calculated without regard to cash instruments or
derivative transactions. If the Fund's extensive use of derivatives was reflected, the Fund's portfolio turnover rate would be significantly higher.
Principal Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
Brazil is considered an
“emerging market,” as that term is defined by the index provider. The term “emerging market” refers to an economy that is in the initial stages of industrialization and has been historically marked by low per capita income
and a lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions.
Investments in emerging markets have the potential for significantly higher or lower rates of return and carry greater risks than investments in more developed markets.
The Index is designed to measure the
performance of the large- and mid-capitalization segments of the Brazilian equity market, covering approximately 85% of the free float-adjusted market capitalization of Brazilian issuers. The Index is a free float-adjusted market
capitalization-weighted index with a capping methodology applied to issuer weights such that no more than 25% of the Index’s value may be invested in a single issuer and the sum of the weights of all issuers representing more than 5% of the
Index should not exceed 50% of its value.
As of December 31,
2018, the Index had 53 constituents, which had an average market capitalization of $6.8 billion, total market capitalizations ranging from $1.2 billion to $41.1 billion and were concentrated in the financials and materials sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index,
an ETF that tracks the Index or a substantially
similar index, or utilize derivatives such as swaps on the Index, swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial
instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the
over-the-counter market, which generally provides for less transparency than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a
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trading day to
vary from 300% of the performance of the Index. The effect of compounding becomes more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time
an investment in the Fund is held and the volatility of the Index during shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further
adverse daily performance will lead to a smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of
a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 31.62%. The Index’s highest volatility rate for any one calendar year during the five-year period was 36.82% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 0.35%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because
the Fund is leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index decreases, the Fund may be one of many market participants that are attempting to sell securities of the Index. Under such circumstances, the market for investments of the Index may lack sufficient
liquidity for all market participants' trades. Therefore, the Fund may have more difficulty selling securities or financial instruments and the Fund's transactions could exacerbate the price decline of the securities of the Index. Additionally,
because the Fund is leveraged, a minor decrease in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track
the performance of the same, or a substantially
similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an
ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing,
borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual
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obligations or may
fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is
entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such
collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies
are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal
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price or time, which may adversely affect the
Fund’s performance.
Brazilian Securities Risk
- Investments in, and/or exposure to, securities of Brazilian issuers involves risks that may be greater than if the Fund’s investments were more geographically diverse. Brazil’s economy is
heavily dependent on trading with key partners. Any increase or decrease in the volume of this trading, changes in taxes or tariffs, or variance in political relationships between nations may impact the Brazilian economy in a way that would be
adverse to the Fund’s investments. The Brazilian economy has historically been exposed to high rates of inflation and a high level of debt, each of which may reduce and/or prevent economic growth. Additionally, investments in Brazil may be
subject to any positive or adverse effects of the varying nature of its economic landscape with respect to expropriation and/or nationalization of assets; strengthened or lessened restrictions on, and government intervention in, international trade;
confiscatory taxation; political instability, including authoritarian and/or military involvement in governmental decision making; and armed conflict and its impact on the economy as a result of civil war and social instability as a result of
religious, ethnic and/or socioeconomic unrest.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues
that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging
markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital
controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets
in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement procedures in
emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s
currency. Emerging markets may develop unevenly and may
never fully develop.
Materials Sector Risk
—
Companies in the materials sector could be adversely affected by commodity price volatility, exchange rate import
controls and increased competition. The production of industrial materials often exceeds demand as a result of over-building or economic downturns, leading to poor investment returns. Companies in the materials sector also are at risk for
environmental damage and product liability claims, and may be materially affected by depletion of resources, technical progress, labor relations, and governmental regulations.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face
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ETF Trust Prospectus
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greater risk of business failure, which could increase
the volatility of the Fund’s portfolio.
Currency Exchange
Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in
securities denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S.
Dollars. Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities
markets. Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if
the Fund held a more diversified number of currencies.
Depositary Receipt Risk
—
To the extent the Fund invests in, and/or has exposure to, foreign companies, the Fund’s investment may be in
the form of depositary receipts or other securities convertible into securities of foreign issuers including American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), and Global Depositary Receipts
(“GDRs”). While the investment in ADRs, EDRs and GDRs, which are traded on exchanges and represent ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective
national markets and currencies, investments in them continue to be subject to certain of the risks associated with investing directly in foreign securities, such as political and exchange rate risks.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio
Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs.
Additionally, active market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active
trading may lead to higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders
as ordinary income when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s
extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price.
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Repurchase agreements may be subject to market and
credit risk related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain
a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 76.37% for the quarter ended September 30, 2017 and its lowest calendar quarter return was -73.85% for the quarter ended September 30, 2015. The year-to-date return
as of December 31, 2018 was -37.21%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(4/10/2013)
|
Return
Before Taxes
|
-37.21%
|
-33.93%
|
-38.11%
|
Return
After Taxes on Distributions
|
-37.39%
|
-33.99%
|
-38.17%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-21.94%
|
-19.70%
|
-19.59%
|
MSCI
Brazil 25/50 Index
(reflects no deduction for fees, expenses or taxes)
|
-1.02%
|
0.35%
|
-2.84%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
10.79%
|
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|
After-tax returns
are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown,
and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares"
is higher because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in May 2013
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily MSCI Canada Bull 3X Shares
Important Information
Regarding the Fund
The
Direxion Daily MSCI Canada Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund
may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the MSCI Canada Index (the “Index”). This means that the return of the Fund for a period longer than a
trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the
Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage and are willing to
monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will lose money if
the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.11%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other financial
instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically
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ETF Trust Prospectus
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leveraged investment results. On a day-to-day basis,
the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit
profiles, including U.S. government securities and repurchase agreements.
The Index is designed to measure the
performance of the large- and mid-capitalization segments of the Canadian equity market, covering approximately 85% of the free float-adjusted market capitalization in Canada. The Index consists of stocks that primarily trade on the Toronto Stock
Exchange. The Index is reviewed and rebalanced semi-annually.
As of December 31, 2018, the Index
was comprised of 91 constituents which had an average total market capitalization of $13.1 billion, total market capitalizations ranging from $1.5 billion to $98.5 billion and were concentrated in the financials and energy sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in the Fund entails
risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not traditionally
associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index;
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(ii) there were no Fund expenses; and (iii)
borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the chart below, the Fund
would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss of value in the Fund,
even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas shaded red (or dark gray)
represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return more than 300% of the
performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the returns shown below as a
result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The
Index’s annualized historical volatility rate for the five year period ended December 31, 2018 was 14.78%. The Index’s highest volatility rate for any one calendar year during the five-year period was 19.43% and volatility for a shorter
period of time may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was -1.62%. Historical Index volatility and performance are not indications of what the Index volatility and
performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose
more money in market conditions that are adverse to
its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an investment in the Fund will be reduced
by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose an amount greater than its net
assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio
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ETF Trust Prospectus
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securities transactions. The use of derivatives may
result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative, which may prevent the Fund from
achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
|
If the Index has a
dramatic move that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event,
the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even
if the Index later reverses all or a portion of its movement.
|
•
|
Futures
Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an
imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a
closing transaction. Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy.
|
|
Futures markets are
highly volatile and the use of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts, which will subject the Fund to additional risks that are different from those
associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the
agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment
held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its
leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions
adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the
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Index, the Fund seeks to rebalance its portfolio
daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund
will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions,
regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its
investment in other investment companies. If the
other investment company fails to achieve its investment objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of
ETFs are listed and traded on national stock exchanges, their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally,
depending on the demand in the market, the Fund may not be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Canadian Securities Risk
—
The United States is Canada’s largest trading and investment partner and the Canadian economy is significantly
affected by developments in the U.S. economy. Since the implementation of North American Free Trade Agreement (“NAFTA”) in 1994 among Canada, the United States and Mexico, total two-way merchandise trade between the United States and
Canada has increased significantly. Any downturn in U.S or Mexican economic activity, which could result from the U.S. threatening to exit NAFTA, is likely to have an adverse impact on the Canadian economy. The Canadian economy is also dependent
upon external trade with other key trading partners, including China and the European Union. In addition, Canada is a large supplier of natural resources (
e.g.
, oil, natural gas and agricultural products). As a result, the Canadian economy is sensitive to fluctuations in certain commodity prices.
Energy Sector Risk
—
Companies that engage in energy-related businesses and companies primarily involved in the production and mining of
coal, development and production of oil, gas and consumable fuels and provide drilling and other energy resources production and distribution related services are subject to risks of legislative or regulatory changes, adverse market conditions
and/or increased competition affecting the energy sector. The prices of the securities of energy and energy services companies may fluctuate widely due to the supply and demand, exploration and production spending, world events and economic
conditions, swift price and supply fluctuations, energy conservation, the success of exploration projects, liabilities for environmental damage and general civil liabilities and tax and other governmental regulatory policies and legislation. Weak
demand for energy companies’ products or services or for energy products and services in general, as well as negative developments in these other areas, including natural disaster and terrorist attacks, impact energy company
securities.
Financials
Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors,
including but not limited to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and
cost of capital and can fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation
and intervention, which may adversely impact the scope of their activities, the prices
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they can charge, the amount of capital they must
maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for financial companies, including effects that are not intended by such regulation. The impact of more stringent
capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience
technology malfunctions and disruptions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or Mid-Capitalization Company
Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial
resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant institutional ownership and
are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure, which could increase
the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Depositary Receipt Risk
—
To the extent the Fund invests in, and/or has exposure to, foreign companies, the Fund’s investment may be in
the form of depositary receipts or other securities convertible into securities of foreign issuers including American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), and Global Depositary Receipts
(“GDRs”). While the investment in ADRs, EDRs and GDRs,
which are traded on exchanges and represent
ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in them continue to be subject to certain of the risks associated with
investing directly in foreign securities, such as political and exchange rate risks.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches of the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business
operations, potentially resulting in financial losses to the Fund. While the Fund has established business continuity plans and risk management systems seeking to address system breaches or failures, these plans and systems are inherently limited.
Further, cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity
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securities in which the Fund invests will cause the net
asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants Concentration
Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are unable to
process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments that have
lower trading volumes.
Market Price Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will fluctuate in
response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or less than net
asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that large
discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the daily net
asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no
guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or
create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
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Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily MSCI Canada Bear 3X Shares
Important Information
Regarding the Fund
The
Direxion Daily MSCI Canada Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result,
the Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the MSCI Canada Index (the “Index”). This means that the return of the Fund for a period
longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher
volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the
return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of leverage and
shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day,
the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment within a
single day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to
achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.11%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the Fund’s net
assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity
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ETF Trust Prospectus
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of less than 397 days and exhibit high quality
credit profiles, including U.S. government securities and repurchase agreements.
The Index is designed to measure the
performance of the large- and mid-capitalization segments of the Canadian equity market, covering approximately 85% of the free float-adjusted market capitalization in Canada. The Index consists of stocks that primarily trade on the Toronto Stock
Exchange. The Index is reviewed and rebalanced semi-annually.
As of December 31, 2018, the Index
was comprised of 91 constituents which had an average total market capitalization of $13.1 billion, total market capitalizations ranging from $1.5 billion to $98.5 billion and were concentrated in the financials and energy sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain inverse leveraged
exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate characteristics similar to
those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index. Derivatives are financial
instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting securities in order to
gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely
differ from -300% of the return of the Index over the
same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money over time while
the Index's performance decreases.
Principal Investment Risks
An investment in the Fund entails
risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual
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borrowing/lending rates were reflected, the estimated
returns would be different than those shown.
As shown in the chart below, the Fund
would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss of value in the Fund,
even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas shaded red (or dark
gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return more than -300% of the
performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the returns shown below as a
result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The
Index’s annualized historical volatility rate for the five year period ended December 31, 2018 was 14.78%. The Index’s highest volatility rate for any one calendar year during the five-year period was 19.43% and volatility for a shorter
period of time may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was -1.62%. Historical Index volatility and performance are not indications of what the Index volatility and
performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize
leverage. An investment in the Fund is exposed to
the risk that a rise in the daily performance of the Index will be magnified. This means that an investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and
other operating expenses, which would further reduce its value. The Fund could theoretically lose an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences
in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage,
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imperfect daily correlations with underlying
investments or the Fund’s other portfolio holdings, higher price volatility, lack of availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment
techniques and risks different from those associated with ordinary portfolio securities transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be
imperfect correlation between the value of the reference assets and the derivative, which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may
expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
|
If the Index has a
dramatic move that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event,
the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment
objective, even if the Index later reverses all or a portion of its movement.
|
•
|
Futures
Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an
imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures
|
|
contracts. There may
not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction. Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting
the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and
without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts, which will subject the Fund to additional risks that are different from those
associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the
agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment
held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its
inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies are stayed or eliminated under special
resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
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The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day
Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of
an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares
intra-day may experience performance that is greater than, or less than, the Fund’s stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when
the Index is volatile near the close of the trading
day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Canadian Securities Risk
—
The United States is Canada’s largest trading and investment partner and the Canadian economy is significantly
affected by developments in the U.S. economy. Since the implementation of North American Free Trade Agreement (“NAFTA”) in 1994 among Canada, the United States and Mexico, total two-way merchandise trade between the United States and
Canada has increased significantly. Any downturn in U.S or Mexican economic activity, which could result from the U.S. threatening to exit NAFTA, is likely to have an adverse impact on the Canadian economy. The Canadian economy is also dependent
upon external trade with other key trading partners, including China and the European Union. In addition, Canada is a large supplier of natural resources (
e.g.
, oil, natural gas and agricultural products). As a result, the Canadian economy is sensitive to fluctuations in certain commodity prices.
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Energy Sector Risk
—
Companies that engage in energy-related businesses and companies primarily involved in the production and mining of
coal, development and production of oil, gas and consumable fuels and provide drilling and other energy resources production and distribution related services are subject to risks of legislative or regulatory changes, adverse market conditions
and/or increased competition affecting the energy sector. The prices of the securities of energy and energy services companies may fluctuate widely due to the supply and demand, exploration and production spending, world events and economic
conditions, swift price and supply fluctuations, energy conservation, the success of exploration projects, liabilities for environmental damage and general civil liabilities and tax and other governmental regulatory policies and legislation. Weak
demand for energy companies’ products or services or for energy products and services in general, as well as negative developments in these other areas, including natural disaster and terrorist attacks, impact energy company
securities.
Financials
Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors,
including but not limited to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and
cost of capital and can fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation
and intervention, which may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant
adverse consequences for financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or
of the financials sector as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or Mid-Capitalization Company
Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial
resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant institutional ownership and
are followed by relatively few security analysts, there will normally be
less publicly available information concerning these
securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting
in more volatile performance. These companies may face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches of the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business
operations, potentially resulting in financial losses to the Fund. While the Fund has established business continuity plans and risk management systems seeking to address system breaches or failures, these plans and systems are inherently limited.
Further, cybersecurity incidents could also affect
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issuers of securities in which the Fund invests,
leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a
limited number of securities. Its net asset value
and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will fluctuate in
response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or less than net
asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that large
discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the daily net
asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no
guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or
create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they
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trade, and the listing requirements may be amended from
time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily FTSE China Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily FTSE
China Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier than
alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the FTSE China 50 Index (the “Index”). This means that the return of the Fund for a period longer than a trading day will be
the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater
leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the
return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.23%
|
Acquired
Fund Fees and Expenses
(1)
|
0.57%
|
Total
Annual Fund Operating Expenses
|
1.55%
|
Expense
Cap/Reimbursement
(2)
|
-0.03%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.52%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$155
|
$487
|
$842
|
$1,843
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 158% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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ETF Trust Prospectus
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
China is considered an
“emerging market,” as that term is defined by the index provider. The term “emerging market” refers to an economy that is in the initial stages of industrialization and has been historically marked by low per capita income
and a lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions. Emerging
markets have the potential for significantly higher or lower rates of return and carry greater risks than more developed economies.
The Index consists of the 50 largest
and most liquid public Chinese companies currently trading on the Hong Kong Stock Exchange (“SEHK”). Securities in the Index are weighted based on the total market value of their shares, so that securities with higher total market values
will generally have a higher representation in the Index. Index constituents are screened for liquidity and weightings and are capped to prevent the Index from being overly concentrated in any one stock. The Index is rebalanced quarterly.
As of December 31,
2018, the Index constituents had an average market capitalization of $62.5 billion, total market capitalizations ranging from $12.4 billion to $381.7 billion and were concentrated in the financial services and technology sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged
exposure to the above. Derivatives are financial
instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the
over-the-counter market, which generally provides for less transparency than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently
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depending on the
period of time an investment in the Fund is held and the volatility of the Index during shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s
investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index
increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 21.11%. The Index’s highest volatility rate for any one calendar year during the five-year period was 25.55% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 4.17%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because
the Fund is leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index decreases, the Fund may be one of many market participants that are attempting to sell securities of the Index. Under such circumstances, the market for investments of the Index may lack sufficient
liquidity for all market participants' trades. Therefore, the Fund may have more difficulty selling securities or financial instruments and the Fund's transactions could exacerbate the price decline of the securities of the Index. Additionally,
because the Fund is leveraged, a minor decrease in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track
the performance of the same, or a substantially
similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an
ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing,
borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual
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obligations or may
fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is
entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such
collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies
are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal
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price or time, which may adversely affect the
Fund’s performance.
Chinese
Securities Risks
—
The Fund invests in, and/or has exposure to, Chinese securities and the Chinese economy.
Investment in securities of Chinese issuers involves risks that may be greater than if the Fund’s investments were more geographically diverse. The Chinese economy is generally considered an emerging market and can be significantly affected by
economic and political conditions and policy in China and surrounding Asian countries. In addition, the Chinese economy is export-driven and highly reliant on trade. A downturn in the economies of China’s primary trading partners could slow or
eliminate the growth of the Chinese economy. Additionally, the economy of China differs greatly from the U.S. economy in such respects as, structure, general development, government involvement, wealth distribution, rate of inflation, interest
rates, allocation of resources and capital reinvestment. Specifically, issuers in China are subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than issuers in more developed markets, and
therefore, all material information may not be available or reliable.
Chinese Government Risk
The Chinese government has historically exercised
substantial control over virtually every sector of the Chinese economy through administrative regulation and/or state ownership. In the past, the Chinese government has from time to time taken actions that influence the prices at which certain goods
may be sold, encouraged companies to invest or concentrate in particular industries, induced mergers between companies in certain industries and induced inflation or otherwise regulated economic expansion. If such past actions were to continue, they
may have significant adverse effects on the economic conditions in China. The Chinese government also strictly regulates the payment of foreign currency denominated obligations and sets monetary policy, and may introduce new laws and regulation that
may impact the Fund. Although China has begun the process of privatizing certain sectors of its economy, privatized entities may lose money and/or be re-nationalized. Accordingly, an investment in Chinese securities could result in a total loss if
these companies are re-nationalized or other regulatory actions are taken by the Chinese government.
Chinese Markets Risk
The Chinese securities markets have a limited
operating history and are not as developed as those in the U.S. A small number of issuers may represent a large portion of the China market as a whole, and prices for securities of these issuers may be very sensitive to adverse political, economic
and regulatory developments in China and other Asian countries and may experience significant losses in such conditions. The Chinese securities markets are characterized by relatively frequent trading halts and low trading volume, resulting in
substantially less liquidity and greater price volatility than more developed securities markets.
Investments in China may also be
subject to any positive or adverse effects of the varying nature of its economic landscape with respect to expropriation and/or nationalization of assets, strengthened or lessened restrictions on and
government intervention in international trade,
confiscatory taxation, political instability, including authoritarian and/or military involvement in governmental decision making, armed conflict, the impact on the economy as a result of civil war and social instability as a result of religious,
ethnic and/or socioeconomic unrest.
Chinese Currency Risk
The value of the renminbi (“RMB”) may be
subject to a high degree of fluctuation due to, among other things, changes in interest rates, the effects of monetary policies issued by the Chinese government, the United States, foreign governments, central banks or supranational entities, the
imposition of current controls of other national or global political or economic developments. The RMB is currently not a freely convertible currency. The Chinese government places strict regulations on RMB and sets the value of RMB to levels
dependent on the value of the U.S. Dollar, but the PRC government has been under pressure to manage the currency in a less restrictive fashion so that it is less correlated to the U.S. Dollar. The Chinese government’s imposition of
restrictions on the repatriation of RMB out of mainland China may limit the depth of the offshore RMB market and may reduce the liquidity of Chinese investments. The Fund’s exposure to Chinese securities and therefore, the RMB, may result in
volatility.
Hong Kong Securities
Risk
—
The economy of Hong Kong has few natural resources
and any fluctuation or shortage in the commodity markets could have a significant adverse effect on the Hong Kong economy. Hong Kong is also heavily dependent on international trade and finance. Additionally, the continuation and success of the
current political, economic, legal and social policies of Hong Kong is dependent on and subject to the control of the Chinese government.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues
that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging
markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital
controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets
in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings
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difficult or impossible at times. Settlement
procedures in emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency. Emerging markets
may develop unevenly and may never fully develop.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Technology Sector
Risk
—
The market prices of technology-related securities tend to exhibit a greater degree of market risk and sharp
price fluctuations than other types of securities. These securities may fall in and out of favor with investors rapidly, which may cause sudden selling and dramatically lower market prices. Technology securities may be affected by intense
competition,
obsolescence of existing technology, general economic conditions and government regulation and may have limited product lines, markets,
financial resources or personnel. Technology companies may experience dramatic and often unpredictable changes in growth rates and competition for qualified personnel. These companies are also heavily
dependent on patent and intellectual property rights, the loss or impairment of which may adversely impact a company’s profitability. A small number of companies represent a large portion of the technology industry. In addition, a rising
interest rate environment tends to negatively affect technology companies,
those technology companies seeking to finance expansion would have increased borrowing costs, which may negatively
impact earnings. Technology companies having high market valuations may appear less attractive to investors, which may cause sharp decreases in their market prices.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly
to
competitive challenges or to changes in business,
product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’ returns. Over certain periods, the performance of
large-capitalization companies has trailed the performance of the overall markets.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Depositary Receipt Risk
—
To the extent the Fund invests in, and/or has exposure to, foreign companies, the Fund’s investment may be in
the form of depositary receipts or other securities convertible into securities of foreign issuers including American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), and Global Depositary Receipts
(“GDRs”). While the investment in ADRs, EDRs and GDRs, which are traded on exchanges and represent ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective
national markets and currencies, investments in them continue to be subject to certain of the risks associated with investing directly in foreign securities, such as political and exchange rate risks.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by
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ETFs. Additionally, the performance of a fund that
tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may
be subject to credit risk with respect to the
financial institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and
credit risk related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain
a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or
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create or redeem Creation Units, trading spreads and
the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
Prior to December 12, 2013, the Fund
sought daily investment results, before fees and expenses, of 300% of the performance of The Bank of New York Mellon China Select ADR Index.
After December 12, 2013, the Fund
sought daily investment results, before fees and expenses, of 300% of the performance of the FTSE China 25 Index. Effective September 22, 2014, the FTSE China 25 Index changed its methodology and name to the FTSE China 50 Index. The methodology
changes were implemented in three phases and were completed on November 24, 2014. After November 24, 2014, the Fund’s performance reflects the new investment objective of seeking daily investment results, before fees and expenses of 300% of
the performance of the FTSE China 50 Index.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 90.64% for the quarter ended September 30, 2013 and its lowest calendar quarter return was -64.39% for the quarter ended September 30, 2011. The year-to-date return
as of December 31, 2018 was -48.50%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(12/3/2009)
|
Return
Before Taxes
|
-48.50%
|
-9.95%
|
-8.17%
|
Return
After Taxes on Distributions
|
-48.64%
|
-10.06%
|
-8.35%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-28.66%
|
-7.15%
|
-5.61%
|
FTSE
China 50 Index
(reflects no deduction for fees, expenses or taxes)
|
-11.81%
|
4.17%
|
1.84%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
11.70%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in December 2009
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan
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or an individual retirement account. Distributions
or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other ETFs.
Payments to Broker-Dealers and Other
Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may
create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
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Direxion
Daily FTSE China Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily FTSE
China Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier
than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the FTSE China 50 Index (the “Index”). This means that the return of the Fund for a period longer than a trading
day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and
greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further,
the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.26%
|
Acquired
Fund Fees and Expenses
(1)
|
0.13%
|
Total
Annual Fund Operating Expenses
|
1.14%
|
Expense
Cap/Reimbursement
(2)
|
-0.06%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.08%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$110
|
$356
|
$622
|
$1,381
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the
Fund’s net assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that
have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
China is considered an
“emerging market,” as that term is defined by the index provider. The term “emerging market” refers to an economy that is in the initial stages of industrialization and has been historically marked by low per capita income
and a lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions. Emerging
markets have the potential for significantly higher or lower rates of return and carry greater risks than more developed economies.
The Index consists of the 50 largest
and most liquid public Chinese companies currently trading on the Hong Kong Stock Exchange (“SEHK”). Securities in the Index are weighted based on the total market value of their shares, so that securities with higher total market values
will generally have a higher representation in the Index. Index constituents are screened for liquidity and weightings and are capped to prevent the Index from being overly concentrated in any one stock. The Index is rebalanced quarterly.
As of December 31,
2018, the Index constituents had an average market capitalization of $62.5 billion, total market capitalizations ranging from $12.4 billion to $381.7 billion and were concentrated in the financial services and technology sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates
or indexes. The Fund invests in derivatives as a
substitute for directly shorting securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily
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performance of the Index reduces the amount of a
shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily
performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 21.11%. The Index’s highest volatility rate for any one calendar year during the five-year period was 25.55% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 4.17%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus,
to the extent that the Fund invests in swaps that
use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any
financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive
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the full amount it
is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such
collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important
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to note that the correlation to these ETFs may vary
from the correlation to the Index due to embedded costs and other factors.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Chinese Securities Risks
—
The Fund invests in, and/or has exposure to, Chinese securities and the Chinese economy. Investment in securities of
Chinese issuers involves risks that may be greater than if the Fund’s investments were more geographically diverse. The Chinese economy is generally considered an emerging market and can be significantly affected by economic and political
conditions and policy in China and surrounding Asian countries. In addition, the Chinese economy is export-driven and highly reliant on trade. A downturn in the economies of China’s primary trading partners could slow or eliminate the growth
of the Chinese economy. Additionally, the economy of China differs greatly from the U.S. economy in such respects as, structure, general development, government involvement, wealth distribution, rate of inflation, interest rates, allocation of
resources and capital reinvestment. Specifically, issuers in China are subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than issuers in more developed markets, and therefore, all material
information may not be available or reliable.
Chinese Government Risk
The Chinese government has historically exercised
substantial control over virtually every sector of the Chinese economy through administrative regulation and/or state ownership. In the past, the Chinese government has from time to time taken actions that influence the prices at which certain goods
may be sold, encouraged companies to invest or concentrate in particular industries, induced mergers between companies in certain industries and induced inflation or otherwise regulated economic expansion. If such past actions were to continue, they
may have significant adverse effects on the economic conditions in China. The Chinese government also strictly regulates the payment of foreign currency denominated obligations and sets monetary policy, and may introduce new laws and regulation that
may impact the Fund. Although China has begun the process of privatizing certain sectors of its economy, privatized entities may lose
money and/or be re-nationalized. Accordingly, an
investment in Chinese securities could result in a total loss if these companies are re-nationalized or other regulatory actions are taken by the Chinese government.
Chinese Markets Risk
The Chinese securities markets have a limited
operating history and are not as developed as those in the U.S. A small number of issuers may represent a large portion of the China market as a whole, and prices for securities of these issuers may be very sensitive to adverse political, economic
and regulatory developments in China and other Asian countries and may experience significant losses in such conditions. The Chinese securities markets are characterized by relatively frequent trading halts and low trading volume, resulting in
substantially less liquidity and greater price volatility than more developed securities markets.
Investments in China may also be
subject to any positive or adverse effects of the varying nature of its economic landscape with respect to expropriation and/or nationalization of assets, strengthened or lessened restrictions on and government intervention in international trade,
confiscatory taxation, political instability, including authoritarian and/or military involvement in governmental decision making, armed conflict, the impact on the economy as a result of civil war and social instability as a result of religious,
ethnic and/or socioeconomic unrest.
Chinese Currency Risk
The value of the renminbi (“RMB”) may be
subject to a high degree of fluctuation due to, among other things, changes in interest rates, the effects of monetary policies issued by the Chinese government, the United States, foreign governments, central banks or supranational entities, the
imposition of current controls of other national or global political or economic developments. The RMB is currently not a freely convertible currency. The Chinese government places strict regulations on RMB and sets the value of RMB to levels
dependent on the value of the U.S. Dollar, but the PRC government has been under pressure to manage the currency in a less restrictive fashion so that it is less correlated to the U.S. Dollar. The Chinese government’s imposition of
restrictions on the repatriation of RMB out of mainland China may limit the depth of the offshore RMB market and may reduce the liquidity of Chinese investments. The Fund’s exposure to Chinese securities and therefore, the RMB, may result in
volatility.
Hong Kong Securities
Risk
—
The economy of Hong Kong has few natural resources
and any fluctuation or shortage in the commodity markets could have a significant adverse effect on the Hong Kong economy. Hong Kong is also heavily dependent on international trade and finance. Additionally, the continuation and success of the
current political, economic, legal and social policies of Hong Kong is dependent on and subject to the control of the Chinese government.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic
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instability, greater risk of market shutdown and
more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues that are held
by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging markets often have
less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital controls through such
measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets in emerging market
countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement procedures in emerging market
countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency. Emerging markets
may develop unevenly and may never fully develop.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Technology Sector
Risk
—
The market prices of technology-related securities tend to exhibit a greater degree of market risk and sharp
price fluctuations than other types of securities. These securities may fall in and out of favor with investors rapidly, which may cause sudden selling and dramatically lower market prices. Technology securities may be affected
by intense competition, obsolescence of existing
technology, general economic conditions and government regulation and may have limited product lines, markets, financial resources or personnel. Technology companies may experience dramatic and often unpredictable changes in growth rates and
competition for qualified personnel. These companies are also heavily dependent on patent and intellectual property rights, the loss or impairment of which may adversely impact a company’s profitability. A small number of companies represent a
large portion of the technology industry. In addition, a rising interest rate environment tends to negatively affect technology companies, those technology companies seeking to finance expansion would have increased borrowing costs, which may
negatively impact earnings. Technology companies having high market valuations may appear less attractive to investors, which may cause sharp decreases in their market prices.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments
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that may be traded in markets that are closed when
the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in
premiums or discounts to net asset value that may be greater than those experienced by other ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock
Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a
limited number of securities. Its net asset value
and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they
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trade, and the listing requirements may be amended from
time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
Prior to December 12, 2013, the Fund
sought daily investment results, before fees and expenses, of -300% of the performance of The Bank of New York Mellon China Select ADR Index.
After December 12, 2013, the Fund
sought daily investment results, before fees and expenses, of -300% of the performance of the FTSE China 25 Index. Effective September 22, 2014, the FTSE China 25 Index changed its methodology and name to the FTSE China 50 Index. The methodology
changes were implemented in three phases and were completed on November 24, 2014. After November 24, 2014, the Fund’s performance reflects the new investment objective of seeking daily investment results, before fees and expenses of -300% of
the performance of the FTSE China 50 Index.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 90.17% for the quarter ended September 30, 2011 and its lowest calendar quarter return was -52.58% for the quarter ended September 30, 2013. The year-to-date return
as of December 31, 2018 was 13.32%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(12/3/2009)
|
Return
Before Taxes
|
13.32%
|
-33.72%
|
-37.80%
|
Return
After Taxes on Distributions
|
13.02%
|
-33.75%
|
-37.82%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
7.86%
|
-19.63%
|
-14.23%
|
FTSE
China 50 Index
(reflects no deduction for fees, expenses or taxes)
|
-11.81%
|
4.17%
|
1.84%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
11.70%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the five-year and since inception periods because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in December 2009
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or
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investments made through tax-deferred arrangements
may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other ETFs.
Payments to Broker-Dealers and Other
Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may
create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
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Direxion
Daily MSCI Developed Markets Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
MSCI Developed Markets Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may
be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the MSCI EAFE
®
Index
(the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the
Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the
Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage and are willing to
monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will lose money if
the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.37%
|
Acquired
Fund Fees and Expenses
(1)
|
0.24%
|
Total
Annual Fund Operating Expenses
|
1.36%
|
Expense
Cap/Reimbursement
(2)
|
-0.17%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.19%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$121
|
$414
|
$728
|
$1,620
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 30% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is a free float-adjusted
market capitalization weighted index that is designed to measure the performance of large- and mid-capitalization companies across the following 21 developed market countries around the world, excluding the US and Canada: Australia, Austria,
Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. The Index is reviewed and reconstituted
semi-annually.
As of December 31,
2018, the Index consisted of 920 constituents, which had an average market capitalization of $13.6 billion, total market capitalizations ranging from $1.2 billion to $247.9 billion and were concentrated in the financials sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall
market movement or the increase or decrease of the
value of the securities in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the
Index’s movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need
to be increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to
future
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adverse performance will increase because the
shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 12.33%. The Index’s highest volatility rate for any one calendar year during the five-year period was 16.87% and volatility for a shorter period
of time may have been substantially higher. The
Index’s annualized performance for the five-year period ended December 31, 2018 was 0.53%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the future. The volatility of
ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable
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|
time or at a price that is lower than
Rafferty’s judgment of the security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
There can be no assurance that a security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest
in other derivatives to achieve exposure consistent
with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index
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at the time of
purchase. If the Index gains value, the Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure.
Thus, an investor that purchases shares intra-day may experience performance that is greater than, or less than, the Fund’s stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially
resulting in the Fund being over- or under-exposed
to the Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Developed Country Investing Risk
—
Issuers from developed countries may be subject to regulatory, political, currency, security, economic and other risks
associated with developed countries. Developed countries generally tend to rely on service sectors (
e.g.
, financial services sector, consumer
services, etc.) as the primary means of economic growth. A prolonged slowdown in one or more service sectors is likely to have a negative impact on the economies of certain developed countries. In the past, certain developed countries have been
targets of terrorism. Acts of terrorism in developed countries or against their interests may cause uncertainty in the financial markets and may adversely affect certain issuers. Heavy regulation of certain markets, including labor and product
markets, may have an adverse effect on certain issuers. Such regulations may negatively affect economic growth or cause prolonged periods of recession. Many developed countries are heavily indebted and face rising healthcare and retirement expenses.
In addition, price fluctuations on certain commodities and regulations impacting the import of commodities may negatively impact developed country economies.
European Economic Risk
- The Economic and Monetary Union of the European Union (the “EU”) requires member countries to comply with restrictions on inflation rates, deficits, interest rates, debt levels and fiscal
and monetary controls, each of which may significantly affect every country in Europe. Changes in imports or exports, changes in governmental or EU regulations on trade, changes in the exchange rate of the euro (the common currency of certain EU
countries),
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the default or threat of default by an EU member
country on its sovereign debt and/or an economic recession in an EU member country may have a significant adverse impact on the economies of EU member countries and their trading partners. The European financial markets experienced volatility and
were adversely affected by concerns about economic downturns, credit rating downgrades, rising government debt levels and possible default on, or restructuring of, government debt in several European countries, including Cyprus, Greece, Ireland,
Italy, Portugal, Spain and Ukraine. A default or debt restructuring by any European country would adversely impact holders of that country’s debt and economy. These concerns have adversely affected the value and exchange rate of the euro and
may continue to significantly affect the economies of every country in Europe, including EU member countries that do not use the euro and non-EU member countries.
Responses to financial problems by
European governments, central banks and others, including austerity measures and reforms, may not produce the desired results, may result in social unrest, may limit future growth and economic recovery or may have other unintended consequences.
Further defaults or restricting by governments and other entities of their debt could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, one or more countries may abandon the euro
and/or withdraw from the EU. In a referendum held on June 23, 2016, the United Kingdom resolved to leave the EU. The referendum may introduce significant uncertainties and instability in the financial markets as the United Kingdom negotiates its
exit from the EU. Secessionist movements, such as the Catalan movement in Spain, as well as government or other responses to such movements, may also create instability and uncertainty in the region.
The occurrence of terrorist incidents
throughout Europe also could impact financial markets. The impact of these events is not clear but could be significant and far-reaching and materially impact a Fund.
Japanese Securities Risk
- Investment in, and/or exposure to, securities of Japanese issuers involves risks that may be greater than if the Fund’s investments were more geographically diverse. The growth of Japan’s
economy has lagged that of its Asian neighbors and other major developed countries. Since 2000 Japan’s economic growth rate has remained relatively low, and it may remain low in the future. The Japanese economy is characterized by government
intervention and protectionism, an unstable financial services sector,
changes in its labor
market, and is heavily dependent on
international trade and has been adversely affected by trade tariffs and competition from emerging economies. As such, economic growth is heavily dependent on continued growth in international trade, government support of the financial services
sector, among other troubled sectors, and consistent government policy. Any changes or trends in these economic factors could have a significant impact on Japan’s economy overall and may negatively affect the Fund’s investment.
Japan’s economy is also closely tied to its two largest trading partners, the U.S. and China. Economic volatility in either nation may create volatility in Japan’s economy as well. Additionally, Japan’s relations with its
neighbors,
particularly China, North Korea, South Korea and
Russia, have at times been strained due to territorial disputes, historical animosities and defense concerns.
Financials Sector
Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but
not limited to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital
and can fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and
intervention, which may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse
consequences for financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the
financials sector as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or
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banking authority
also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets. Additionally, the Fund may be exposed to a limited number of currencies. As a
result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund held a more diversified number of currencies.
Depositary Receipt Risk
—
To the extent the Fund invests in, and/or has exposure to, foreign companies, the Fund’s investment may be in
the form of depositary receipts or other securities convertible into securities of foreign issuers including American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), and Global Depositary Receipts
(“GDRs”). While the investment in ADRs, EDRs and GDRs, which are traded on exchanges and represent ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective
national markets and currencies, investments in them continue to be subject to certain of the risks associated with investing directly in foreign securities, such as political and exchange rate risks.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In
such
circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of
the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money
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in the event of a decline in the value of collateral
provided for loaned securities, a decline in the value of any investments made with cash collateral, or a “gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could
also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following performance
information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar
year to calendar
year. The bar chart shows changes in the Fund’s performance from calendar year to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and ten-year periods compare with those of one or more
broad-based market indexes for the same periods. The Fund’s past performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 80.36% for the quarter ended June 30, 2009 and its lowest calendar quarter return was -56.63% for the quarter ended September 30, 2011. The year-to-date return as
of December 31, 2018 was -43.42%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
10
Years
|
Return
Before Taxes
|
-43.42%
|
-8.68%
|
2.31%
|
Return
After Taxes on Distributions
|
-43.64%
|
-8.80%
|
0.93%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-25.51%
|
-6.27%
|
1.52%
|
MSCI
EAFE Index
(reflects no deduction for fees, expenses or taxes)
|
-13.79%
|
0.53%
|
6.32%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the one-year and five-year periods because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
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Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in December 2008
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily MSCI Developed Markets Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
MSCI Developed Markets Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the
Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the MSCI
EAFE
®
Index (the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each
trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the
impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that
invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of leverage and
shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day,
the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment within a
single day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to
achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
1.78%
|
Acquired
Fund Fees and Expenses
(1)
|
0.13%
|
Total
Annual Fund Operating Expenses
|
2.66%
|
Expense
Cap/Reimbursement
(2)
|
-1.58%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.08%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$110
|
$676
|
$1,269
|
$2,876
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the
Fund’s net assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that
have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is a free float-adjusted
market capitalization weighted index that is designed to measure the performance of large- and mid-capitalization companies across the following 21 developed market countries around the world, excluding the US and Canada: Australia, Austria,
Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. The Index is reviewed and reconstituted
semi-annually.
As of December 31,
2018, the Index consisted of 920 constituents, which had an average market capitalization of $13.6 billion, total market capitalizations ranging from $1.2 billion to $247.9 billion and were concentrated in the financials sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is
consistent with the Fund’s inverse leveraged
investment objective. The impact of the Index’s movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning
that the Fund’s exposure will need to be increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in
high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
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The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 12.33%. The Index’s highest volatility rate for any one calendar year during the five-year period was 16.87% and volatility for a shorter period of time
may have been substantially higher. The Index’s
annualized performance for the five-year period
ended December 31, 2018 was 0.53%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as
swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no
assurance
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that a security that is deemed liquid when purchased
will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar
|
amount invested in a basket of securities representing
a particular index or an ETF that seeks to track an index.
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions,
netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
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Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance
that is greater than, or less than, the Fund’s
stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve
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the tax efficiency or to comply with various
regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Developed Country Investing Risk
—
Issuers from developed countries may be subject to regulatory, political, currency, security, economic and other risks
associated with developed countries. Developed countries generally tend to rely on service sectors (
e.g.
, financial services sector, consumer
services, etc.) as the primary means of economic growth. A prolonged slowdown in one or more service sectors is likely to have a negative impact on the economies of certain developed countries. In the past, certain developed countries have been
targets of terrorism. Acts of terrorism in developed countries or against their interests may cause uncertainty in the financial markets and may adversely affect certain issuers. Heavy regulation of certain markets, including labor and product
markets, may have an adverse effect on certain issuers. Such regulations may negatively affect economic growth or cause prolonged periods of recession. Many developed countries are heavily indebted and face rising healthcare and retirement expenses.
In addition, price fluctuations on certain commodities and regulations impacting the import of commodities may negatively impact developed country economies.
European Economic Risk
- The Economic and Monetary Union of the European Union (the “EU”) requires member countries to comply with restrictions on inflation rates, deficits, interest rates, debt levels and fiscal
and monetary controls, each of which may significantly affect every country in Europe. Changes in imports or exports, changes in governmental or EU regulations on trade, changes in the exchange rate of the euro (the common currency of certain EU
countries), the default or threat of default by an EU member country on its sovereign debt and/or an economic recession in an EU member country may have a significant adverse impact on the economies of EU member countries and their trading partners.
The European financial markets experienced volatility and were adversely affected by concerns about economic downturns, credit rating downgrades, rising government debt levels and possible default on, or restructuring of, government debt in several
European countries, including Cyprus, Greece, Ireland, Italy, Portugal, Spain and Ukraine. A default or debt restructuring by any European country would adversely impact holders of that country’s debt and economy. These concerns have adversely
affected the value and exchange rate of the euro and may continue to significantly affect the economies of every country in Europe, including EU member countries that do not use the euro and non-EU member countries.
Responses to financial problems by
European governments, central banks and others, including austerity measures and reforms, may not produce the desired results, may result in social unrest, may limit future growth and economic recovery or may have other unintended consequences.
Further defaults or restricting by governments and other entities of their debt could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, one or more countries may abandon the euro
and/or withdraw from the EU. In a referendum held on June 23, 2016, the United Kingdom resolved to leave
the EU. The referendum may introduce significant
uncertainties and instability in the financial markets as the United Kingdom negotiates its exit from the EU. Secessionist movements, such as the Catalan movement in Spain, as well as government or other responses to such movements, may also create
instability and uncertainty in the region.
The occurrence of terrorist incidents
throughout Europe also could impact financial markets. The impact of these events is not clear but could be significant and far-reaching and materially impact a Fund.
Japanese Securities Risk
- Investment in, and/or exposure to, securities of Japanese issuers involves risks that may be greater than if the Fund’s investments were more geographically diverse. The growth of Japan’s
economy has lagged that of its Asian neighbors and other major developed countries. Since 2000 Japan’s economic growth rate has remained relatively low, and it may remain low in the future. The Japanese economy is characterized by government
intervention and protectionism, an unstable financial services sector,
changes in its labor
market, and is heavily dependent on
international trade and has been adversely affected by trade tariffs and competition from emerging economies. As such, economic growth is heavily dependent on continued growth in international trade, government support of the financial services
sector, among other troubled sectors, and consistent government policy. Any changes or trends in these economic factors could have a significant impact on Japan’s economy overall and may negatively affect the Fund’s investment.
Japan’s economy is also closely tied to its two largest trading partners, the U.S. and China. Economic volatility in either nation may create volatility in Japan’s economy as well. Additionally, Japan’s relations with its
neighbors, particularly China, North Korea, South Korea and Russia, have at times been strained due to territorial disputes, historical animosities and defense concerns.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to
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changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks
an index that includes securities from a market that
closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a
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timely manner or at all. The Fund could also lose
money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a “gap” between the return on cash collateral reinvestments and any fees
the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following performance
information provides some indication of the risks of investing in the Fund by
demonstrating how
its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and
ten-year periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated
performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 54.18% for the quarter ended September 30, 2011 and its lowest calendar quarter return was -55.65% for the quarter ended June 30, 2009. The year-to-date return as
of December 31, 2018 was 47.98%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
10
Years
|
Return
Before Taxes
|
47.98%
|
-11.23%
|
-34.17%
|
Return
After Taxes on Distributions
|
47.55%
|
-11.28%
|
-34.19%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
28.35%
|
-8.05%
|
-12.96%
|
MSCI
EAFE Index
(reflects no deduction for fees, expenses or taxes)
|
-13.79%
|
0.53%
|
6.32%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the five-year and ten-year periods because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
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ETF Trust Prospectus
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124
|
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in December 2008
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily MSCI Emerging Markets Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
MSCI Emerging Markets Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be
riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the MSCI Emerging Markets
Index
SM
(the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading
day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of
compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest
for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage and are willing to
monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will lose money if
the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.52%
|
Total
Annual Fund Operating Expenses
|
1.48%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.47%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$150
|
$467
|
$807
|
$1,768
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 136% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
Direxion Shares
ETF Trust Prospectus
|
126
|
reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The term “emerging
market” refers to an economy that is in the initial stages of industrialization and has been historically marked by low per capita income and a lack of capital market transparency, but appears to be implementing political and/or market reforms
resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions. Investments in emerging markets have the potential for significantly higher or lower rates of return and carry
greater risks than investments in more developed economies.
The Index is a
free float-adjusted market capitalization weighted index that is designed to represent the performance of large- and mid-capitalizations securities across the following 24 emerging market countries: Brazil, Chile, China, Colombia, Czech Republic,
Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey, and United Arab Emirates. The Index is reconstituted semi-annually.
As of December 31, 2018, the Index
consisted of 1,125 constituents, which had an average market capitalization of $4.3 billion, total market capitalizations ranging from $29 million to $229.1 billion and were concentrated in the financials sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments
that derive value from the underlying reference
asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less
transparency than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund
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|
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|
is held and the
volatility of the Index during shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a
smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the
dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 14.01%. The Index’s highest volatility rate for any one calendar year during the five-year period was 16.87% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 1.65%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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128
|
Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because
the Fund is leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on
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collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the
daily change in the Fund's net asset value per share
to a multiple of the daily performance of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary
from the correlation to the Index due to embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies
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that concentrate in only a few industries, security
issues that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally,
emerging markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of
capital controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities
markets in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement
procedures in emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency. Emerging markets
may develop unevenly and may never fully develop.
Chinese Securities Risks
—
Investment in securities of Chinese issuers involves risks that may be greater than if the Fund’s investments
were more geographically diverse. The Chinese economy is generally considered an emerging market and can be significantly affected by economic and political conditions and policy in China and surrounding Asian countries. In addition, the Chinese
economy is export-driven and highly reliant on trade. A downturn in the economies of China’s primary trading partners could slow or eliminate the growth of the Chinese economy. Additionally, the economy of China differs greatly from the U.S.
economy in such respects as, structure, general development, government involvement, wealth distribution, rate of inflation, interest rates, allocation of resources and capital reinvestment. Specifically, issuers in China are subject to less
stringent requirements regarding accounting, auditing, financial reporting and record keeping than issuers in more developed markets, and therefore, all material information may not be available or reliable.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain,
and potentially, their size. Government regulation
may change frequently and may have significant adverse consequences for financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various
countries on any individual financial company or of the financials sector as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Micro-Capitalization
Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition,
micro-cap companies often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or
mid-capitalization. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Small- and/or Mid-Capitalization Company
Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial
resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant institutional ownership and
are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure, which could increase
the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease
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in the value of any of these currencies would have a
greater impact on the Fund’s net asset value and total return than if the Fund held a more diversified number of currencies.
Depositary Receipt Risk
—
To the extent the Fund invests in, and/or has exposure to, foreign companies, the Fund’s investment may be in
the form of depositary receipts or other securities convertible into securities of foreign issuers including American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), and Global Depositary Receipts
(“GDRs”). While the investment in ADRs, EDRs and GDRs, which are traded on exchanges and represent ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective
national markets and currencies, investments in them continue to be subject to certain of the risks associated with investing directly in foreign securities, such as political and exchange rate risks.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio
Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs.
Additionally, active market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active
trading may lead to higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders
as ordinary income when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s
extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has
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agreed to pay a borrower. These events could also
trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and ten-year periods compare
with those of one or more broad-based market indexes
for the same periods. The Fund’s past performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 100.05% for the quarter ended June 30, 2009 and its lowest calendar quarter return was -65.80% for the quarter ended September 30, 2011. The year-to-date return as
of December 31, 2018 was -49.95%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
10
Years
|
Return
Before Taxes
|
-49.95%
|
-11.23%
|
-1.02%
|
Return
After Taxes on Distributions
|
-50.00%
|
-11.26%
|
-1.71%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-29.48%
|
-8.01%
|
-0.29%
|
MSCI
Emerging Markets Index
(reflects no deduction for fees, expenses or taxes)
|
-14.57%
|
1.65%
|
8.02%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in December 2008
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
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Purchase and Sale of Fund Shares
The Fund’s shares are not
individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as creation units, each of which is
comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may
trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily MSCI Emerging Markets Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
MSCI Emerging Markets Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the
Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the MSCI Emerging Markets Index
SM
(the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading day’s
compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of compounding
on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest for periods
less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of leverage and
shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day,
the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment within a
single day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to
achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.24%
|
Acquired
Fund Fees and Expenses
(1)
|
0.14%
|
Total
Annual Fund Operating Expenses
|
1.13%
|
Expense
Cap/Reimbursement
(2)
|
-0.04%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.09%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$111
|
$355
|
$618
|
$1,371
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the
Fund’s net assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that
have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The term “emerging
market” refers to an economy that is in the initial stages of industrialization and has been historically marked by low per capita income and a lack of capital market transparency, but appears to be implementing political and/or market reforms
resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions. Investments in emerging markets have the potential for significantly higher or lower rates of return and carry
greater risks than investments in more developed economies.
The Index is a
free float-adjusted market capitalization weighted index that is designed to represent the performance of large- and mid-capitalizations securities across the following 24 emerging market countries: Brazil, Chile, China, Colombia, Czech Republic,
Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey, and United Arab Emirates. The Index is reconstituted semi-annually.
As of December 31, 2018, the Index
consisted of 1,125 constituents, which had an average market capitalization of $4.3 billion, total market capitalizations ranging from $29 million to $229.1 billion and were concentrated in the financials sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute
for directly shorting securities in order to gain
inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a
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shareholder’s investment, any further adverse
daily performance will lead to a smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a
shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 14.01%. The Index’s highest volatility rate for any one calendar year during the five-year period was 16.87% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 1.65%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus,
to the extent that the Fund invests in swaps that
use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any
financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive
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the full amount it
is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such
collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important
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to note that the correlation to these ETFs may vary
from the correlation to the Index due to embedded costs and other factors.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues
that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging
markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital
controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets
in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement procedures in
emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s
currency. Emerging markets may develop unevenly and may
never fully develop.
Chinese
Securities Risks
—
Investment in securities of Chinese issuers involves risks that may be greater than if the
Fund’s investments were more geographically diverse. The Chinese economy is generally considered an emerging market and can be significantly affected by economic and political conditions and policy in China and surrounding Asian countries. In
addition, the Chinese economy is export-driven and highly reliant on trade. A downturn in the economies of China’s primary trading partners could slow or eliminate the growth of the Chinese economy. Additionally, the economy of China differs
greatly from the U.S. economy in such respects as, structure, general development, government involvement, wealth distribution, rate of inflation, interest rates, allocation of resources and capital reinvestment. Specifically, issuers in China are
subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than issuers in more developed markets, and therefore, all material information may not be available or reliable.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Micro-Capitalization
Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition,
micro-cap companies often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial
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resources than larger, more established companies,
including companies which are considered small- or mid-capitalization. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Small- and/or Mid-Capitalization Company
Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial
resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant institutional ownership and
are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure, which could increase
the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return
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on cash collateral reinvestments and any fees the
Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following performance
information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year to calendar
year. The table shows how the Fund’s average annual returns
for the one-year,
five-year and ten-year periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future.
Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 89.73% for the quarter ended September 30, 2011 and its lowest calendar quarter return was -65.26% for the quarter ended June 30, 2009. The year-to-date return as
of December 31, 2018 was 33.16%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
10
Years
|
Return
Before Taxes
|
33.16%
|
-21.32%
|
-42.99%
|
Return
After Taxes on Distributions
|
32.75%
|
-21.37%
|
-43.00%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
19.60%
|
-14.11%
|
-13.27%
|
MSCI
Emerging Markets Index
(reflects no deduction for fees, expenses or taxes)
|
-14.57%
|
1.65%
|
8.02%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the five-year and ten-year periods because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
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|
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in December 2008
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily FTSE Europe Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily FTSE
Europe Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier than
alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the FTSE Developed Europe All Cap Index (the “Index”). This means that the return of the Fund for a period longer than a
trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the
Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.18%
|
Acquired
Fund Fees and Expenses
(1)
|
0.11%
|
Total
Annual Fund Operating Expenses
|
1.04%
|
Expense
Cap/Reimbursement
(2,3)
|
0.02%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.06%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
(3)
|
For the fiscal year ended
October 31, 2018, as a result of a portion of the Adviser's management fee and/or a previous reimbursement of Other Expenses, the Adviser recouped fees in the amount of 0.02%.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$108
|
$333
|
$576
|
$1,273
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 54% of the average
value of its portfolio. However, this portfolio turnover rate
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|
is calculated without regard to cash instruments or
derivative transactions. If the Fund's extensive use of derivatives was reflected, the Fund's portfolio turnover rate would be significantly higher.
Principal Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is a market capitalization
weighted index that is designed to measure the equity market performance of large-, mid- and small-cap companies in developed markets in Europe. As of December 31, 2018, the Index included securities from the following 16 developed market countries:
Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland and the United Kingdom. The Index is rebalanced semi-annually.
As of December 31, 2018, the Index
had 1,330 constituents, which had an average market capitalization of $6.6 billion, a median market capitalization of $1.7 billion, total market capitalizations ranging from $52 million to $243.5 billion and were concentrated in the financials and
consumer goods sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the
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prior adverse performance. Equally, however, if
favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 14.98%. The Index’s highest volatility rate for any one calendar year during the five-year period was 20.79% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was -0.10%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural
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disasters, new legislation or regulatory changes
inside or outside the United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than
Rafferty’s judgment of the security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
There can be no assurance that a security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index decreases, the Fund may be one of many market participants that are attempting to sell securities of the Index. Under such circumstances, the market for investments of the Index may lack sufficient
liquidity for all market participants' trades. Therefore, the Fund may have more difficulty selling securities or financial instruments and the Fund's transactions could exacerbate the price decline of the securities of the Index. Additionally,
because the Fund is leveraged, a minor decrease in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a
|
specified period which may range from one day to
more than one year. In a standard swap transaction, two parties agree to exchange the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross
return to be exchanged or swapped between the parties is calculated based on a notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks
to track an index.
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
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In addition, the
Fund may enter into swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single
counterparty. Further, there is a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares
intra-day may experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index
as of the Fund's net asset value calculation time.
It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
European Economic Risk
- The Economic and Monetary Union of the European Union (the “EU”) requires member countries to comply with restrictions on inflation rates, deficits, interest rates, debt levels and fiscal
and monetary controls, each of which may significantly affect every country in Europe. Changes in imports or exports, changes in governmental or EU regulations on trade, changes in the exchange rate of the euro (the common currency of certain EU
countries), the default or threat of default by an EU member country on its sovereign debt and/or an economic recession in an EU member country may have a significant adverse impact on the economies of EU member countries and their trading partners.
The European financial markets experienced
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volatility and were adversely affected by concerns
about economic downturns, credit rating downgrades, rising government debt levels and possible default on, or restructuring of, government debt in several European countries, including Cyprus, Greece, Ireland, Italy, Portugal, Spain and Ukraine. A
default or debt restructuring by any European country would adversely impact holders of that country’s debt and economy. These concerns have adversely affected the value and exchange rate of the euro and may continue to significantly affect
the economies of every country in Europe, including EU member countries that do not use the euro and non-EU member countries.
Responses to financial problems by
European governments, central banks and others, including austerity measures and reforms, may not produce the desired results, may result in social unrest, may limit future growth and economic recovery or may have other unintended consequences.
Further defaults or restricting by governments and other entities of their debt could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, one or more countries may abandon the euro
and/or withdraw from the EU. In a referendum held on June 23, 2016, the United Kingdom resolved to leave the EU. The referendum may introduce significant uncertainties and instability in the financial markets as the United Kingdom negotiates its
exit from the EU. Secessionist movements, such as the Catalan movement in Spain, as well as government or other responses to such movements, may also create instability and uncertainty in the region.
The occurrence of terrorist incidents
throughout Europe also could impact financial markets. The impact of these events is not clear but could be significant and far-reaching and materially impact a Fund.
Consumer Goods
Sector Risk
- Because companies in the consumer goods sector manufacture products, the success of these companies is tied closely to the performance of the overall domestic and international
economy, interest rates, competition and consumer confidence. Additionally, government regulation, including new laws, affecting the permissibility of using various production methods or other types of inputs such as materials, may adversely impact
companies in the consumer goods industry. Changes or trends in commodity prices, which may be influenced or characterized by unpredictable factors may adversely impact companies in the consumer goods sector.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change
frequently and may have significant adverse
consequences for financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the
financials sector as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Micro-Capitalization Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition, micro-cap companies
often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or mid-capitalization. As
a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater
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impact on the Fund’s net asset value and total
return than if the Fund held a more diversified number of currencies.
Depositary Receipt Risk
—
To the extent the Fund invests in, and/or has exposure to, foreign companies, the Fund’s investment may be in
the form of depositary receipts or other securities convertible into securities of foreign issuers including American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), and Global Depositary Receipts
(“GDRs”). While the investment in ADRs, EDRs and GDRs, which are traded on exchanges and represent ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective
national markets and currencies, investments in them continue to be subject to certain of the risks associated with investing directly in foreign securities, such as political and exchange rate risks.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance
its portfolio, may
be unable to accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary
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market at market
prices rather than at net asset value. The market prices of Shares will fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market
may trade Shares at a price greater than net asset value (a premium) or less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares
can be created and redeemed in creation units, the Adviser believes that large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary
significantly. The Fund’s investment results are measured based upon the daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as
experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or
other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly
be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
The performance
shown prior to August 22, 2016 reflects the Fund’s previous daily leveraged investment objective, before fees and expenses, of 300% of the FTSE Developed Europe Index. After August 22, 2016, the Fund began to seek a daily leveraged investment
objective, before fees and expenses, of 300% of the FTSE Developed Europe All Cap Index. If the Fund had continued to seek its previous
investment objective, the calendar year performance of
the Fund would have varied from that shown.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 24.70% for the quarter ended June 30, 2017 and its lowest calendar quarter return was -36.89% for the quarter ended December 31, 2018. The year-to-date return as of
December 31, 2018 was -46.34%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(1/22/2014)
|
Return
Before Taxes
|
-46.34%
|
-12.51%
|
Return
After Taxes on Distributions
|
-46.60%
|
-12.64%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-27.08%
|
-8.81%
|
FTSE
Developed Europe All Cap Index
(reflects no deduction for fees, expenses or taxes)
|
-15.14%
|
-0.24%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in January 2014
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
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creation units, each of which is comprised of 50,000
Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price
greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily MSCI India Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
MSCI India Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier
than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the MSCI India Index (the “Index”). This means that the return of the Fund for a period longer than a trading day will
be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater
leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the
return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage and are willing to
monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will lose money if
the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.18%
|
Acquired
Fund Fees and Expenses
(1)
|
0.43%
|
Total
Annual Fund Operating Expenses
|
1.36%
|
Expense
Cap/Reimbursement
(2,3)
|
0.02%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.38%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
(3)
|
For the fiscal year ended
October 31, 2018, as a result of a portion of the Adviser's management fee and/or a previous reimbursement of Other Expenses, the Adviser recouped fees in the amount of 0.02%.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$140
|
$433
|
$747
|
$1,637
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 59% of the average
value of its portfolio. However, this portfolio turnover rate
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is calculated without regard to cash instruments or
derivative transactions. If the Fund's extensive use of derivatives was reflected, the Fund's portfolio turnover rate would be significantly higher.
Principal Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
India is considered an
“emerging market,” as that term is defined by the index provider. The term “emerging market” refers to an economy that is in the initial stages of industrialization and has been historically marked by low per capita income
and a lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions.
Investments in emerging markets have the potential for significantly higher or lower rates of return and carry greater risks than investments in more developed markets.
The Index is designed to measure the
performance of the large- and mid-capitalization segments of the Indian equity market, covering approximately 85% of the Indian equity universe. The Index is rebalanced and recalculated semi-annually.
As of
December 31, 2018, the Index had 78 constituents which had an average float adjusted total market capitalization of $5.8 billion, total market capitalizations ranging from $1 billion to $45.8 billion and were concentrated in the financials and
information technology sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments
that derive value from the underlying reference
asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less
transparency than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund
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is held and the
volatility of the Index during shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a
smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the
dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 15.81%. The Index’s highest volatility rate for any one calendar year during the five-year period was 18.53% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 8.07%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because
the Fund is leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index decreases, the Fund may be one of many market participants that are attempting to sell securities of the Index. Under such circumstances, the market for investments of the Index may lack sufficient
liquidity for all market participants' trades. Therefore, the Fund may have more difficulty selling securities or financial instruments and the Fund's transactions could exacerbate the price decline of the securities of the Index. Additionally,
because the Fund is leveraged, a minor decrease in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track
the performance of the same, or a substantially
similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an
ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing,
borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual
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obligations or may
fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is
entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such
collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies
are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal
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price or time, which may adversely affect the
Fund’s performance.
Indian Securities
Risk
- Investments in, and/or exposure to, Indian issuers involve risks that are specific to India, including legal, regulatory, political and economic risks. Political and legal uncertainty,
ongoing religious and border disputes within its territory and between India and its neighboring countries, greater government control over the economy, currency fluctuations or blockage, and the risk of nationalization or expropriation of assets
may result in higher potential for losses. The securities markets in India are relatively underdeveloped and may subject the Fund to higher transaction costs or greater uncertainty than investments in more developed securities markets. Indian
securities markets are characterized by a small number of listed companies that have significantly smaller market capitalizations, greater price volatility, greater delays and possibility of disruptions in settlement transactions, and less
liquidity. The Fund’s investments in securities of issuers located or operating in India also may be limited or prevented, at times, due to the limits on foreign ownership imposed by the Reserve Bank of India.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues
that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging
markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital
controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets
in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement procedures in
emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency. Emerging markets
may develop unevenly and may never fully develop.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Information
Technology Sector Risk
—
The value of stocks of information technology companies and companies that rely heavily on
technology is particularly vulnerable
to rapid changes in technology product cycles, rapid product obsolescence, government regulation and competition,
both domestically and internationally, including competition from competitors with lower production costs. Information technology companies and companies that rely heavily on technology, especially
those of smaller,
less-seasoned companies,
tend to be more volatile than the overall market. Information technology companies are
heavily dependent on patent and intellectual property rights, the loss or impairment of which may adversely affect profitability. Additionally, companies in the information technology sector may face dramatic and often unpredictable changes in
growth
rates and competition for the services of qualified personnel.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions,
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whether or not based on fundamental analysis, can
decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Currency Exchange
Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in
securities denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S.
Dollars. Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities
markets. Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if
the Fund held a more diversified number of currencies.
Depositary Receipt Risk
—
To the extent the Fund invests in, and/or has exposure to, foreign companies, the Fund’s investment may be in
the form of depositary receipts or other securities convertible into securities of foreign issuers including American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), and Global Depositary Receipts
(“GDRs”). While the investment in ADRs, EDRs and GDRs, which are traded on exchanges and represent ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective
national markets and currencies, investments in them continue to be subject to certain of the risks associated with investing directly in foreign securities, such as political and exchange rate risks.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes
before or after the New York Stock Exchange can vary
from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money
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in the event of a decline in the value of collateral
provided for loaned securities, a decline in the value of any investments made with cash collateral, or a “gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could
also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following performance
information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar
year to calendar
year. The bar chart shows changes in the Fund’s performance from calendar year to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or
more broad-based market indexes for the same periods. The Fund’s past performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s
website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Performance prior to December 1,
2011 reflects the Fund’s previous investment objective where it sought daily investment results, before fees and expenses, of 200% of the performance of the Indus India Index. If the Fund had continued to seek its previous investment
objective, the calendar year performance of the Fund would have varied from that shown.
Additionally,
performance shown from December 1, 2011 to January 3, 2017 reflects the Fund’s previous daily leveraged investment objective, before fees and expenses, of 300% of the Indus India Index. After January 3, 2017, the Fund began to seek a daily
leveraged investment objective, before fees and expenses, of 300% of the MSCI India Index. If the Fund had continued to seek its previous investment objective, the calendar year performance of the Fund would have varied from that shown.
Total Return for the Calendar
Years Ended December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 58.48% for the quarter ended March 31, 2017 and its lowest calendar quarter return was -42.05% for the quarter ended September 30, 2011. The year-to-date return as
of December 31, 2018 was -33.91%.
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Average Annual Total
Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(3/11/2010)
|
Return
Before Taxes
|
-33.91%
|
4.31%
|
-9.20%
|
Return
After Taxes on Distributions
|
-33.94%
|
4.29%
|
-9.24%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-20.06%
|
3.36%
|
-6.29%
|
MSCI
India Index
(reflects no deduction for fees, expenses or taxes)
|
-7.30%
|
8.07%
|
3.35%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
11.60%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the one-year and since inception periods because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in March 2010
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase and Sale of Fund Shares
The Fund’s shares are not
individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as creation units, each of which is
comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may
trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily MSCI Italy Bull 3X Shares
Important Information
Regarding the Fund
The
Direxion Daily MSCI Italy Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund
may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the MSCI Italy 25/50 Index (the “Index”). This means that the return of the Fund for a period longer than
a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the
Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage and are willing to
monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will lose money if
the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.11%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other financial
instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically
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ETF Trust Prospectus
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leveraged investment results. On a day-to-day basis,
the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit
profiles, including U.S. government securities and repurchase agreements.
The Index is designed to measure the
performance of the large- and mid-capitalization segments of the Italian equity market, covering approximately 85% of the free float-adjusted market capitalization in Italy. The Index consists of stocks primarily traded on the Milan Stock Exchange.
The Index is reviewed and rebalanced quarterly.
As of December 31, 2018, the Index
was comprised of 23 constituents which had average total market capitalization of $12.2 billion, total market capitalizations ranging from $3.2 billion to $44.4 billion and were concentrated in the financials, energy and utilities sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in the Fund entails
risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not traditionally
associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index;
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(ii) there were no Fund expenses; and (iii)
borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the chart below, the Fund
would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss of value in the Fund,
even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas shaded red (or dark gray)
represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return more than 300% of the
performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the returns shown below as a
result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The
Index’s annualized historical volatility rate for the five year period ended December 31, 2018 was 22.62%. The Index’s highest volatility rate for any one calendar year during the five-year period was 31.41% and volatility for a shorter
period of time may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was -2.11%. Historical Index volatility and performance are not indications of what the Index volatility and
performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose
more money in market conditions that are adverse to
its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an investment in the Fund will be reduced
by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose an amount greater than its net
assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio
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securities transactions. The use of derivatives may
result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative, which may prevent the Fund from
achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
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If the Index has a
dramatic move that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event,
the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even
if the Index later reverses all or a portion of its movement.
|
•
|
Futures
Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an
imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a
closing transaction. Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy.
|
|
Futures markets are
highly volatile and the use of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts, which will subject the Fund to additional risks that are different from those
associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the
agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment
held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its
leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions
adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the
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Index, the Fund seeks to rebalance its portfolio
daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund
will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions,
regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its
investment in other investment companies. If the
other investment company fails to achieve its investment objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of
ETFs are listed and traded on national stock exchanges, their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally,
depending on the demand in the market, the Fund may not be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Italian Securities Risk
- The Fund’s investment in, and/or exposure to, Italian issuers may subject the Fund to legal, regulatory, political, currency and economic risk specific to Italy. Italy’s economy is
dependent upon external trade with other economies, specifically Germany, France, other Western European developed countries and the United States. As a result, Italy is dependent on the economies of these other countries and any change in the price
or demand for Italy’s exports may have an adverse impact on its economy. Recently, the Italian economy, along with certain other European economies, has experienced significant volatility and adverse trends due to concerns about economic
downturn and rising government debt levels. Interest rates on Italy’s debt may rise to levels that may make it difficult for it to service high debt levels without significant financial help from the European Union and could potentially lead
to default. These events have adversely impacted the Italian economy, causing credit agencies to lower Italy’s sovereign debt rating and could decrease outside investment in Italian companies.
European Economic Risk
- The Economic and Monetary Union of the European Union (the “EU”) requires member countries to comply with restrictions on inflation rates, deficits, interest rates, debt levels and fiscal
and monetary controls, each of which may significantly affect every country in Europe. Changes in imports or exports, changes in governmental or EU regulations on trade, changes in the exchange rate of the euro (the common currency of certain EU
countries), the default or threat of default by an EU member country on its sovereign debt and/or an economic recession in an EU member country may have a significant adverse impact on the economies of EU member countries and their trading partners.
The European financial markets experienced volatility and were adversely affected by concerns about economic downturns, credit rating downgrades, rising government debt levels and possible default on, or restructuring of, government debt in several
European countries, including Cyprus, Greece, Ireland, Italy, Portugal, Spain and Ukraine. A default or debt restructuring by any European country would adversely impact holders of that country’s debt and economy. These concerns have adversely
affected the value and exchange rate of the euro and may continue to significantly affect the economies of every country in Europe, including EU member countries that do not use the euro and non-EU member countries.
Responses to financial problems by
European governments, central banks and others, including austerity measures and reforms, may not produce the desired results, may result
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in social unrest, may limit future growth and
economic recovery or may have other unintended consequences. Further defaults or restricting by governments and other entities of their debt could have additional adverse effects on economies, financial markets and asset valuations around the world.
In addition, one or more countries may abandon the euro and/or withdraw from the EU. In a referendum held on June 23, 2016, the United Kingdom resolved to leave the EU. The referendum may introduce significant uncertainties and instability in the
financial markets as the United Kingdom negotiates its exit from the EU. Secessionist movements, such as the Catalan movement in Spain, as well as government or other responses to such movements, may also create instability and uncertainty in the
region.
The occurrence of
terrorist incidents throughout Europe also could impact financial markets. The impact of these events is not clear but could be significant and far-reaching and materially impact a Fund.
Energy Sector Risk
—
Companies that engage in energy-related businesses and companies primarily involved in the production and mining of
coal, development and production of oil, gas and consumable fuels and provide drilling and other energy resources production and distribution related services are subject to risks of legislative or regulatory changes, adverse market conditions
and/or increased competition affecting the energy sector. The prices of the securities of energy and energy services companies may fluctuate widely due to the supply and demand, exploration and production spending, world events and economic
conditions, swift price and supply fluctuations, energy conservation, the success of exploration projects, liabilities for environmental damage and general civil liabilities and tax and other governmental regulatory policies and legislation. Weak
demand for energy companies’ products or services or for energy products and services in general, as well as negative developments in these other areas, including natural disaster and terrorist attacks, impact energy company
securities.
Financials
Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors,
including but not limited to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and
cost of capital and can fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation
and intervention, which may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant
adverse consequences for financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or
of the financials sector as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Utilities Sector Risk
–
Utility companies are affected by supply and demand,
operating costs, government regulation, environmental factors, liabilities for environmental damage and general liabilities, and rate caps or rate changes. Although rate changes of a regulated utility usually fluctuate in approximate correlation
with financing costs, due to political and regulatory factors, rate changes ordinarily occur only following a delay after the changes in financing costs. This factor will tend to favorably affect a regulated utility company’s earnings and
dividends in times of decreasing costs, but conversely, will tend to adversely affect earnings and dividends when costs are rising. The value of regulated utility equity securities may tend to have an inverse relationship to the movement of interest
rates. Certain utility companies have experienced full or partial deregulation in recent years. These utilities are frequently more similar to industrial companies in that they are subject to greater competition and have been permitted by regulators
to diversify outside of their original geographic regions and their traditional lines of business. These opportunities may permit certain utility companies to earn more than their traditional regulated rates of return. Some companies, however, may
be forced to defend their core business and may be less profitable. In addition, natural disasters, terrorist attacks, government intervention or other factors may render a utility company’s equipment unusable or obsolete which may negatively
impact profitability.
Utility companies may be adversely
affected by increases in fuel and other operating costs, high costs of borrowing to finance capital construction during inflationary periods, restrictions on operations and increased costs and delays associated with compliance with environmental and
nuclear safety regulations, and difficulties involved in obtaining natural gas for resale or fuel for generating electricity at reasonable prices. Additionally, these companies may be subject to risks related to the construction and operation of
nuclear power plants, the effects of energy conservation and the effects of regulatory changes.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Mid-Capitalization Company Risk
- Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than more established, larger-capitalization companies.
Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities
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of larger companies. Adverse publicity and investor
perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result, the performance of mid-capitalization companies can be more volatile and they face greater risk of
business failure, which could increase the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Depositary Receipt Risk
—
To the extent the Fund invests in, and/or has exposure to, foreign companies, the Fund’s investment may be in
the form of depositary receipts or other securities convertible into securities of foreign issuers including American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), and Global Depositary Receipts
(“GDRs”). While the investment in ADRs, EDRs and GDRs, which are traded on exchanges and represent ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective
national markets and currencies, investments in them continue to be subject to certain of the risks associated with investing directly in foreign securities, such as political and exchange rate risks.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by
other
ETFs. Additionally, the performance of a fund that
tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches of the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business
operations, potentially resulting in financial losses to the Fund. While the Fund has established business continuity plans and risk management systems seeking to address system breaches or failures, these plans and systems are inherently limited.
Further, cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may
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be subject to credit risk with respect to the
financial institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and
credit risk related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain
a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will fluctuate in
response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or less than net
asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that large
discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the daily net
asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no
guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares
and/or
create or redeem Creation Units, trading spreads and
the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
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Payments to
Broker-Dealers and Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily MSCI Italy Bear 3X Shares
Important Information
Regarding the Fund
The
Direxion Daily MSCI Italy Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the
Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the MSCI Italy 25/50 Index (the “Index”). This means that the return of the Fund for a
period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher
volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the
return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of leverage and
shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day,
the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment within a
single day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to
achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.11%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the Fund’s net
assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity
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of less than 397 days and exhibit high quality
credit profiles, including U.S. government securities and repurchase agreements.
The Index is designed to measure the
performance of the large- and mid-capitalization segments of the Italian equity market, covering approximately 85% of the free float-adjusted market capitalization in Italy. The Index consists of stocks primarily traded on the Milan Stock Exchange.
The Index is reviewed and rebalanced quarterly.
As of December 31, 2018, the Index
was comprised of 23 constituents which had average total market capitalization of $12.2 billion, total market capitalizations ranging from $3.2 billion to $44.4 billion and were concentrated in the financials, energy and utilities sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain inverse leveraged
exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate characteristics similar to
those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index. Derivatives are financial
instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting securities in order to
gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely
differ from -300% of the return of the Index over the
same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money over time while
the Index's performance decreases.
Principal Investment Risks
An investment in the Fund entails
risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual
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borrowing/lending rates were reflected, the estimated
returns would be different than those shown.
As shown in the chart below, the Fund
would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss of value in the Fund,
even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas shaded red (or dark
gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return more than -300% of the
performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the returns shown below as a
result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The
Index’s annualized historical volatility rate for the five year period ended December 31, 2018 was 22.62%. The Index’s highest volatility rate for any one calendar year during the five-year period was 31.41% and volatility for a shorter
period of time may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was -2.11%. Historical Index volatility and performance are not indications of what the Index volatility and
performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize
leverage. An investment in the Fund is exposed to
the risk that a rise in the daily performance of the Index will be magnified. This means that an investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and
other operating expenses, which would further reduce its value. The Fund could theoretically lose an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences
in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage,
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imperfect daily correlations with underlying
investments or the Fund’s other portfolio holdings, higher price volatility, lack of availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment
techniques and risks different from those associated with ordinary portfolio securities transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be
imperfect correlation between the value of the reference assets and the derivative, which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may
expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
|
If the Index has a
dramatic move that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event,
the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment
objective, even if the Index later reverses all or a portion of its movement.
|
•
|
Futures
Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an
imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures
|
|
contracts. There may
not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction. Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting
the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and
without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts, which will subject the Fund to additional risks that are different from those
associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the
agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment
held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its
inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies are stayed or eliminated under special
resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
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The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day
Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of
an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares
intra-day may experience performance that is greater than, or less than, the Fund’s stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when
the Index is volatile near the close of the trading
day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Italian Securities Risk
- The Fund’s investment in, and/or exposure to, Italian issuers may subject the Fund to legal, regulatory, political, currency and economic risk specific to Italy. Italy’s economy is
dependent upon external trade with other economies, specifically Germany, France, other Western European developed countries and the United States. As a result, Italy is dependent on the economies of these other countries and any change in the price
or demand for Italy’s exports may have an adverse impact on its economy. Recently, the Italian economy, along with certain other European economies, has experienced significant volatility and adverse trends due to concerns about economic
downturn and rising government debt levels. Interest rates on Italy’s debt may rise to levels that may make it difficult for it to service high debt levels without significant financial help from the European Union and could potentially lead
to default. These events have adversely impacted the Italian economy, causing
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credit agencies to lower Italy’s sovereign debt
rating and could decrease outside investment in Italian companies.
European Economic Risk
- The Economic and Monetary Union of the European Union (the “EU”) requires member countries to comply with restrictions on inflation rates, deficits, interest rates, debt levels and fiscal
and monetary controls, each of which may significantly affect every country in Europe. Changes in imports or exports, changes in governmental or EU regulations on trade, changes in the exchange rate of the euro (the common currency of certain EU
countries), the default or threat of default by an EU member country on its sovereign debt and/or an economic recession in an EU member country may have a significant adverse impact on the economies of EU member countries and their trading partners.
The European financial markets experienced volatility and were adversely affected by concerns about economic downturns, credit rating downgrades, rising government debt levels and possible default on, or restructuring of, government debt in several
European countries, including Cyprus, Greece, Ireland, Italy, Portugal, Spain and Ukraine. A default or debt restructuring by any European country would adversely impact holders of that country’s debt and economy. These concerns have adversely
affected the value and exchange rate of the euro and may continue to significantly affect the economies of every country in Europe, including EU member countries that do not use the euro and non-EU member countries.
Responses to financial problems by
European governments, central banks and others, including austerity measures and reforms, may not produce the desired results, may result in social unrest, may limit future growth and economic recovery or may have other unintended consequences.
Further defaults or restricting by governments and other entities of their debt could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, one or more countries may abandon the euro
and/or withdraw from the EU. In a referendum held on June 23, 2016, the United Kingdom resolved to leave the EU. The referendum may introduce significant uncertainties and instability in the financial markets as the United Kingdom negotiates its
exit from the EU. Secessionist movements, such as the Catalan movement in Spain, as well as government or other responses to such movements, may also create instability and uncertainty in the region.
The occurrence of terrorist incidents
throughout Europe also could impact financial markets. The impact of these events is not clear but could be significant and far-reaching and materially impact a Fund.
Energy Sector Risk
—
Companies that engage in energy-related businesses and companies primarily involved in the production and mining of
coal, development and production of oil, gas and consumable fuels and provide drilling and other energy resources production and distribution related services are subject to risks of legislative or regulatory changes, adverse market conditions
and/or increased competition affecting the energy sector. The prices of the securities of energy and energy services companies may fluctuate widely due to the supply and demand, exploration and production spending, world events and economic
conditions, swift price
and supply fluctuations, energy conservation, the
success of exploration projects, liabilities for environmental damage and general civil liabilities and tax and other governmental regulatory policies and legislation. Weak demand for energy companies’ products or services or for energy
products and services in general, as well as negative developments in these other areas, including natural disaster and terrorist attacks, impact energy company securities.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Utilities Sector Risk
–
Utility companies are affected by supply and demand,
operating costs, government regulation, environmental factors, liabilities for environmental damage and general liabilities, and rate caps or rate changes. Although rate changes of a regulated utility usually fluctuate in approximate correlation
with financing costs, due to political and regulatory factors, rate changes ordinarily occur only following a delay after the changes in financing costs. This factor will tend to favorably affect a regulated utility company’s earnings and
dividends in times of decreasing costs, but conversely, will tend to adversely affect earnings and dividends when costs are rising. The value of regulated utility equity securities may tend to have an inverse relationship to the movement of interest
rates. Certain utility companies have experienced full or partial deregulation in recent years. These utilities are frequently more similar to industrial companies in that they are subject to greater competition and have been permitted by regulators
to diversify outside of their original geographic regions and their traditional lines of business. These opportunities may permit certain utility companies to earn more than their traditional regulated rates of return. Some companies, however, may
be forced to defend their core business and may be less profitable. In addition, natural disasters, terrorist attacks, government intervention or other factors may render a utility company’s equipment unusable or obsolete which may negatively
impact profitability.
Utility companies may be adversely
affected by increases in fuel and other operating costs, high costs of borrowing to finance capital construction during inflationary periods,
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restrictions on operations and increased costs and
delays associated with compliance with environmental and nuclear safety regulations, and difficulties involved in obtaining natural gas for resale or fuel for generating electricity at reasonable prices. Additionally, these companies may be subject
to risks related to the construction and operation of nuclear power plants, the effects of energy conservation and the effects of regulatory changes.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Mid-Capitalization Company Risk
- Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than more established, larger-capitalization companies.
Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result, the performance of mid-capitalization companies can be more volatile and they
face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial
reporting standards in foreign countries typically
are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches of the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business
operations, potentially resulting in financial losses to the Fund. While the Fund has established business continuity plans and risk management systems seeking to address system breaches or failures, these plans and systems are inherently limited.
Further, cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio
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turnover without including the short-term cash
instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly
higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will fluctuate in
response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than
net asset value (a premium) or less than net asset
value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that large discounts or
premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the daily net asset value
of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee
that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or
redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net
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|
asset value, Shares may trade at a price greater than
net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily MSCI Japan Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
MSCI Japan Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier
than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the MSCI Japan Index (the “Index”). This means that the return of the Fund for a period longer than a trading day will
be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater
leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the
return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage and are willing to
monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will lose money if
the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.31%
|
Acquired
Fund Fees and Expenses
(1)
|
0.34%
|
Total
Annual Fund Operating Expenses
|
1.40%
|
Expense
Cap/Reimbursement
(2)
|
-0.11%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.29%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$131
|
$432
|
$755
|
$1,670
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 6% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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|
reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is designed to measure the
performance of the large- and mid-cap segments of the Japanese equity market, covering approximately 85% of the free float-adjusted market capitalization of Japanese issuers. The Index is reviewed quarterly and rebalances semi-annually.
As of December 31,
2018, the Index included 322 constituents, which had an average market capitalization of $9.5 billion, total market capitalization ranging from approximately $1.3 billion to $133.4 billion and were concentrated in the consumer discretionary and
industrials sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements
during the day will affect whether the Fund’s
portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has fallen on a given day, net
assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and “trading day,”
refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated
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given any set of assumptions for the following
factors: a) Index volatility; b) Index performance; c) period of time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below
illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated Fund returns for a number of combinations of Index volatility and Index performance over a one-year period.
Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses
and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 17.64%. The Index’s highest volatility rate for any one calendar year during the five-year period was 23.21% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 3.06%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility
of ETFs or instruments that reflect the value of the
Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no
assurance
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that a security that is deemed liquid when purchased
will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index decreases, the Fund may be one of many market participants that are attempting to sell securities of the Index. Under such circumstances, the market for investments of the Index may lack sufficient
liquidity for all market participants' trades. Therefore, the Fund may have more difficulty selling securities or financial instruments and the Fund's transactions could exacerbate the price decline of the securities of the Index. Additionally,
because the Fund is leveraged, a minor decrease in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar
|
amount invested in a basket of securities representing
a particular index or an ETF that seeks to track an index.
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
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Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares
intra-day may experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities
or derivatives held by the Fund. The Fund may not
have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not
included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index. Activities surrounding periodic Index reconstitutions and other Index
rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax efficiency or to comply with various regulatory restrictions, either of
which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Japanese Securities Risk
- Investment in, and/or exposure to, securities of Japanese issuers involves risks that may be greater than if the Fund’s investments were more geographically diverse. The growth of Japan’s
economy has lagged that of its Asian neighbors and other major developed countries. Since 2000 Japan’s economic growth rate has remained relatively low, and it may remain low in the future. The Japanese economy is characterized by government
intervention and protectionism, an unstable financial services sector,
changes in its labor
market, and is heavily dependent on
international trade and has been adversely affected by trade tariffs and competition from emerging economies. As such, economic growth is heavily dependent on continued growth in international trade, government support of the financial services
sector, among other troubled sectors, and consistent government policy. Any changes or trends in these economic factors could have a significant impact on Japan’s economy overall and may negatively affect the Fund’s investment.
Japan’s economy is also closely tied to its two largest trading partners, the U.S. and China. Economic volatility in either nation may create volatility in Japan’s economy as well. Additionally, Japan’s relations with its
neighbors,
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particularly China, North Korea, South Korea and
Russia, have at times been strained due to territorial disputes, historical animosities and defense concerns.
Consumer Discretionary Sector Risk
—
Because companies in the consumer discretionary sector manufacture products and provide discretionary services directly
to the consumer, the success of these companies is tied closely to the performance of the overall domestic and international economy, interest rates, competition and consumer confidence. Success depends heavily on disposable household income and
consumer spending. Also, companies in the consumer discretionary sector may be subject to severe competition, which may have an adverse impact on a company’s profitability. Changes in demographics and consumer tastes also can affect the demand
for, and success of, consumer discretionary products in the marketplace.
Industrials Sector Risk
—
Stock prices of issuers in the industrials sector are affected by supply and demand both for their specific product or
service and for industrials sector products in general. Government regulation, world events and economic conditions will also affect the performance of investments in such issuers. Aerospace and defense companies, a component of the industrials
sector, can be significantly affected by government spending policies because companies involved in this industry rely to a significant extent on U.S. and other government demand for their products and services. Thus, the financial condition of, and
investor interest in, aerospace and defense companies are heavily influenced by government defense spending policies which are typically under pressure from efforts to control government spending budgets. Transportation companies, another component
of the industrials sector, are subject to cyclical performance and therefore investment in such companies may experience occasional sharp price movements which may result from changes in the economy, fuel prices, labor agreements and insurance
costs.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease
the value and liquidity of securities held by the
Fund resulting in more volatile performance. These companies may face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Currency Exchange
Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in
securities denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S.
Dollars. Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities
markets. Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if
the Fund held a more diversified number of currencies.
Depositary Receipt Risk
—
To the extent the Fund invests in, and/or has exposure to, foreign companies, the Fund’s investment may be in
the form of depositary receipts or other securities convertible into securities of foreign issuers including American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), and Global Depositary Receipts
(“GDRs”). While the investment in ADRs, EDRs and GDRs, which are traded on exchanges and represent ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective
national markets and currencies, investments in them continue to be subject to certain of the risks associated with investing directly in foreign securities, such as political and exchange rate risks.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes
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before or after the New York Stock Exchange can vary
from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money
in the event of a decline in the value of collateral
provided for loaned securities, a decline in the value of any investments made with cash collateral, or a “gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could
also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following performance
information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar
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year to calendar
year. The bar chart shows changes in the Fund’s performance from calendar year to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or
more broad-based market indexes for the same periods. The Fund’s past performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s
website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 35.59% for the quarter ended March 31, 2015 and its lowest calendar quarter return was -41.86% for the quarter ended December 31, 2018. The year-to-date return as
of December 31, 2018 was -44.90%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(6/26/2013)
|
Return
Before Taxes
|
-44.90%
|
-4.16%
|
1.27%
|
Return
After Taxes on Distributions
|
-44.90%
|
-4.17%
|
1.21%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-26.58%
|
-3.10%
|
0.96%
|
MSCI
Japan Index
(reflects no deduction for fees, expenses or taxes)
|
-12.88%
|
3.06%
|
5.11%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the one-year and
five-year periods because the calculation recognizes a
capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in June 2013
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily Latin America Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily Latin
America Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier than
alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the S&P Latin America 40 Index (the “Index”). This means that the return of the Fund for a period longer than a trading
day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and
greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further,
the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.36%
|
Acquired
Fund Fees and Expenses
(1)
|
0.38%
|
Total
Annual Fund Operating Expenses
|
1.49%
|
Expense
Cap/Reimbursement
(2)
|
-0.16%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.33%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
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(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
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Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
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Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$135
|
$455
|
$798
|
$1,766
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Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 56% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
Latin America is considered an
“emerging market,” as that term is defined by the index provider. The term “emerging market” refers to an economy that is in the initial stages of industrialization and has been historically marked by low per capita income
and a lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions.
Investments in emerging markets have the potential for significantly higher or lower rates of return and carry greater risks than investments in more developed markets.
The Index is a
float-adjusted market capitalization weighted equity index of issuers drawn from five major Latin American markets: Brazil, Chile, Columbia, Mexico, and Perú. It is designed for investors seeking broad market exposure to approximately forty
highly liquid, large, blue-chip companies from the Latin American markets. The Index attempts to capture 70% of the Latin American region’s total market capitalization. The Index rebalances quarterly.
As of December 31, 2018, the Index
had 41 constituents with a median total market capitalization of $14.1 billion, total market capitalizations ranging from $3.5 billion to $69.7 billion and were included in the financials, materials, and energy sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged
exposure to the above. Derivatives are financial
instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the
over-the-counter market, which generally provides for less transparency than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently
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depending on the
period of time an investment in the Fund is held and the volatility of the Index during shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s
investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index
increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 24.77%. The Index’s highest volatility rate for any one calendar year during the five-year period was 30.33% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was -0.81%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because
the Fund is leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index decreases, the Fund may be one of many market participants that are attempting to sell securities of the Index. Under such circumstances, the market for investments of the Index may lack sufficient
liquidity for all market participants' trades. Therefore, the Fund may have more difficulty selling securities or financial instruments and the Fund's transactions could exacerbate the price decline of the securities of the Index. Additionally,
because the Fund is leveraged, a minor decrease in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track
the performance of the same, or a substantially
similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an
ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing,
borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
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Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual
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obligations or may
fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is
entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such
collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies
are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal
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price or time, which may adversely affect the
Fund’s performance.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues
that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging
markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital
controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets
in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement procedures in
emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency. Emerging markets
may develop unevenly and may never fully develop.
Latin American Securities Risk
—
The economies of certain Latin American countries have experienced high interest rates, economic volatility, inflation,
currency devaluations, government debt defaults and high unemployment rates. Certain Latin American countries have experienced periods of political and economic instability and social unrest in the past. International economic conditions, as well as
world prices for oil and other commodities may also influence the development of Latin American economies. These risks, among others, may materially affect the value of the Fund’s investments.
Energy
Sector Risk
—
Companies that engage in energy-related businesses and companies primarily involved in the
production and mining of coal,
development
and production of oil, gas
and consumable fuels and provide drilling and other energy resources production and distribution related services are subject to risks of legislative or regulatory changes, adverse market conditions
and/or increased
competition affecting the energy sector. The prices of the securities of
energy and energy services companies may fluctuate
widely due to the supply and demand, exploration and production spending, world events and economic conditions, swift price and supply fluctuations, energy conservation, the success of exploration projects, liabilities for environmental damage and
general civil liabilities and tax and other governmental regulatory policies and legislation. Weak demand for energy companies’ products or services or for energy products and services in general, as well as negative developments in these
other areas, including natural disaster and terrorist attacks, impact energy company securities.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Materials Sector Risk
—
Companies in the materials sector could be adversely affected by commodity price volatility, exchange rate import
controls and increased competition. The production of industrial materials often exceeds demand as a result of over-building or economic downturns, leading to poor investment returns. Companies in the materials sector also are at risk for
environmental damage and product liability claims, and may be materially affected by depletion of resources, technical progress, labor relations, and governmental regulations.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Mid-Capitalization
Company Risk
- Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than more established,
larger-capitalization companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are
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dependent on a
small management group. In addition, because these stocks are not well known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly
available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and
liquidity of securities held by the Fund. As a result, the performance of mid-capitalization companies can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Depositary Receipt Risk
—
To the extent the Fund invests in, and/or has exposure to, foreign companies, the Fund’s investment may be in
the form of depositary receipts or other securities convertible into securities of foreign issuers including American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), and Global Depositary Receipts
(“GDRs”). While the investment in ADRs, EDRs and GDRs, which are traded on exchanges and represent ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective
national markets and currencies, investments in them continue to be subject to certain of the risks associated with investing directly in foreign securities, such as political and exchange rate risks.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments
that may be traded in markets that are closed when
the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in
premiums or discounts to net asset value that may be greater than those experienced by other ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock
Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
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Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience
the same investment results as experienced by those
creating and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants
are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to
trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 73.96% for the quarter ended September 30, 2010 and its lowest calendar quarter return was -62.92% for the quarter ended September 30, 2011. The year-to-date return
as of December 31, 2018 was -39.16%.
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Average Annual Total
Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(12/3/2009)
|
Return
Before Taxes
|
-39.16%
|
-25.73%
|
-26.76%
|
Return
After Taxes on Distributions
|
-39.36%
|
-25.78%
|
-27.15%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-23.01%
|
-16.32%
|
-12.35%
|
S&P
Latin America 40 Index
(reflects no deduction for fees, expenses or taxes)
|
-6.24%
|
-0.81%
|
-1.96%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
11.70%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in December 2009
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000
Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price
greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “S&P Latin America 40
Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard &
Poor’s
®
and S&P
®
are registered
trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones
Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones,
S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P Latin
America 40 Index.
Direxion Shares
ETF Trust Prospectus
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Direxion
Daily MSCI Mexico Bull 3X Shares
Important Information
Regarding the Fund
The
Direxion Daily MSCI Mexico Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund
may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the MSCI Mexico IMI 25/50 Index (the “Index”). This means that the return of the Fund for a period longer
than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of
the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage and are willing to
monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will lose money if
the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.37%
|
Acquired
Fund Fees and Expenses
(1)
|
0.32%
|
Total
Annual Fund Operating Expenses
|
1.44%
|
Expense
Cap/Reimbursement
(2)
|
-0.17%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.27%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$129
|
$439
|
$771
|
$1,710
|
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 140% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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|
reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is designed to measure the
performance of the large-, mid- and small-capitalization segments of the Mexican equity market, covering approximately 99% of the free float-adjusted market capitalization in Mexico. The Index consists of stocks traded primarily on the Mexican Stock
Market and is rebalanced quarterly.
As of December 31, 2018, the Index
was comprised of 57 constituents which had an average total market capitalization of $2.7 billion, total market capitalizations ranging from $150.5 million to $23.4 billion and were concentrated in the consumer staples, communication services, and
financials sectors.
The
components of the Index and the percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
,
hold 25% or more of its total assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio
so that its exposure to the Index is consistent with
the Fund’s investment objective. The impact of the Index’s movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund
should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning
strategy typically results in high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next
trading day.
Because of daily
rebalancing and the compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of
the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund
will lose money over time while the Index's performance increases.
Principal Investment Risks
An investment in the Fund entails
risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not traditionally
associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
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ETF Trust Prospectus
|
198
|
The chart below
provides examples of how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index
performance; c) period of time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows
estimated Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii)
there were no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the chart below, the Fund
would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss of value in the Fund,
even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas shaded red (or dark gray)
represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return more than 300% of the
performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the returns shown below as a
result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The
Index’s annualized historical volatility rate for the five year period ended December 31, 2018 was 20.21%. The Index’s highest volatility rate for any one calendar year during the five-year period was 26.44% and volatility for a shorter
period of time may have been substantially higher. The Index’s annualized performance for the five-year period ended
December 31, 2018 was -7.34%. Historical Index
volatility and performance are not indications of what the Index volatility and performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the
Index.
For information regarding
the effects of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note
Regarding the Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced
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to sell the security at a loss. Such a situation may
prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index decreases, the Fund may be one of many market participants that are attempting to sell securities of the Index. Under such circumstances, the market for investments of the Index may lack sufficient
liquidity for all market participants' trades. Therefore, the Fund may have more difficulty selling securities or financial instruments and the Fund's transactions could exacerbate the price decline of the securities of the Index. Additionally,
because the Fund is leveraged, a minor decrease in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
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Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between
|
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the parties is
calculated based on a notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
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If the Index has a
dramatic move that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event,
the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even
if the Index later reverses all or a portion of its movement.
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•
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Futures
Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an
imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a
closing transaction. Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly
volatile and the use of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts, which will subject the Fund to additional risks that are different from those
associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the
agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment
held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its
leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions
adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as
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a result, the Fund may not be able to achieve its
leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income
items, valuation methodology, accounting standards
and disruptions or illiquidity in the markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be
different from that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund
being over- or under-exposed to the Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain
from taking positions to improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Mexican Securities Risk
-
Investment in securities of Mexican issuers involves risks that may be greater than if the Fund’s investments were more geographically diverse.
Mexico’s economy is heavily dependent on trading with key partners, including the United States and certain Latin American countries. As a result, Mexico is dependent on, among other things, the U.S. economy and any change in the price or
demand for Mexican exports may have an adverse impact on the Mexican economy. Any increases or decreases in the volume of this trading, changes in taxes or tariffs, or variance in political relationships between those nations may impact the Mexican
economy overall. Recent political developments in the U.S. have raised potential implications for the current trade arrangements between the U.S. and Mexico, which could negatively impact the Mexican economy.
Mexico has been destabilized by local
insurrections, social upheavals, and drug related violence. Recently, Mexico experienced an outbreak of violence due to drug trafficking. Incidents involving Mexico’s security may have an adverse effect on the Mexican economy and cause
uncertainty in
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its financial markets. Recently, Mexican elections
have been contentious and have been very closely decided. Changes in political parties or other Mexican political events may affect the economy and cause instability. Historically, Mexico has experienced substantial economic instability from, among
other things, economic volatility, high unemployment rates, periods of very high inflation and significant devaluation of the Mexican currency, the peso.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues
that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging
markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital
controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets
in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement procedures in
emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency. Emerging markets
may develop unevenly and may never fully develop.
Communication Services Sector Risk
—
The communication services sector may be dominated by a small number of companies which may lead to additional
volatility in the sector. Communication services companies are particularly vulnerable to the potential obsolescence of products and services due to technological advances and the innovation of competitors. Communication services companies may also
be affected by other competitive pressures, such as pricing competition, as well as research and development costs, substantial capital requirements and government regulation. Fluctuating domestic and international demand, shifting demographics and
often unpredictable changes in consumer demand can drastically affect a communication services company’s profitability. Telecommunication service providers
are often required to obtain licenses or franchises
in order to provide services in a given location. Licensing or franchise rights are limited, which may result in an advantage to certain participants. Compliance with governmental regulations, delays or failure to receive regulatory approvals, or
the enactment of new regulatory requirements may negatively affect the business of telecommunication services companies. Companies in media and entertainment industries can be significantly affected by competition, particularly in formulating new
products and services using new technologies, and the cyclicality of revenues and earnings. Certain companies in the communication services sector may be particular targets of network security breaches, hacking and potential theft of proprietary or
consumer information or disruptions in services, which would have a material adverse effect on their businesses.
Consumer Staples Sector Risk
—
Consumer staples companies are subject to government regulation affecting their products which may negatively impact
such companies’ performance. For instance, government regulations may affect the permissibility of using various food additives and production methods of companies that make food products, which could affect company profitability. Also, the
success of food, beverages, household and personal product companies may be strongly affected by changing consumer tastes and/or interest, marketing campaigns and other factors affecting supply and demand, including performance of the overall
domestic and global economy, interest rates, competition and consumer confidence and spending. In particular, tobacco companies may be adversely affected by new laws, regulations and litigation. The consumer staples sector may also be adversely
affected by changes or trends in commodity prices, which may be influenced or characterized by unpredictable factors.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product,
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financial, or market conditions and may not be able
to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’ returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of
the overall markets.
Micro-Capitalization Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition, micro-cap companies
often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or mid-capitalization. As
a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Small- and/or Mid-Capitalization Company
Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial
resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant institutional ownership and
are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure, which could increase
the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Depositary Receipt Risk
—
To the extent the Fund invests in, and/or has exposure to, foreign companies, the Fund’s investment may be in
the form of depositary receipts or other securities convertible into securities of foreign issuers including American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), and Global Depositary Receipts
(“GDRs”). While the investment in ADRs, EDRs and GDRs, which are traded on exchanges and represent ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their
respective
national markets and currencies, investments in them
continue to be subject to certain of the risks associated with investing directly in foreign securities, such as political and exchange rate risks.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches of the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business
operations, potentially resulting in financial losses to the Fund. While the Fund has established business continuity plans and risk management systems seeking to address system breaches or failures, these plans and systems are inherently limited.
Further, cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
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High Portfolio
Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs.
Additionally, active market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active
trading may lead to higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders
as ordinary income when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s
extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to
process creation and/or redemption orders, Shares
may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments that have lower trading volumes.
Market Price Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will fluctuate in
response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or less than net
asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that large
discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the daily net
asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no
guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or
create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following performance
information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year to calendar
year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before and after
taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
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|
During the period of time shown in
the bar chart, the Fund’s highest calendar quarter return was 21.24% for the quarter ended September 30, 2018 and its lowest calendar quarter return was -51.96% for the quarter ended December 31, 2018. The year-to-date return as of December
31, 2018 was -52.20%.
Average Annual
Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(5/3/2017)
|
Return
Before Taxes
|
-52.20%
|
-42.70%
|
Return
After Taxes on Distributions
|
-52.55%
|
-42.99%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-30.30%
|
-30.74%
|
MSCI
Mexico IMI 25/50 Index
(reflects no deduction for fees, expenses or taxes)
|
-14.64%
|
-10.76%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
4.96%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in May 2017
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception in May 2017
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily MSCI Mexico Bear 3X Shares
Important Information
Regarding the Fund
The
Direxion Daily MSCI Mexico Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result,
the Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the MSCI Mexico IMI 25/50 Index (the “Index”). This means that the return of the Fund
for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods,
higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more
than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of leverage and
shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day,
the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment within a
single day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to
achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.11%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the Fund’s net
assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity
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ETF Trust Prospectus
|
206
|
of less than 397 days and exhibit high quality
credit profiles, including U.S. government securities and repurchase agreements.
The Index is designed to measure the
performance of the large-, mid- and small-capitalization segments of the Mexican equity market, covering approximately 99% of the free float-adjusted market capitalization in Mexico. The Index consists of stocks traded primarily on the Mexican Stock
Market and is rebalanced quarterly.
As of December 31, 2018, the Index
was comprised of 57 constituents which had an average total market capitalization of $2.7 billion, total market capitalizations ranging from $150.5 million to $23.4 billion and were concentrated in the consumer staples, communication services, and
financials sectors.
The
components of the Index and the percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
,
hold 25% or more of its total assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain inverse leveraged
exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate characteristics similar to
those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index. Derivatives are financial
instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting securities in order to
gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s
returns compounded over the period, which will very
likely differ from -300% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is
even possible that the Fund will lose money over time while the Index's performance decreases.
Principal Investment Risks
An investment in the Fund entails
risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual
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|
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|
borrowing/lending rates were reflected, the estimated
returns would be different than those shown.
As shown in the chart below, the Fund
would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss of value in the Fund,
even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas shaded red (or dark
gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return more than -300% of the
performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the returns shown below as a
result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The
Index’s annualized historical volatility rate for the five year period ended December 31, 2018 was 20.21%. The Index’s highest volatility rate for any one calendar year during the five-year period was 26.44% and volatility for a shorter
period of time may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was -7.34%. Historical Index volatility and performance are not indications of what the Index volatility and
performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize
leverage. An investment in the Fund is exposed to
the risk that a rise in the daily performance of the Index will be magnified. This means that an investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and
other operating expenses, which would further reduce its value. The Fund could theoretically lose an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences
in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage,
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ETF Trust Prospectus
|
208
|
imperfect daily correlations with underlying
investments or the Fund’s other portfolio holdings, higher price volatility, lack of availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment
techniques and risks different from those associated with ordinary portfolio securities transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be
imperfect correlation between the value of the reference assets and the derivative, which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may
expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
|
If the Index has a
dramatic move that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event,
the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment
objective, even if the Index later reverses all or a portion of its movement.
|
•
|
Futures
Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an
imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures
|
|
contracts. There may
not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction. Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting
the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and
without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts, which will subject the Fund to additional risks that are different from those
associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the
agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment
held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its
inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies are stayed or eliminated under special
resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
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The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day
Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of
an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares
intra-day may experience performance that is greater than, or less than, the Fund’s stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when
the Index is volatile near the close of the trading
day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Mexican Securities Risk
-
Investment in securities of Mexican issuers involves risks that may be greater than if the Fund’s investments were more geographically diverse.
Mexico’s economy is heavily dependent on trading with key partners, including the United States and certain Latin American countries. As a result, Mexico is dependent on, among other things, the U.S. economy and any change in the price or
demand for Mexican exports may have an adverse impact on the Mexican economy. Any increases or decreases in the volume of this trading, changes in taxes or tariffs, or variance in political relationships between those nations may impact the Mexican
economy overall. Recent political developments in the U.S. have raised potential implications for the current trade arrangements between the U.S. and Mexico, which could negatively impact the Mexican economy.
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Mexico has been
destabilized by local insurrections, social upheavals, and drug related violence. Recently, Mexico experienced an outbreak of violence due to drug trafficking. Incidents involving Mexico’s security may have an adverse effect on the Mexican
economy and cause uncertainty in its financial markets. Recently, Mexican elections have been contentious and have been very closely decided. Changes in political parties or other Mexican political events may affect the economy and cause
instability. Historically, Mexico has experienced substantial economic instability from, among other things, economic volatility, high unemployment rates, periods of very high inflation and significant devaluation of the Mexican currency, the
peso.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues
that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging
markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital
controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets
in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement procedures in
emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency. Emerging markets
may develop unevenly and may never fully develop.
Communication Services Sector Risk
—
The communication services sector may be dominated by a small number of companies which may lead to additional
volatility in the sector. Communication services companies are particularly vulnerable to the potential obsolescence of products and services due to technological advances and the innovation of competitors. Communication services companies may also
be affected by other competitive pressures, such as pricing competition, as well as research and development costs,
substantial capital requirements and government
regulation. Fluctuating domestic and international demand, shifting demographics and often unpredictable changes in consumer demand can drastically affect a communication services company’s profitability. Telecommunication service providers
are often required to obtain licenses or franchises in order to provide services in a given location. Licensing or franchise rights are limited, which may result in an advantage to certain participants. Compliance with governmental regulations,
delays or failure to receive regulatory approvals, or the enactment of new regulatory requirements may negatively affect the business of telecommunication services companies. Companies in media and entertainment industries can be significantly
affected by competition, particularly in formulating new products and services using new technologies, and the cyclicality of revenues and earnings. Certain companies in the communication services sector may be particular targets of network security
breaches, hacking and potential theft of proprietary or consumer information or disruptions in services, which would have a material adverse effect on their businesses.
Consumer Staples Sector Risk
—
Consumer staples companies are subject to government regulation affecting their products which may negatively impact
such companies’ performance. For instance, government regulations may affect the permissibility of using various food additives and production methods of companies that make food products, which could affect company profitability. Also, the
success of food, beverages, household and personal product companies may be strongly affected by changing consumer tastes and/or interest, marketing campaigns and other factors affecting supply and demand, including performance of the overall
domestic and global economy, interest rates, competition and consumer confidence and spending. In particular, tobacco companies may be adversely affected by new laws, regulations and litigation. The consumer staples sector may also be adversely
affected by changes or trends in commodity prices, which may be influenced or characterized by unpredictable factors.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials
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sector is also a target for cyber attacks and may
experience technology malfunctions and disruptions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Micro-Capitalization Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition, micro-cap companies
often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or mid-capitalization. As
a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Small- and/or Mid-Capitalization Company
Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial
resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant institutional ownership and
are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure, which could increase
the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree
by fluctuations in currency exchange rates,
political, diplomatic or economic conditions and regulatory requirements in other countries. The laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may
be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches of the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business
operations, potentially resulting in financial losses to the Fund. While the Fund has established business continuity plans and risk management systems seeking to address system breaches or failures, these plans and systems are inherently limited.
Further, cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the
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possibility of significantly increased short-term
capital gains (which will be taxable to shareholders as ordinary income when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the
Fund’s trading. As such, if the Fund’s extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will fluctuate in
response to changes
in the value of the Fund’s holdings and supply
and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or less than net asset value (a discount). The Adviser cannot predict if Shares will trade
at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that large discounts or premiums to the net asset value of Shares should not be sustained.
There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the daily net asset value of the Fund over a period of time. Investors purchasing and selling
Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To
the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or
discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may
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only purchase and sell Shares on a national
securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value
(discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily Russia Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Russia Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier than
alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the MVIS Russia Index (the “Index”). This means that the return of the Fund for a period longer than a trading day will be
the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater
leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the
return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.15%
|
Acquired
Fund Fees and Expenses
(1)
|
0.46%
|
Total
Annual Fund Operating Expenses
|
1.36%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other
|
investment companies, including investments in money
market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund, they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that
presented in the Fund's financial highlights included in the Fund's reports to shareholders.
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$138
|
$431
|
$745
|
$1,635
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 93% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
Russia is considered an
“emerging market,” as that term is defined by the index provider. The term “emerging market” refers to an economy that is in the initial stages of industrialization and has been historically marked by low per capita income
and a lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions.
Investments in emerging markets have the potential for significantly higher or lower rates of return and carry greater risks than investments in more developed
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markets. Additionally, because Russia produces and
exports large volumes of oil and gas, the Russian economy is particularly sensitive to the fluctuations in the global energy sector.
The Index is a rules-based index,
intended to represent the overall performance of publically traded companies that are domiciled and primarily listed on an exchange in Russia or that are not Russian companies, but nonetheless generate at least 50% of their revenues in Russia.
Components of the Index may include large-, mid- and small-capitalization stocks, but each component must have a market capitalization of greater than $150 million on a rebalancing date to be eligible for the Index. Stocks whose market
capitalizations fall below $75 million as of any rebalancing date will no longer be eligible for the Index. Stocks must have a three-month average daily trading volume value of at least $1 million to be eligible for the Index and issuers of such
stocks must have traded at least 250,000 shares each month over the last six months. The Index is reviewed and, if necessary, reconstituted quarterly.
As of December 31,
2018, the Index included 26 constituents, which had an average market capitalization of $17.9 billion, total market capitalization ranging from approximately $1.5 billion to $65.5 billion and were concentrated in the energy and materials
sectors.
The
components of the Index and the percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
,
hold 25% or more of its total assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund
should fall, meaning the Fund’s exposure will
need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to
the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates
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the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 25.71%. The Index’s highest volatility rate for any one calendar year during the five-year period was 32.12% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was -3.97%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment
Techniques and Policies” in the Fund’s
statutory prospectus, and “Special Note Regarding the Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index decreases, the Fund may be one of many market participants that are attempting to sell securities
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of the Index. Under such circumstances, the market
for investments of the Index may lack sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty selling securities or financial instruments and the Fund's transactions could exacerbate the price decline
of the securities of the Index. Additionally, because the Fund is leveraged, a minor decrease in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap
transaction with the Fund. In that event, the Fund
may be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the
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difference between
the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if
the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may experience performance that is greater than, or less than, the Fund’s stated
multiple of the Index.
If there
is a significant intra-day market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and
sales of Shares prior to the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not
included in the Index. The Fund may be subject to
large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s
ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s
correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Russian Securities Risk
- Investment in, and/or exposure to, Russian securities involves risks in addition to those associated with investments in securities of issuers in more developed countries, which may adversely the
Fund. Such heightened risks include, among others, expropriation and/or nationalization of assets, restrictions on and government intervention in international trade, confiscatory or punitive taxation, regional conflict, political instability,
including authoritarian and/or military involvement in governmental decision making, armed conflict, the imposition of economic sanctions by other nations, the impact on the economy as a result of civil war and social instability as a result of
religious, ethnic and/or socioeconomic unrest.
The securities markets of Russia are
underdeveloped and are often considered to be less correlated to global economic cycles than those markets located in more developed countries. As a result, securities markets in Russia are subject to greater risks associated with market volatility,
lower market capitalization, lower trading volume, inflation, greater price fluctuations, uncertainty regarding the existence of trading markets, governmental control and heavy regulation of labor and industry. Additionally, certain investments in
Russia may become less liquid in response to market developments or adverse investor perceptions, or become illiquid after purchase by the Fund, particularly during periods of market turmoil. Moreover, trading on securities markets in Russia may be
suspended altogether.
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The government in Russia may restrict
or control to varying degrees the ability of foreign investors to invest in securities of issuers located or operating in Russia. These restrictions and/or controls may at times limit or prevent foreign investment in securities of issuers located or
operating in Russia. Moreover, governmental approval or special licenses may be required prior to investments by foreign investors and may limit the amount of investments by foreign investors in a particular industry and/or issuer and may limit such
foreign investment to a certain class of securities of an issuer that may have less advantageous rights than the classes available for purchase by domiciliaries of Russia and/or impose additional taxes on foreign investors. These factors, among
others, make investing in issuers located or operating in Russia significantly riskier than investing in issuers located or operating in more developed countries.
The value of the Russian Ruble may be
subject to a high degree of fluctuation. The Fund’s assets will be invested primarily in equity securities of Russian issuers and the income received by the Fund will be principally in Russian Rubles. The Fund’s exposure to the Russian
Ruble and changes in value of the Russian Ruble versus the U.S. Dollar may result in reduced returns to the Fund. Moreover, the Fund may incur costs in connection with conversions between U.S. Dollars and the Russian Ruble. In addition, the current
economic turmoil in Russia and the effects on the current global economic crisis on the Russian economy may have significant adverse effects on the Russian Ruble.
As a result of recent events
involving Ukraine and Russia, the United States and the European Union have imposed sanctions on certain Russian entities and individuals and certain sectors of Russia’s economy, which may result in, among other things, the devaluation of
Russian currency, a downgrade in the country’s credit rating, and/or a decline in the value and liquidity of Russian securities, property or interests. The United States and other nations or international organizations may impose additional
economic sanctions or take other actions that may adversely affect Russia-exposed issuers and companies in various sectors of the Russian economy, including, but not limited to, the financial services, energy, metals and mining, engineering, and
defense and defense-related materials sectors. These sanctions, any future sanctions or other actions, or even the threat of further sanctions or other actions, may negatively affect the value and liquidity of the Fund’s portfolio and may
impair the Fund’s ability to achieve its investment objective. For example, the Fund may be prohibited from investing in securities issued by companies subject to such sanctions. In addition, the sanctions may require the Fund to freeze its
existing investments in Russian companies, prohibiting the Fund from buying, selling or otherwise transacting in these investments. Russia has undertaken and may undertake additional countermeasures or retaliatory actions which may further impair
the value and liquidity of Russian securities and potentially disrupt the Fund’s operations.
Despite recent reform and
privatization, the Russian government continues to control a large share of economic activity in the region. The Russian government owns shares in corporations in a range of sectors including banking, energy production and distribution, automotive,
transportation
and telecommunications. Additionally, because Russia
produces and exports large volumes of oil and gas, the Russian economy is particularly sensitive to the price of oil and gas on the world market, and a decline in the price of oil and gas could have a significant negative impact on the Russian
economy.
For these or other
reasons, in the event that an emergency exists in which it is not reasonably practicable for the Fund to dispose of its securities or to determine its net asset value, the Fund could seek to suspend redemptions of creation units. The Fund could
also, among other things, limit or suspend creations of creation units. During the period that creations or redemptions are affected, the Fund’s shares could trade at a significant premium or discount to their net asset value. In the case of a
period during which creations are suspended, the Fund could experience substantial redemptions, which may cause the Fund to experience increased transaction costs and make greater taxable distributions to shareholders of the Fund. The Fund may also
change its investment objective by, for example, seeking to track an alternative index. Alternatively, the Fund could liquidate, through a liquidating trust or otherwise, all or a portion of its assets, which may be at unfavorable prices.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues
that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging
markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital
controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets
in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement procedures in
emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s
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currency. Emerging markets may develop unevenly and may
never fully develop.
Energy Sector Risk
—
Companies that engage in energy-related businesses and companies primarily involved in the production and mining of
coal, development and production of oil, gas and consumable fuels and provide drilling and other energy resources production and distribution related services
are subject to risks of
legislative or regulatory changes, adverse market conditions and/or increased competition affecting the energy sector. The prices of the securities of energy and energy services companies may fluctuate widely due to the supply and demand,
exploration and production spending, world events and economic conditions, swift price and supply fluctuations, energy conservation, the success of exploration projects, liabilities for environmental damage and general civil liabilities and tax and
other governmental regulatory policies and legislation. Weak demand for energy companies’ products or services or for energy products and services in general, as well as negative developments in these other areas, including natural disaster
and terrorist attacks, impact energy company securities.
Materials Sector Risk
—
Companies in the materials sector could be adversely affected by commodity price volatility, exchange rate import
controls and increased competition. The production of industrial materials often exceeds demand as a result of over-building or economic downturns, leading to poor investment returns. Companies in the materials sector also are at risk for
environmental damage and product liability claims, and may be materially affected by depletion of resources, technical progress, labor relations, and governmental regulations.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Depositary Receipt Risk
—
To the extent the Fund invests in, and/or has exposure to, foreign companies, the Fund’s investment may be in
the form of depositary receipts or other securities convertible into securities of foreign issuers including American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), and Global Depositary Receipts
(“GDRs”). While the investment in ADRs, EDRs and GDRs, which are traded on exchanges and represent ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective
national markets and currencies, investments in them continue to be subject to certain of the risks associated with investing directly in foreign securities, such as political and exchange rate risks.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business
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operations,
potentially resulting in financial losses to the Fund. While the Fund has established business continuity plans and risk management systems seeking to address system breaches or failures, these plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to
credit risks associated with the instruments in
which they invest. There is no guarantee that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable,
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such as extraordinary market volatility or other
reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange on
which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
The performance shown prior to March
17, 2012 reflects the Fund’s previous investment objective where it sought daily investment results, before fees and expenses, of 300% of the performance of the DAX Global Russia+ Index. If the Fund had continued to seek its previous
investment objective, the calendar year performance of the Fund would have varied from that shown.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 53.49% for the quarter ended September 30, 2017 and its lowest calendar quarter return was -76.05% for the quarter ended December 31, 2014. The year-to-date return
as of December 31, 2018 was -40.06%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(5/25/2011)
|
Return
Before Taxes
|
-40.06%
|
-39.37%
|
-39.73%
|
Return
After Taxes on Distributions
|
-40.15%
|
-39.42%
|
-39.77%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-23.53%
|
-21.36%
|
-16.47%
|
MVIS
Russia Index
(reflects no deduction for fees, expenses or taxes)
|
-6.48%
|
-3.97%
|
-5.14%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
11.16%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax
returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares" is higher
because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in May 2011
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan
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or an individual retirement account. Distributions
or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other ETFs.
Payments to Broker-Dealers and Other
Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may
create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
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Direxion
Daily Russia Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Russia Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be
riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the MVIS Russia Index (the “Index”). This means that the return of the Fund for a period longer than a
trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the
Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.25%
|
Acquired
Fund Fees and Expenses
(1)
|
0.17%
|
Total
Annual Fund Operating Expenses
|
1.17%
|
Expense
Cap/Reimbursement
(2)
|
-0.05%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.12%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$114
|
$367
|
$639
|
$1,416
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the
Fund’s net assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that
have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
Russia is considered an
“emerging market,” as that term is defined by the index provider. The term “emerging market” refers to an economy that is in the initial stages of industrialization and has been historically marked by low per capita income
and a lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions.
Investments in emerging markets have the potential for significantly higher or lower rates of return and carry greater risks than investments in more developed markets. Additionally, because Russia produces and exports large volumes of oil and gas,
the Russian economy is particularly sensitive to the fluctuations in the global energy sector.
The Index is a rules-based index,
intended to represent the overall performance of publically traded companies that are domiciled and primarily listed on an exchange in Russia or that are not Russian companies, but nonetheless generate at least 50% of their revenues in Russia.
Components of the Index may include large-, mid- and small-capitalization stocks, but each component must have a market capitalization of greater than $150 million on a rebalancing date to be eligible for the Index. Stocks whose market
capitalizations fall below $75 million as of any rebalancing date will no longer be eligible for the Index. Stocks must have a three-month average daily trading volume value of at least $1 million to be eligible for the Index and issuers of such
stocks must have traded at least 250,000 shares each month over the last six months. The Index is reviewed and, if necessary, reconstituted quarterly.
As of December 31,
2018, the Index included 26 constituents, which had an average market capitalization of $17.9 billion, total market capitalization ranging from approximately $1.5 billion to $65.5 billion and were concentrated in the energy and materials
sectors.
The
components of the Index and the percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
,
hold 25% or more of its total assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding
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affects all
investments, but has a more significant impact on funds that are leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of
the performance of the Index. The effect of compounding becomes more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in
the Fund is held and the volatility of the Index during shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily
performance will lead to a smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a
shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 25.71%. The Index’s highest volatility rate for any one calendar year during the five-year period was 32.12% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was -3.97%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus,
to the extent that the Fund invests in swaps that
use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any
financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive
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the full amount it
is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such
collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important
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to note that the correlation to these ETFs may vary
from the correlation to the Index due to embedded costs and other factors.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Russian Securities Risk
- Investment in, and/or exposure to, Russian securities involves risks in addition to those associated with investments in securities of issuers in more developed countries, which may adversely the
Fund. Such heightened risks include, among others, expropriation and/or nationalization of assets, restrictions on and government intervention in international trade, confiscatory or punitive taxation, regional conflict, political instability,
including authoritarian and/or military involvement in governmental decision making, armed conflict, the imposition of economic sanctions by other nations, the impact on the economy as a result of civil war and social instability as a result of
religious, ethnic and/or socioeconomic unrest.
The securities markets of Russia are
underdeveloped and are often considered to be less correlated to global economic cycles than those markets located in more developed countries. As a result, securities markets in Russia are subject to greater risks associated with market volatility,
lower market capitalization, lower trading volume, inflation, greater price fluctuations, uncertainty regarding the existence of trading markets, governmental control and heavy regulation of labor and industry. Additionally, certain investments in
Russia may become less liquid in response to market developments or adverse investor perceptions, or become illiquid after purchase by the Fund, particularly during periods of market turmoil. Moreover, trading on securities markets in Russia may be
suspended altogether.
The
government in Russia may restrict or control to varying degrees the ability of foreign investors to invest in securities of issuers located or operating in Russia. These restrictions and/or controls may at times limit or prevent foreign investment
in securities of issuers located or operating in Russia. Moreover, governmental approval or special licenses may be required prior to investments by foreign investors and may limit the amount of investments by foreign investors in a particular
industry and/or issuer and may limit such foreign
investment to a certain class of securities of an
issuer that may have less advantageous rights than the classes available for purchase by domiciliaries of Russia and/or impose additional taxes on foreign investors. These factors, among others, make investing in issuers located or operating in
Russia significantly riskier than investing in issuers located or operating in more developed countries.
The value of the Russian Ruble may be
subject to a high degree of fluctuation. The Fund’s assets will be invested primarily in equity securities of Russian issuers and the income received by the Fund will be principally in Russian Rubles. The Fund’s exposure to the Russian
Ruble and changes in value of the Russian Ruble versus the U.S. Dollar may result in reduced returns to the Fund. Moreover, the Fund may incur costs in connection with conversions between U.S. Dollars and the Russian Ruble. In addition, the current
economic turmoil in Russia and the effects on the current global economic crisis on the Russian economy may have significant adverse effects on the Russian Ruble.
As a result of recent events
involving Ukraine and Russia, the United States and the European Union have imposed sanctions on certain Russian entities and individuals and certain sectors of Russia’s economy, which may result in, among other things, the devaluation of
Russian currency, a downgrade in the country’s credit rating, and/or a decline in the value and liquidity of Russian securities, property or interests. The United States and other nations or international organizations may impose additional
economic sanctions or take other actions that may adversely affect Russia-exposed issuers and companies in various sectors of the Russian economy, including, but not limited to, the financial services, energy, metals and mining, engineering, and
defense and defense-related materials sectors. These sanctions, any future sanctions or other actions, or even the threat of further sanctions or other actions, may negatively affect the value and liquidity of the Fund’s portfolio and may
impair the Fund’s ability to achieve its investment objective. For example, the Fund may be prohibited from investing in securities issued by companies subject to such sanctions. In addition, the sanctions may require the Fund to freeze its
existing investments in Russian companies, prohibiting the Fund from buying, selling or otherwise transacting in these investments. Russia has undertaken and may undertake additional countermeasures or retaliatory actions which may further impair
the value and liquidity of Russian securities and potentially disrupt the Fund’s operations.
Despite recent reform and
privatization, the Russian government continues to control a large share of economic activity in the region. The Russian government owns shares in corporations in a range of sectors including banking, energy production and distribution, automotive,
transportation and telecommunications. Additionally, because Russia produces and exports large volumes of oil and gas, the Russian economy is particularly sensitive to the price of oil and gas on the world market, and a decline in the price of oil
and gas could have a significant negative impact on the Russian economy.
For these or other reasons, in the
event that an emergency exists in which it is not reasonably practicable for the Fund
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to dispose of its securities or to determine its net
asset value, the Fund could seek to suspend redemptions of creation units. The Fund could also, among other things, limit or suspend creations of creation units. During the period that creations or redemptions are affected, the Fund’s shares
could trade at a significant premium or discount to their net asset value. In the case of a period during which creations are suspended, the Fund could experience substantial redemptions, which may cause the Fund to experience increased transaction
costs and make greater taxable distributions to shareholders of the Fund. The Fund may also change its investment objective by, for example, seeking to track an alternative index. Alternatively, the Fund could liquidate, through a liquidating trust
or otherwise, all or a portion of its assets, which may be at unfavorable prices.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues
that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging
markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital
controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets
in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement procedures in
emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency. Emerging markets
may develop unevenly and may never fully develop.
Energy Sector Risk
—
Companies that engage in energy-related businesses and companies primarily involved in the production and mining of
coal, development and production of oil, gas and consumable fuels and provide drilling and other energy resources production and distribution related services
are subject to risks of
legislative or regulatory changes, adverse market conditions and/or increased competition
affecting the energy sector. The prices of the
securities of energy and energy services companies may fluctuate widely due to the supply and demand, exploration and production spending, world events and economic conditions, swift price and supply fluctuations, energy conservation, the success of
exploration projects, liabilities for environmental damage and general civil liabilities and tax and other governmental regulatory policies and legislation. Weak demand for energy companies’ products or services or for energy products and
services in general, as well as negative developments in these other areas, including natural disaster and terrorist attacks, impact energy company securities.
Materials Sector Risk
—
Companies in the materials sector could be adversely affected by commodity price volatility, exchange rate import
controls and increased competition. The production of industrial materials often exceeds demand as a result of over-building or economic downturns, leading to poor investment returns. Companies in the materials sector also are at risk for
environmental damage and product liability claims, and may be materially affected by depletion of resources, technical progress, labor relations, and governmental regulations.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as
securities
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markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained.
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There may,
however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in
the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To the
extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount
on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
The performance shown prior to March
17, 2012 reflects the Fund’s previous investment objective where it sought daily investment results, before fees and expenses, of -300% of the performance of the DAX Global Russia+ Index. If the Fund had continued to seek its previous
investment objective, the calendar year performance of the Fund would have varied from that shown.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 93.52% for the quarter ended December 31, 2014 and its lowest calendar quarter return was -57.07% for the quarter ended March 31, 2015. The year-to-date return as
of December 31, 2018 was -10.30%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(5/25/2011)
|
Return
Before Taxes
|
-10.30%
|
-37.92%
|
-38.19%
|
Return
After Taxes on Distributions
|
-10.56%
|
-37.95%
|
-38.21%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-6.11%
|
-20.98%
|
-16.33%
|
MVIS
Russia Index
(reflects no deduction for fees, expenses or taxes)
|
-6.48%
|
-3.97%
|
-5.14%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
11.16%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax
returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares" is higher
because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in May 2011
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
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Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily MSCI South Korea Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
MSCI South Korea Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be
riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the MSCI Korea 25/50 Index (the “Index”). This means that the return of the Fund for a period longer than a
trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the
Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage and are willing to
monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will lose money if
the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.33%
|
Acquired
Fund Fees and Expenses
(1)
|
0.42%
|
Total
Annual Fund Operating Expenses
|
1.50%
|
Expense
Cap/Reimbursement
(2)
|
-0.13%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.37%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$139
|
$461
|
$806
|
$1,779
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 96% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
South Korea is considered an
“emerging market,” as that term is defined by the index provider. The term “emerging market” refers to an economy that is in the initial stages of industrialization and has been historically marked by low per capita income
and a lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions.
Investments in emerging markets have the potential for significantly higher or lower rates of return and carry greater risks than investments in more developed markets.
The Index is designed to measure the
performance of the large- and mid-cap segments of the South Korean equity market, covering approximately 85% of the free float-adjusted market capitalization of South Korean issuers. The Index utilizes a capping methodology applied to issuer weights
such that no more than 25% of the Index’s value may be invested in a single issuer and the sum of the weights of all issuers representing more than 5% of the Index will not exceed 50% of its value. The Index is rebalanced quarterly.
As of December 31,
2018, the Index had 115 constituents, which had an average market capitalization of $5.8 billion, total market capitalizations ranging from $132.6 million to $139.2 billion and were concentrated in the information technology sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar
index as the Fund, or futures contracts that provide
leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative
instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact
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of compounding
will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during shareholder’s holding period of an investment in the Fund. If adverse daily performance of the
Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally,
however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides
examples of how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance;
c) period of time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 17.45%. The Index’s highest volatility rate for any one calendar year during the five-year period was 20.16% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 0.85%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because
the Fund is leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index decreases, the Fund may be one of many market participants that are attempting to sell securities of the Index. Under such circumstances, the market for investments of the Index may lack sufficient
liquidity for all market participants' trades. Therefore, the Fund may have more difficulty selling securities or financial instruments and the Fund's transactions could exacerbate the price decline of the securities of the Index. Additionally,
because the Fund is leveraged, a minor decrease in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track
the performance of the same, or a substantially
similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an
ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing,
borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual
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238
|
obligations or may
fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is
entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such
collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies
are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal
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price or time, which may adversely affect the
Fund’s performance.
South
Korean Securities Risk
- Investment in, and/or exposure to, securities of South Korean issuers involves risks that may be greater than if the Fund’s investments were more geographically
diverse. South Korea’s economy is heavily dependent on trading with key partners. Any increases or decreases in the volume of this trading, changes in taxes or tariffs, or variance in political relationships between nations may impact the
South Korean economy overall in a way that would be adverse to the Fund’s investments. Specifically, economic or political developments with respect to South Korea’s neighboring nations may influence the performance of any investments
made within South Korea. Potential hostilities with North Korea may have an adverse effect on the South Korean economy.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues
that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging
markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital
controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets
in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement procedures in
emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency. Emerging markets
may develop unevenly and may never fully develop.
Information Technology Sector Risk
—
The value of stocks of information technology companies and companies that rely heavily on technology is particularly
vulnerable
to rapid changes in technology product cycles, rapid product obsolescence, government regulation and competition,
both
domestically and internationally, including
competition from competitors with lower production costs. Information technology companies and companies that rely heavily on technology, especially those of smaller, less-seasoned companies, tend to be more volatile than the overall market.
Information technology companies are heavily dependent on patent and intellectual property rights, the loss or impairment of which may adversely affect profitability. Additionally, companies in the information technology sector may face dramatic and
often unpredictable changes in growth rates and competition for the services of qualified personnel.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Micro-Capitalization
Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition,
micro-cap companies often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or
mid-capitalization. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Small- and/or Mid-Capitalization Company
Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial
resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant institutional ownership and
are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure, which could increase
the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as
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markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Depositary Receipt Risk
—
To the extent the Fund invests in, and/or has exposure to, foreign companies, the Fund’s investment may be in
the form of depositary receipts or other securities convertible into securities of foreign issuers including American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), and Global Depositary Receipts
(“GDRs”). While the investment in ADRs, EDRs and GDRs, which are traded on exchanges and represent ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective
national markets and currencies, investments in them continue to be subject to certain of the risks associated with investing directly in foreign securities, such as political and exchange rate risks.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments
may be restricted,
which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments, may incur significant
tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower
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of the loaned securities fails to return the
securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a “gap”
between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 53.08% for the quarter ended March 31, 2017 and its lowest calendar quarter return was -37.78% for the quarter ended December 31, 2018. The year-to-date return as
of December 31, 2018 was -59.94%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(4/10/2013)
|
Return
Before Taxes
|
-59.94%
|
-14.39%
|
-6.91%
|
Return
After Taxes on Distributions
|
-60.03%
|
-14.68%
|
-7.35%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-35.37%
|
-10.03%
|
-5.03%
|
MSCI
Korea 25/50 Index
(reflects no deduction for fees, expenses or taxes)
|
-20.01%
|
0.85%
|
3.30%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
10.79%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher because the calculation recognizes a capital loss upon the redemption of Fund shares.
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|
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in April 2013
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily EURO STOXX 50
®
Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily EURO
STOXX 50
®
Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results
and is very different from most other exchange-traded funds. As a result, the Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the EURO STOXX 50
®
Index (the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading
day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of
compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest
for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
1.22%
|
Acquired
Fund Fees and Expenses
(1)
|
0.26%
|
Total
Annual Fund Operating Expenses
|
2.23%
|
Expense
Cap/Reimbursement
(2)
|
-1.02%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.21%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$123
|
$599
|
$1,102
|
$2,485
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 53% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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ETF Trust Prospectus
|
244
|
reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is part of the STOXX
blue-chip index family and represents the performance of the 50 largest companies among the 19 supersectors in terms of free-float market capitalization in 11 Eurozone countries. These countries have historically included Austria, Belgium, Finland,
France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The largest stocks from the 19 EURO STOXX Supersector indices are added to the selection list for the Index until the coverage equals approximately 60% of the
free-float market capitalization of each corresponding EURO STOXX TMI Supersector Index. In addition, any stocks that are current components of the Index are added to the selection list. From the selection list, the 40 largest stocks in terms of
free-float market capitalization are selected to be components of the Index. The remaining 10 stocks are selected from the largest remaining stocks ranked 41-60 on the selection list.
As of December 31,
2018, the Index consisted of 50 components that had average total market capitalization of $62.6 billion, total market capitalizations ranging from $21.1 billion to $154.3 billion and were concentrated in the banking sector.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall
market movement or the increase or decrease of the
value of the securities in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the
Index’s movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need
to be increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to
future
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|
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|
adverse performance will increase because the
shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 17.72%. The Index’s highest volatility rate for any one calendar year during the five-year period was 22.98% and volatility for a shorter period
of time may have been substantially higher. The
Index’s annualized performance for the five-year period ended December 31, 2018 was -1.77%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the future. The volatility of
ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable
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time or at a price that is lower than
Rafferty’s judgment of the security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
There can be no assurance that a security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index decreases, the Fund may be one of many market participants that are attempting to sell securities of the Index. Under such circumstances, the market for investments of the Index may lack sufficient
liquidity for all market participants' trades. Therefore, the Fund may have more difficulty selling securities or financial instruments and the Fund's transactions could exacerbate the price decline of the securities of the Index. Additionally,
because the Fund is leveraged, a minor decrease in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined
|
reference assets or underlying securities or
instruments. The gross return to be exchanged or swapped between the parties is calculated based on a notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular
index or an ETF that seeks to track an index.
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no
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suitable counterparties will be willing to enter
into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
European Economic Risk
- The Economic and Monetary Union of the European Union (the “EU”) requires member countries to comply with restrictions on inflation rates, deficits, interest rates, debt levels and fiscal
and monetary controls, each of which may significantly affect every country in Europe. Changes in imports or exports, changes in governmental or EU regulations on trade, changes in the exchange rate of the euro (the common currency of certain EU
countries), the default or threat of default by an EU member country on its sovereign debt and/or an economic recession in an EU member country may have a significant adverse impact on the economies of EU member countries and their trading partners.
The European financial markets experienced volatility and were adversely affected by concerns about economic downturns, credit rating downgrades, rising government debt levels and possible default on, or restructuring of, government debt in several
European
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|
countries, including Cyprus, Greece, Ireland, Italy,
Portugal, Spain and Ukraine. A default or debt restructuring by any European country would adversely impact holders of that country’s debt and economy. These concerns have adversely affected the value and exchange rate of the euro and may
continue to significantly affect the economies of every country in Europe, including EU member countries that do not use the euro and non-EU member countries.
Responses to financial problems by
European governments, central banks and others, including austerity measures and reforms, may not produce the desired results, may result in social unrest, may limit future growth and economic recovery or may have other unintended consequences.
Further defaults or restricting by governments and other entities of their debt could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, one or more countries may abandon the euro
and/or withdraw from the EU. In a referendum held on June 23, 2016, the United Kingdom resolved to leave the EU. The referendum may introduce significant uncertainties and instability in the financial markets as the United Kingdom negotiates its
exit from the EU. Secessionist movements, such as the Catalan movement in Spain, as well as government or other responses to such movements, may also create instability and uncertainty in the region.
The occurrence of terrorist incidents
throughout Europe also could impact financial markets. The impact of these events is not clear but could be significant and far-reaching and materially impact a Fund.
Banking Industry Risk
–
The Fund may invest in, and/or have exposure to, the
banking industry. Companies within the banking industry can be significantly affected by extensive governmental regulation, which may limit both the amounts and types of loans and other financial commitments they can make and the interest rates and
fees they can charge and amount of capital they must maintain. Profitability is largely dependent on the availability and cost of capital funds and can fluctuate significantly when interest rates change. Credit losses resulting from financial
difficulties of borrowers can negatively impact the sector. Banks may also be subject to severe price competition. These risks can be exacerbated if a particular region in which a bank operates experiences economic decline. The regional banking
industry is highly competitive and thus, failure to maintain or increase market share may result in regional bank failures or mergers with larger, or multi-national banks.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the
Fund’s share
price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars. Devaluation of a currency by a country’s government or banking
authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets. Additionally, the Fund may be exposed to a limited number of
currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund held a more diversified number of currencies.
Depositary Receipt Risk
—
To the extent the Fund invests in, and/or has exposure to, foreign companies, the Fund’s investment may be in
the form of depositary receipts or other securities convertible into securities of foreign issuers including American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), and Global Depositary Receipts
(“GDRs”). While the investment in ADRs, EDRs and GDRs, which are traded on exchanges and represent ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective
national markets and currencies, investments in them continue to be subject to certain of the risks associated with investing directly in foreign securities, such as political and exchange rate risks.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system
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|
breaches or
failures, these plans and systems are inherently limited. Further, cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market.
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ETF Trust Prospectus
|
250
|
There can be no assurance that Shares will continue
to meet the listing requirements of the exchange on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
During the period of time shown in
the bar chart, the Fund’s highest calendar quarter return was -3.44% for the quarter ended September 30, 2018 and its lowest calendar quarter return was -36.53% for the quarter ended December 31, 2018. The year-to-date return as of December
31, 2018 was -48.82%.
Average Annual
Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(7/12/2017)
|
Return
Before Taxes
|
-48.82%
|
-30.82%
|
Return
After Taxes on Distributions
|
-49.05%
|
-32.57%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-28.58%
|
-23.01%
|
EURO
STOXX 50
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-16.25%
|
-7.29%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
4.28%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant
to investors who hold their Fund shares through
tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares" is higher because the calculation recognizes a capital loss upon the redemption of Fund
shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in July 2017
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception in July 2017
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily EURO STOXX 50
©
Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily EURO
STOXX 50
©
Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment
results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the EURO STOXX 50
®
Index (the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading
day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of
compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest
for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.11%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
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Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
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Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the Fund’s net
assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity
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of less than 397 days and exhibit high quality
credit profiles, including U.S. government securities and repurchase agreements.
The Index is part of the STOXX
blue-chip index family and represents the performance of the 50 largest companies among the 19 supersectors in terms of free-float market capitalization in 11 Eurozone countries. These countries have historically included Austria, Belgium, Finland,
France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The largest stocks from the 19 EURO STOXX Supersector indices are added to the selection list for the Index until the coverage equals approximately 60% of the
free-float market capitalization of each corresponding EURO STOXX TMI Supersector Index. In addition, any stocks that are current components of the Index are added to the selection list. From the selection list, the 40 largest stocks in terms of
free-float market capitalization are selected to be components of the Index. The remaining 10 stocks are selected from the largest remaining stocks ranked 41-60 on the selection list.
As of December 31,
2018, the Index consisted of 50 components that had average total market capitalization of $62.6 billion, total market capitalizations ranging from $21.1 billion to $154.3 billion and were concentrated in the banking sector.
The Fund may gain inverse leveraged
exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate characteristics similar to
those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index. Derivatives are financial
instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting securities in order to
gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included
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in the Index; (ii) there were no Fund expenses; and
(iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown
in the chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete
loss of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%.
Areas shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to
return more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than
the returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 17.72%. The Index’s highest volatility rate for any one calendar year during the five-year period was 22.98% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was -1.77%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
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Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
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Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
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If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery
|
of an
asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a
liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction. Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability
of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without
warning.
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions,
netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that
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security or investment company, which it then sells.
The Fund closes out a short sale by purchasing the security that it has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by
the Index’s movement. Because of this, it is
unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day.
Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
European Economic Risk
- The Economic and Monetary Union of the European Union (the “EU”) requires member countries to comply with restrictions on inflation rates, deficits, interest rates, debt levels and fiscal
and monetary controls, each of which may significantly affect every country in Europe. Changes in imports or exports, changes in governmental or EU regulations on trade, changes in the exchange rate of the euro (the common currency of certain EU
countries), the default or threat of default by an EU member country on its sovereign debt and/or an economic recession in an EU member country may have a significant adverse impact on the economies of EU member countries and their trading partners.
The European financial markets experienced
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volatility and were adversely affected by concerns
about economic downturns, credit rating downgrades, rising government debt levels and possible default on, or restructuring of, government debt in several European countries, including Cyprus, Greece, Ireland, Italy, Portugal, Spain and Ukraine. A
default or debt restructuring by any European country would adversely impact holders of that country’s debt and economy. These concerns have adversely affected the value and exchange rate of the euro and may continue to significantly affect
the economies of every country in Europe, including EU member countries that do not use the euro and non-EU member countries.
Responses to financial problems by
European governments, central banks and others, including austerity measures and reforms, may not produce the desired results, may result in social unrest, may limit future growth and economic recovery or may have other unintended consequences.
Further defaults or restricting by governments and other entities of their debt could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, one or more countries may abandon the euro
and/or withdraw from the EU. In a referendum held on June 23, 2016, the United Kingdom resolved to leave the EU. The referendum may introduce significant uncertainties and instability in the financial markets as the United Kingdom negotiates its
exit from the EU. Secessionist movements, such as the Catalan movement in Spain, as well as government or other responses to such movements, may also create instability and uncertainty in the region.
The occurrence of terrorist incidents
throughout Europe also could impact financial markets. The impact of these events is not clear but could be significant and far-reaching and materially impact a Fund.
Banking Industry Risk
–
The Fund may invest in, and/or have exposure to, the
banking industry. Companies within the banking industry can be significantly affected by extensive governmental regulation, which may limit both the amounts and types of loans and other financial commitments they can make and the interest rates and
fees they can charge and amount of capital they must maintain. Profitability is largely dependent on the availability and cost of capital funds and can fluctuate significantly when interest rates change. Credit losses resulting from financial
difficulties of borrowers can negatively impact the sector. Banks may also be subject to severe price competition. These risks can be exacerbated if a particular region in which a bank operates experiences economic decline. The regional banking
industry is highly competitive and thus, failure to maintain or increase market share may result in regional bank failures or mergers with larger, or multi-national banks.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the
performance of large-capitalization companies has
trailed the performance of the overall markets.
Currency Exchange
Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in
securities denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S.
Dollars. Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities
markets. Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if
the Fund held a more diversified number of currencies.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In
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such
circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of
the Fund.
Equity
Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks,
are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money
in the event of a decline in the value of collateral
provided for loaned securities, a decline in the value of any investments made with cash collateral, or a “gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could
also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations,
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updated performance will be available on the
Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily Aerospace & Defense Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Aerospace & Defense Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may
be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the Dow Jones U.S. Select Aerospace & Defense Index (the “Index”). This means that the return of the Fund
for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods,
higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more
than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.22%
|
Acquired
Fund Fees and Expenses
(1)
|
0.03%
|
Total
Annual Fund Operating Expenses
|
1.00%
|
Expense
Cap/Reimbursement
(2)
|
-0.02%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.98%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$100
|
$316
|
$551
|
$1,223
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 39% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is provided by Dow Jones
U.S. Index (the “Index Provider”). The Index attempts to measure the performance of the aerospace and defense industry of the U.S. equity market. The Index Provider selects the stocks comprising the Index from the aerospace and defense
sector on the basis of the float-adjusted, market capitalization-weight of each constituent. Aerospace companies include manufacturers, assemblers and distributors of aircraft and aircraft parts used in commercial or private air transport. Defense
companies include producers of components and equipment for the defense industry, such as military aircraft, radar equipment and weapons.
As of December 31, 2018 the Index
consisted of 36 components that had a median total market capitalization of $4 billion, total market capitalizations ranging from $573 million to $183.1 billion and were concentrated in the aerospace and defense industry which is included in the
industrials sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the
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prior adverse performance. Equally, however, if
favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 15.52%. The Index’s highest volatility rate for any one calendar year during the five-year period was 19.85% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 12.00%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural
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disasters, new legislation or regulatory changes
inside or outside the United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than
Rafferty’s judgment of the security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
There can be no assurance that a security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap
agreement between the Fund and its counterparty may
permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s
investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent
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trading day. The
exact exposure of an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index
gains value, the Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that
purchases shares intra-day may experience performance that is greater than, or less than, the Fund’s stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder,
the Fund must rely on the other investment company
to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment objective, the
value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges, their shares
may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not be able to
liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Aerospace and Defense Industry Risk
—
Companies in the aerospace and defense industries can be significantly affected by changes in government regulations
and spending policies, economic conditions and industry consolidation. The aerospace industry in particular has recently been affected by adverse economic conditions and consolidation within the industry.
Industrials Sector Risk
—
Stock prices of issuers in the industrials sector are affected by supply and demand both for their specific product or
service and for industrials sector products in general. Government regulation, world events and economic conditions will also affect the performance of investments in such issuers. Aerospace and defense companies, a component of the industrials
sector, can be significantly affected by government spending policies because companies involved in this industry rely to a significant extent on U.S. and other government demand for their products and services. Thus, the financial condition of, and
investor interest in, aerospace and defense companies are heavily influenced by government defense spending policies which are typically under pressure from efforts to control government spending budgets. Transportation companies, another component
of the industrials sector, are subject to cyclical performance and therefore investment in such companies may experience occasional sharp price movements which may result from changes in the economy, fuel prices, labor agreements and insurance
costs.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these
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stocks are not well-known to the investing public,
do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger
companies. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of
business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market.
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There can be no assurance that Shares will continue
to meet the listing requirements of the exchange on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
During the period of time shown in
the bar chart, the Fund’s highest calendar quarter return was 40.73% for the quarter ended September 30, 2018 and its lowest calendar quarter return was -52.32% for the quarter ended December 31, 2018. The year-to-date return as of December
31, 2018 was -32.71%.
Average Annual
Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(5/3/2017)
|
Return
Before Taxes
|
-32.71%
|
12.33%
|
Return
After Taxes on Distributions
|
-32.88%
|
11.74%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-19.28%
|
9.35%
|
Dow
Jones U.S. Select Aerospace & Defense Index
(reflects no deduction for fees, expenses or taxes)
|
-6.79%
|
9.02%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
4.96%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the one-year period
because the calculation recognizes a capital loss upon
the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in May 2017
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception in May 2017
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “Dow Jones U.S. Select
Aerospace & Defense Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard & Poor’s
®
and S&P
®
are registered trademarks of
Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones Trademark Holdings LLC
(“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty.
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Rafferty’s ETFs are not sponsored, endorsed,
sold or promoted by SPDJI, Dow Jones, S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or
interruptions of the Dow Jones U.S. Select Aerospace & Defense Index.
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Direxion
Daily Aerospace & Defense Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Aerospace & Defense Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the
Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the Dow Jones U.S. Select Aerospace & Defense Index (the “Index”). This means that the
return of the Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer
holding periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much
as, or more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.11%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the Fund’s net
assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity
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of less than 397 days and exhibit high quality
credit profiles, including U.S. government securities and repurchase agreements.
The Index is
provided by Dow Jones U.S. Index (the “Index Provider”). The Index attempts to measure the performance of the aerospace and defense industry of the U.S. equity market. The Index Provider selects the stocks comprising the Index from the
aerospace and defense sector on the basis of the float-adjusted, market capitalization-weight of each constituent. Aerospace companies include manufacturers, assemblers and distributors of aircraft and aircraft parts used in commercial or private
air transport. Defense companies include producers of components and equipment for the defense industry, such as military aircraft, radar equipment and weapons.
As of December 31, 2018 the Index
consisted of 36 components that had a median total market capitalization of $4 billion, total market capitalizations ranging from $573 million to $183.1 billion and were concentrated in the aerospace and defense industry which is included in the
industrials sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms
“daily,” “day,” and “trading
day,” refer to the period from the close of
the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations
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of Index volatility and Index performance over a
one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure)
of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 15.52%. The Index’s highest volatility rate for any one calendar year during the five-year period was 19.85% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 12.00%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the
Funds” in the Fund’s Statement of Additional
Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value
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of the Index should be expected to have a substantial
adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions,
netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines.
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When the Fund shorts securities, including
securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it has sold short and returning that security to the entity
that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse
leveraged investment objective. The target amount of
portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or
under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to
the required levels.
The Fund
may have difficulty achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or
illiquidity in the markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that
of the Index. In addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or
under-exposed to the Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from
taking positions to improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Aerospace and Defense Industry Risk
—
Companies in the aerospace and defense industries can be significantly affected by changes in government regulations
and spending policies, economic conditions and industry consolidation. The aerospace industry in particular has recently been affected by adverse economic conditions and consolidation within the industry.
Industrials Sector Risk
—
Stock prices of issuers in the industrials sector are affected by supply and demand both for their specific product or
service and for industrials sector products in general. Government regulation, world events and economic conditions will also affect the performance of investments in such issuers. Aerospace and defense companies, a component of the industrials
sector, can be significantly affected by government spending policies because companies involved in this industry rely to a significant extent on U.S. and other government demand for their products and services. Thus, the financial condition of, and
investor interest in, aerospace and defense companies are heavily influenced by government defense spending policies which are typically under pressure from efforts to control government spending budgets. Transportation companies, another component
of the industrials sector, are subject to cyclical performance and therefore investment in such companies may experience occasional sharp price movements which may result from changes in the economy, fuel prices, labor agreements and insurance
costs.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to
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changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher
transaction costs because of increased broker
commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income when distributed to them). The Fund calculates
portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of derivative instruments were reflected, the
calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary
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market at market
prices rather than at net asset value. The market prices of Shares will fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market
may trade Shares at a price greater than net asset value (a premium) or less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares
can be created and redeemed in creation units, the Adviser believes that large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary
significantly. The Fund’s investment results are measured based upon the daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as
experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or
other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly
be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase and Sale of Fund Shares
The Fund’s shares are not
individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a
national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset
value (discount).
Tax
Information
The Fund intends
to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred
arrangement, such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most
other ETFs.
Payments to
Broker-Dealers and Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “Dow Jones U.S. Select
Aerospace & Defense Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard & Poor’s
®
and S&P
®
are registered trademarks of
Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones Trademark Holdings LLC
(“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their
respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Dow Jones U.S. Select Aerospace &
Defense Index.
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Direxion
Daily S&P Biotech Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
S&P Biotech Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be
riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the S&P Biotechnology Select Industry Index (the “Index”). This means that the return of the Fund for a
period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher
volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the
return of the Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.17%
|
Total
Annual Fund Operating Expenses
|
1.13%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.12%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
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(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
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Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$114
|
$358
|
$621
|
$1,374
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 510% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is provided by Standard
& Poor’s (the “Index Provider”) and includes domestic companies from the biotechnology industry. The Index is designed to measure the performance of the biotechnology sub-industry based on the Global Industry Classification
Standards (“GICS”). GICS classifications are determined primarily based on a company’s revenues, however, earnings and market perception are also considered by GICS. The Index consists of constituents of the S&P Total Market
Index (“S&P TMI”) that belong to the GICS biotechnology sub-industry that satisfy the following criteria: (1) have a float-adjusted market capitalization above $300 million with a float-adjusted liquidity ratio (defined by dollar
value traded over the previous 12 months divided by the float-adjusted market capitalization as of the Index rebalancing reference date) above 50%; have a float-adjusted market capitalization above $500 million with a float-adjusted liquidity ratio
above 90%; or have a float-adjusted market capitalization above $400 million with a float-adjusted liquidity ratio above 150%; and (2) are U.S.-based companies. The market capitalization threshold may be relaxed to ensure that there are at least 22
stocks in the Index as of the rebalancing effective date. Rebalancing is done quarterly. The S&P TMI tracks all U.S. common stocks listed on the New York Stock Exchange (including the NYSE Arca, Inc. and NYSE Amex), the NASDAQ Global Select
Market, the NASDAQ Select Market and the NASDAQ Capital Market.
As of December 31, 2018, the Index
had 120 constituents which had a median market capitalization of $1.2 billion, total market capitalizations ranging from $220 million to $138.7 billion and were concentrated in the healthcare sector, the GICS sector in which the biotechnology
industry is included.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact
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on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 33.59%. The Index’s highest volatility rate for any one calendar year during the five-year period was 39.92% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 10.82%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because
the Fund is leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on
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collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially
resulting in the Fund being over- or under-exposed
to the Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Biotechnology Industry Risk
- Companies within the biotech industry invest heavily in research and development, which may not lead to commercially successful products. The biotech industry is also subject to significant
governmental regulation, which may delay or inhibit the release of new products. Many biotech companies are dependent upon their ability to use and enforce intellectual property rights and patents. Any impairment or expiration of such rights may
have adverse financial consequences for these companies. Biotech stocks, especially those of smaller, less-seasoned companies, tend to be more volatile than the overall market. Biotech companies can be significantly affected by technological change
and obsolescence, product liability lawsuits and consequential high insurance costs.
Healthcare Sector Risk
—
The profitability of companies in the healthcare sector may be affected by extensive, costly and uncertain government
regulation, restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient services, limited number of products, industry innovation, changes in
technologies and other market developments. Many healthcare companies are heavily dependent on patent protection. The expiration of patents may adversely affect the profitability of these companies. Many healthcare companies are subject to extensive
litigation based on product liability and similar claims. Healthcare companies are subject to competitive forces that may make it difficult to raise prices and, in fact, may result in price discounting. Many new products in the
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healthcare sector may be subject to regulatory
approvals. The process of obtaining such approvals may be long and costly with no guarantee that any product will come to market.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Micro-Capitalization Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition, micro-cap companies
often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or mid-capitalization. As
a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments,
may incur
significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments
Direxion Shares
ETF Trust Prospectus
|
280
|
made with cash collateral, or a “gap”
between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following performance
information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year to calendar
year.
The table shows
how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before and after taxes, is not necessarily
an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 72.03% for the quarter ended September 30, 2016 and its lowest calendar quarter return was -67.44% for the quarter ended March 31, 2016. The year-to-date return as
of December 31, 2018 was -57.28%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(5/28/2015)
|
Return
Before Taxes
|
-57.28%
|
-35.39%
|
Return
After Taxes on Distributions
|
-57.35%
|
-35.44%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-33.89%
|
-22.69%
|
S&P
Biotechnology Select Industry Index
(reflects no deduction for fees, expenses or taxes)
|
-14.99%
|
-2.30%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
6.90%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
281
|
Direxion Shares ETF
Trust Prospectus
|
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in May 2015
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “S&P Biotechnology
Select Industry Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard & Poor’s
®
and S&P
®
are registered trademarks of
Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones Trademark Holdings LLC
(“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their
respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P Biotechnology Select Industry
Index.
Direxion Shares
ETF Trust Prospectus
|
282
|
Direxion
Daily S&P Biotech Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
S&P Biotech Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may
be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the S&P Biotechnology Select Industry Index (the “Index”). This means that the return of the Fund
for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods,
higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more
than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.22%
|
Acquired
Fund Fees and Expenses
(1)
|
0.16%
|
Total
Annual Fund Operating Expenses
|
1.13%
|
Expense
Cap/Reimbursement
(2)
|
-0.02%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.11%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$113
|
$357
|
$620
|
$1,373
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
283
|
Direxion Shares ETF
Trust Prospectus
|
reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the
Fund’s net assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that
have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is
provided by Standard & Poor’s (the “Index Provider”) and includes domestic companies from the biotechnology industry. The Index is designed to measure the performance of the biotechnology sub-industry based on the Global
Industry Classification Standards (“GICS”). GICS classifications are determined primarily based on a company’s revenues, however, earnings and market perception are also considered by GICS. The Index consists of constituents of the
S&P Total Market Index (“S&P TMI”) that belong to the GICS biotechnology sub-industry that satisfy the following criteria: (1) have a float-adjusted market capitalization above $300 million with a float-adjusted liquidity ratio
(defined by dollar value traded over the previous 12 months divided by the float-adjusted market capitalization as of the Index rebalancing reference date) above 50%; have a float-adjusted market capitalization above $500 million with a
float-adjusted liquidity ratio above 90%; or have a float-adjusted market capitalization above $400 million with a float-adjusted liquidity ratio above 150%; and (2) are U.S.-based companies. The market capitalization threshold may be relaxed to
ensure that there are at least 22 stocks in the Index as of the rebalancing effective date. Rebalancing is done quarterly. The S&P TMI tracks all U.S. common stocks listed on the New York Stock Exchange (including the NYSE Arca, Inc. and NYSE
Amex), the NASDAQ Global Select Market, the NASDAQ Select Market and the NASDAQ Capital Market.
As of December 31, 2018, the Index
had 120 constituents which had a median market capitalization of $1.2 billion, total market capitalizations ranging from $220 million to $138.7 billion and were concentrated in the healthcare sector, the GICS sector in which the biotechnology
industry is included.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index
that has aggregate characteristics similar to those
of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index. Derivatives are financial instruments
that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting securities in order to gain inverse
leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a
Direxion Shares
ETF Trust Prospectus
|
284
|
trading day to
vary from -300% of the performance of the Index. The effect of compounding becomes more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of
time an investment in the Fund is held and the volatility of the Index during shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any
further adverse daily performance will lead to a smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the
amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 33.59%. The Index’s highest volatility rate for any one calendar year during the five-year period was 39.92% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 10.82%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus,
to the extent that the Fund invests in swaps that
use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any
financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive
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the full amount it
is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such
collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective.
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The Fund may take
or refrain from taking positions to improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Biotechnology Industry Risk
- Companies within the biotech industry invest heavily in research and development, which may not lead to commercially successful products. The biotech industry is also subject to significant
governmental regulation, which may delay or inhibit the release of new products. Many biotech companies are dependent upon their ability to use and enforce intellectual property rights and patents. Any impairment or expiration of such rights may
have adverse financial consequences for these companies. Biotech stocks, especially those of smaller, less-seasoned companies, tend to be more volatile than the overall market. Biotech companies can be significantly affected by technological change
and obsolescence, product liability lawsuits and consequential high insurance costs.
Healthcare Sector Risk
—
The profitability of companies in the healthcare sector may be affected by extensive, costly and uncertain government
regulation, restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient services, limited number of products, industry innovation, changes in
technologies and other market developments. Many healthcare companies are heavily dependent on patent protection. The expiration of patents may adversely affect the profitability of these companies. Many healthcare companies are subject to extensive
litigation based on product liability and similar claims. Healthcare companies are subject to competitive forces that may make it difficult to raise prices and, in fact, may result in price discounting. Many new products in the healthcare sector may
be subject to regulatory approvals. The process of obtaining such approvals may be long and costly with no guarantee that any product will come to market.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Micro-Capitalization Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition, micro-cap companies
often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or mid-capitalization. As
a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and
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risk related to the collateral securing the
repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
Total Return
for the Calendar Years Ended December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 75.03% for the quarter ended December 31, 2018 and its lowest calendar quarter return was -52.47% for the quarter ended September 30, 2016. The year-to-date return
as of December 31, 2018 was -7.08%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(5/28/2015)
|
Return
Before Taxes
|
-7.08%
|
-46.23%
|
Return
After Taxes on Distributions
|
-7.46%
|
-46.29%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-4.23%
|
-27.18%
|
S&P
Biotechnology Select Industry Index
(reflects no deduction for fees, expenses or taxes)
|
-14.99%
|
-2.30%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
6.90%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax
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returns depend on an investor’s tax situation
and may differ from those shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on
Distributions and Sale of Fund Shares" is higher because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in May 2015
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those
distributions will be subject to federal income tax
and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be
taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other ETFs.
Payments to Broker-Dealers and Other
Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may
create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
Index Information
The “S&P Biotechnology
Select Industry Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard & Poor’s
®
and S&P
®
are registered trademarks of
Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones Trademark Holdings LLC
(“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their
respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P Biotechnology Select Industry
Index.
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Direxion
Daily Communication Services Index Bull 3X Shares
Important Information
Regarding the Fund
The
Direxion Daily Communication Services Index Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a
result, the Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the Communication Services Select Sector Index (the “Index”). This means that the return
of the Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding
periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or
more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage and are willing to
monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will lose money if
the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.11%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other financial
instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically
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leveraged investment results. On a day-to-day basis,
the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit
profiles, including U.S. government securities and repurchase agreements.
The Index is provided by S&P Dow
Jones Indices (the “Index Provider”) and includes domestic companies from the communication services sector, which includes the following industries: diversified telecommunications services, wireless communication services, media,
entertainment, and interactive media and services. The Index is one of at least eleven Select Sector Indexes developed and maintained by the Index Provider in accordance with the following criteria: (1) each of the stocks in the Index is also a
constituent company of the S&P 500
®
Index; (2) each constituent in the S&P 500
®
Index is assigned to one of the Select Sector Indexes; and (3) the Index is calculated by the Index Provider using a “modified market
capitalization” methodology, which is a hybrid between equal weighting and conventional market capitalization weighting with the weighting capped for the largest stocks included in the Index in order to conform to the requirements of the
Internal Revenue Code of 1986, as amended. In general, the Code requires that no more than 25% of the Fund be invested in any one issuer, and at least 50% of the Fund must be invested in cash, government securities, other funds, and issuer
securities where each issuer security represents less than 5% of Fund assets.
As of December 31, 2018, the Index
was comprised of 26 constituents which had a median total market capitalization of $22.9 billion, total market capitalizations ranging from $2.3 billion to $362.1 billion and were concentrated in the communication services sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value
of the securities in the Index. At the close of the
markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect whether the
Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has fallen on a
given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and “trading
day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in the Fund entails
risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not traditionally
associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to
future
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adverse performance will increase because the
shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the chart below, the Fund
would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss of value in the Fund,
even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas shaded red (or dark gray)
represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return more than 300% of the
performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the returns shown below as a
result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The
Index’s annualized historical volatility rate for the five year period ended December 31, 2018 was 15.60%. The Index’s highest volatility rate for any one calendar year during the five-year period was 21.37% and volatility for a shorter
period
of time may have been substantially higher. The
Index’s annualized performance for the five-year period ended December 31, 2018 was 8.94%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the future. The volatility of
ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable
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time or at a price that is lower than
Rafferty’s judgment of the security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
There can be no assurance that a security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
|
If
the Index has a dramatic move that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund.
In that event, the Fund may be unable to enter into another swap agreement or invest
|
in other derivatives to achieve exposure consistent
with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts, which will subject the Fund to additional risks that are different from those
associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the
agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment
held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its
leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions
adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index
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at the time of purchase. If the Index gains value,
the Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases
shares intra-day may experience performance that is greater than, or less than, the Fund’s stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other
investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Communication Services Sector Risk
—
The communication services sector may be dominated by a small number of companies which may lead to additional
volatility in the sector. Communication services companies are particularly vulnerable to the potential obsolescence of products and services due to technological advances and the innovation of competitors. Communication services companies may also
be affected by other competitive pressures, such as pricing competition, as well as research and development costs, substantial capital requirements and government regulation. Fluctuating domestic and international demand, shifting demographics and
often unpredictable changes in consumer demand can drastically affect a communication services company’s profitability. Telecommunication service providers are often required to obtain licenses or franchises in order to provide services in a
given location. Licensing or franchise rights are limited, which may result in an advantage to certain participants. Compliance with governmental regulations, delays or failure to receive regulatory approvals, or the enactment of new regulatory
requirements may negatively affect the business of telecommunication services companies. Companies in media and entertainment industries can be significantly affected by competition, particularly in formulating new products and services using new
technologies, and the cyclicality of revenues and earnings. Certain companies in the communication services sector may be particular targets of network security breaches, hacking and potential theft of proprietary or consumer information or
disruptions in services, which would have a material adverse effect on their businesses.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Mid-Capitalization Company Risk
- Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than more established, larger-capitalization companies.
Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well known to the investing
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public, do not have significant institutional
ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and
investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result, the performance of mid-capitalization companies can be more volatile and they face greater
risk of business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches of the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business
operations, potentially resulting in financial losses to the Fund. While the Fund has established business continuity plans and risk management systems seeking to address system breaches or failures, these plans and systems are inherently limited.
Further, cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. When you sell your Shares, they could be worth
less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will fluctuate in
response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or less than net
asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that large
discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the daily net
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of the Fund over a period of time. Investors
purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for
Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the
resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it does not have annual returns for at least one full calendar year prior to the date of this Prospectus. Updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in January 2019
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception in January 2019
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket
of assets (securities and/or cash) in large blocks,
known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market
prices rather than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “Communication Services
Select Sector Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard & Poor’s
®
and S&P
®
are registered trademarks of
Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones Trademark Holdings LLC
(“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their
respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Communication Services Select Sector
Index.
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Direxion
Daily Communication Services Index Bear 3X Shares
Important Information
Regarding the Fund
The
Direxion Daily Communication Services Index Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded
funds. As a result, the Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the Communication Services Select Sector Index (the “Index”). This
means that the return of the Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a
consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the
Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of leverage and
shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day,
the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment within a
single day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to
achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.11%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the Fund’s net
assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity
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ETF Trust Prospectus
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of less than 397 days and exhibit high quality
credit profiles, including U.S. government securities and repurchase agreements.
The Index is provided by S&P Dow
Jones Indices (the “Index Provider”) and includes domestic companies from the communication services sector, which includes the following industries: diversified telecommunications services, wireless communication services, media,
entertainment, and interactive media and services. The Index is one of at least eleven Select Sector Indexes developed and maintained by the Index Provider in accordance with the following criteria: (1) each of the stocks in the Index is also a
constituent company of the S&P 500
®
Index; (2) each constituent in the S&P 500
®
Index is assigned to one of the Select Sector Indexes; and (3) the Index is calculated by the Index Provider using a “modified market
capitalization” methodology, which is a hybrid between equal weighting and conventional market capitalization weighting with the weighting capped for the largest stocks included in the Index in order to conform to the requirements of the
Internal Revenue Code of 1986, as amended. In general, the Code requires that no more than 25% of the Fund be invested in any one issuer, and at least 50% of the Fund must be invested in cash, government securities, other funds, and issuer
securities where each issuer security represents less than 5% of Fund assets.
As of December 31, 2018, the Index
was comprised of 26 constituents which had a median total market capitalization of $22.9 billion, total market capitalizations ranging from $2.3 billion to $362.1 billion and were concentrated in the communication services sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain inverse leveraged
exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate characteristics similar to
those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index. Derivatives are financial
instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting securities in order to
gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment
objective. The impact of the Index’s movements
during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased.
Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms “daily,”
“day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in the Fund entails
risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance
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for periods greater than one single day can be
estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid
with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance
shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses
and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the chart below, the Fund
would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss of value in the Fund,
even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas shaded red (or dark
gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return more than -300% of the
performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the returns shown below as a
result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The
Index’s annualized historical volatility rate for the five year period ended December 31, 2018 was 15.60%. The Index’s highest volatility rate for any one calendar year during the five-year period was 21.37% and volatility for a shorter
period of time may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 8.94%. Historical Index volatility
and performance are not indications of what the
Index volatility and performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
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|
300
|
Market illiquidity
may cause losses for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the
Index may lack sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the
securities of the Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
|
If the Index has a
dramatic move that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event,
the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment
objective, even if the Index later reverses all or a portion of its movement.
|
•
|
Futures
Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an
imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a
closing transaction. Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly
volatile and the use of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts, which will subject the Fund to additional risks that are different from those
associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the
agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment
held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its
inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies are stayed or eliminated under special
resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
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Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also seek inverse or
“short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of the underlying
short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund may be
required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various factors,
including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day
Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of
an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares
intra-day may experience performance
that is greater than, or less than, the Fund’s
stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Communication Services Sector Risk
—
The communication services sector may be dominated by a small number of companies which may lead to additional
volatility in the sector. Communication services companies are particularly vulnerable to the potential obsolescence of products and services due to technological advances and the innovation of competitors. Communication services companies may also
be affected by other competitive pressures, such as pricing competition, as well as research and development costs, substantial capital requirements and government regulation. Fluctuating domestic and international demand, shifting demographics and
often unpredictable changes in consumer demand can drastically affect a communication services company’s profitability. Telecommunication service providers are often required to obtain licenses or franchises in order to provide services in a
given location. Licensing or franchise
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rights are limited, which may result in an advantage
to certain participants. Compliance with governmental regulations, delays or failure to receive regulatory approvals, or the enactment of new regulatory requirements may negatively affect the business of telecommunication services companies.
Companies in media and entertainment industries can be significantly affected by competition, particularly in formulating new products and services using new technologies, and the cyclicality of revenues and earnings. Certain companies in the
communication services sector may be particular targets of network security breaches, hacking and potential theft of proprietary or consumer information or disruptions in services, which would have a material adverse effect on their
businesses.
Large-Capitalization
Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond
quickly to competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the
companies’ returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Mid-Capitalization Company Risk
- Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than more established, larger-capitalization companies.
Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result, the performance of mid-capitalization companies can be more volatile and they
face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches of the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business
operations, potentially resulting in financial losses to the Fund. While the Fund has established business continuity plans and risk management systems seeking to address system breaches or failures, these plans and systems are inherently limited.
Further, cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance
its portfolio, may be unable to accurately price its
investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided
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for loaned securities, a decline in the value of any
investments made with cash collateral, or a “gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will fluctuate in
response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or less than net
asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that large
discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the daily net
asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no
guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or
create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it does not have annual returns for at least one full calendar year prior to the date of this Prospectus. Updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or
by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Since Inception in January 2019
|
Portfolio Manager
|
Tony
Ng
|
Since
Since Inception in January 2019
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “Communication Services
Select Sector Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard & Poor’s
®
and S&P
®
are registered trademarks of
Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones Trademark Holdings LLC
(“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored,
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endorsed, sold or promoted by SPDJI, Dow Jones,
S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Communication
Services Select Sector Index.
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Direxion
Daily Consumer Discretionary Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Consumer Discretionary Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may
be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the Consumer Discretionary Select Sector Index (the “Index”). This means that the return of the Fund for a
period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher
volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the
return of the Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(2)
|
0.03%
|
Total
Annual Fund Operating Expenses
|
0.99%
|
Expense
Cap/Reimbursement
(1,3)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.98%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(3)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes)
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in financial
instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial
instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds,
deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase
agreements.
The Index is
provided by S&P Dow Jones Indices (the “Index Provider”) and includes domestic companies from the consumer discretionary sector which includes the following industries: retail (specialty, multiline, internet & direct marketing);
hotels, restaurants & leisure; textiles, apparel & luxury goods; household durables; automobiles; automobile components; distributors; leisure equipment & products; and diversified consumer services. The Index is one of eleven Select
Sector Indexes developed and maintained in accordance with the following criteria: (1) each of the stocks in the Index is also a constituent company of the S&P 500
®
Index; (2) each constituent in the S&P 500
®
Index is assigned to one of the Select Sector Indexes; and (3) the Index is calculated by the Index Provider using a modified “market capitalization” methodology, which is a hybrid between equal weighting and conventional market
capitalization weighting with the weighting capped for the largest stocks included in the Index. This design ensures that each of the component stocks within a Select Sector Index is represented in a proportion consistent with its percentage with
respect to the total market capitalization of such Select Sector Index.
As of December 31, 2018, the Index
was comprised of 65 constituents which had a median total market capitalization of $12 billion, total market capitalizations ranging from $3.3 billion to $734.4 billion and were concentrated in the consumer discretionary sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-
counter market, which generally provides for less
transparency than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily
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performance will lead to a smaller dollar loss
because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due
to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 14.70%. The Index’s highest volatility rate for any one calendar year during the five-year period was 19.35% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 9.89%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because
the Fund is leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on
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collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Since a Fund starts each trading day with exposure which
is 300% of its net assets, a change in both the exposure and the net assets of the Fund by the same absolute amount results in a change in the comparative relationship of the two. As an example (using simplified numbers), if the Fund had $100 in net
assets at the market close, it would seek $300 of exposure to the next trading day’s Index performance. If the Index rose by 1% by noon the following trading day, the exposure of the Fund will have risen by 1% to $303 and the net assets will
have risen by that $3 gain to $103. With net assets of $103 and exposure of $303 , a purchaser at that point would be receiving 294% exposure of her investment instead of 300%.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries
may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the
tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Consumer Discretionary Sector Risk
—
Because companies in the consumer discretionary sector manufacture products and provide discretionary services directly
to the consumer, the success of these companies is tied closely to the performance of the overall domestic and international economy, interest rates, competition and consumer confidence. Success depends heavily on disposable household income and
consumer spending. Also, companies in the consumer discretionary sector may be subject to severe competition, which may have an adverse impact on a company’s profitability. Changes in demographics and consumer tastes also can affect the demand
for, and success of, consumer discretionary products in the marketplace.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
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Mid-Capitalization
Company Risk
- Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than more established,
larger-capitalization companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well known to the
investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the
securities of larger companies. Adverse publicity and investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund.
As a result,
the performance
of mid-capitalization companies can be more volatile
and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments
or derivative transactions that comprise the
majority of the Fund’s trading. As such, if the Fund’s extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will fluctuate in
response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or less than net
asset value (a
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discount). The
Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that large discounts or premiums to the net
asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the daily net asset value of the Fund over a
period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active
secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation
Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior
investment performance is provided for the Fund because it does not have annual returns for at least one full calendar year prior to the date of this Prospectus. Updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in November 2018
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception in November 2018
|
Portfolio
Manager
|
Purchase and Sale of Fund Shares
The Fund’s shares are not
individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as creation units, each of which is
comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may
trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “Consumer Discretionary
Select Sector Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard & Poor’s
®
and S&P
®
are registered trademarks of
Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones Trademark Holdings LLC
(“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their
respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Consumer Discretionary Select Sector
Index.
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Direxion
Daily Consumer Discretionary Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Consumer Discretionary Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the
Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the Consumer Discretionary Select Sector Index (the “Index”). This means that the return of
the Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding
periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or
more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(2)
|
0.13%
|
Total
Annual Fund Operating Expenses
|
1.09%
|
Expense
Cap/Reimbursement
(1,3)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.08%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(3)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other
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financial instruments that, in combination, provide
inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the Fund’s net assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with
institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is
provided by S&P Dow Jones Indices (the “Index Provider”) and includes domestic companies from the consumer discretionary sector which includes the following industries: retail (specialty, multiline, internet & direct marketing);
hotels, restaurants & leisure; textiles, apparel & luxury goods; household durables; automobiles; automobile components; distributors; leisure equipment & products; and diversified consumer services. The Index is one of eleven Select
Sector Indexes developed and maintained in accordance with the following criteria: (1) each of the stocks in the Index is also a constituent company of the S&P 500
®
Index; (2) each constituent in the S&P 500
®
Index is assigned to one of the Select Sector Indexes; and (3) the Index is calculated by the Index Provider using a modified “market capitalization” methodology, which is a hybrid between equal weighting and conventional market
capitalization weighting with the weighting capped for the largest stocks included in the Index. This design ensures that each of the component stocks within a Select Sector Index is represented in a proportion consistent with its percentage with
respect to the total market capitalization of such Select Sector Index.
As of December 31, 2018, the Index
was comprised of 65 constituents which had a median total market capitalization of $12 billion, total market capitalizations ranging from $3.3 billion to $734.4 billion and were concentrated in the consumer discretionary sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The
Fund will attempt to achieve its investment
objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the
Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen
on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need
to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of
the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable
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daily performance of the Index increases the amount
of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 14.70%. The Index’s highest volatility rate for any one calendar year during the five-year period was 19.35% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 9.89%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s
judgment
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of the security’s true market value, the Fund
may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a security that is deemed liquid when purchased
will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments.
|
The gross return to be exchanged or swapped between
the parties is calculated based on a notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions,
netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or
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continue to enter into, transactions with the Fund
and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day
Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of
an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure.
Conversely, if the
Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may experience performance that is greater than, or less than, the Fund’s stated multiple
of the Index.
If there is a
significant intra-day market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales
of Shares prior to the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Consumer Discretionary Sector Risk
—
Because companies in the consumer discretionary sector manufacture products and provide discretionary services directly
to the consumer, the success of these companies is tied closely to the performance of the overall domestic and international economy, interest rates, competition and consumer confidence. Success depends heavily on disposable household income and
consumer spending. Also, companies in the consumer discretionary sector may be subject to severe competition, which may have an adverse impact on a company’s profitability. Changes in demographics and consumer tastes also can affect the demand
for, and success of, consumer discretionary products in the marketplace.
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Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Mid-Capitalization
Company Risk
- Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than more established,
larger-capitalization companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well known to the
investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the
securities of larger companies. Adverse publicity and investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund.
As a result,
the performance
of mid-capitalization companies can be more volatile
and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading
of the Fund’s Shares on such exchanges as the
NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to higher transaction costs because of increased broker commissions
resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income when distributed to them). The Fund calculates portfolio turnover
without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of derivative instruments were reflected, the calculated portfolio
turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests
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in non-U.S. securities or other securities or
instruments that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior
investment performance is provided for the Fund because it does not have annual returns for at least one full calendar year prior to the date of this Prospectus. Updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in November 2018
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception in November 2018
|
Portfolio
Manager
|
Purchase and Sale of Fund Shares
The Fund’s shares are not
individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a
national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset
value (discount).
Tax
Information
The Fund intends
to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred
arrangement, such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most
other ETFs.
Payments to
Broker-Dealers and Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “Consumer Discretionary
Select Sector Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard & Poor’s
®
and S&P
®
are registered trademarks of
Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones Trademark Holdings LLC
(“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their
respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Consumer Discretionary Select Sector
Index.
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Direxion
Daily Consumer Staples Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Consumer Staples Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be
riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the Consumer Staples Select Sector Index (the “Index”). This means that the return of the Fund for a period
longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher
volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the
return of the Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(2)
|
0.02%
|
Total
Annual Fund Operating Expenses
|
0.98%
|
Expense
Cap/Reimbursement
(1,3)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.97%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(3)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes)
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in financial
instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial
instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds,
deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase
agreements.
The Index
is provided by S&P Dow Jones Indices (the “Index Provider”) and includes domestic companies from the consumer staples sector which includes the following industries: food and staples retailing; household products; food products;
beverages; tobacco; and personal products. The Index is one of eleven Select Sector Indexes developed and maintained in accordance with the following criteria: (1) each of the stocks in the Index is also a constituent company of the S&P 500
®
Index; (2) each constituent in the S&P 500
®
Index is assigned to one of the Select Sector Indexes; and (3) the Index is calculated by the Index Provider using a modified “market capitalization” methodology, which is a hybrid between equal weighting and conventional capitalization
market weighting with the weighting capped for the largest stocks included in the Index. This design ensures that each of the component stocks within a Select Sector Index is represented in a proportion consistent with its percentage with respect to
the total market capitalization of such Select Sector Index.
As of December 31,
2018, the Index was comprised of 33 constituents, which had a median total market capitalization of $23.2 billion, total market capitalizations ranging from $4.9 billion to $270.6 billion and were concentrated in the consumer staples sector.
The components of the Index
and the percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its
total assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the
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prior adverse performance. Equally, however, if
favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 11.71%. The Index’s highest volatility rate for any one calendar year during the five-year period was 14.53% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 6.33%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural
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disasters, new legislation or regulatory changes
inside or outside the United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than
Rafferty’s judgment of the security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
There can be no assurance that a security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap
agreement between the Fund and its counterparty may
permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s
investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent
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trading day. The exact exposure of an investment in
the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Since a Fund starts each trading day with exposure which
is 300% of its net assets, a change in both the exposure and the net assets of the Fund by the same absolute amount results in a change in the comparative relationship of the two. As an example (using simplified numbers), if the Fund had $100 in net
assets at the market close, it would seek $300 of exposure to the next trading day’s Index performance. If the Index rose by 1% by noon the following trading day, the exposure of the Fund will have risen by 1% to $303 and the net assets will
have risen by that $3 gain to $103. With net assets of $103 and exposure of $303 , a purchaser at that point would be receiving 294% exposure of her investment instead of 300%.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear
the Fund’s
proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other investment company to achieve its investment
objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment objective, the value of the Fund’s
investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges, their shares may trade at a discount or a
premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not be able to liquidate its holdings in ETFs
at an optimal price or time, which may adversely affect the Fund’s performance.
Consumer Staples Sector Risk
—
Consumer staples companies are subject to government regulation affecting their products which may negatively impact
such companies’ performance. For instance, government regulations may affect the permissibility of using various food additives and production methods of companies that make food products, which could affect company profitability. Also, the
success of food, beverages, household and personal product companies may be strongly affected by changing consumer tastes and/or interest, marketing campaigns and other factors affecting supply and demand, including performance of the overall
domestic and global economy, interest rates, competition and consumer confidence and spending. In particular, tobacco companies may be adversely affected by new laws, regulations and litigation. The consumer staples sector may also be adversely
affected by changes or trends in commodity prices, which may be influenced or characterized by unpredictable factors.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Mid-Capitalization
Company Risk
-
Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and
financial resources than more established, larger-capitalization companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because
these stocks are not well known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities
compared to what is available for the securities of larger companies. Adverse publicity and investor
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perceptions,
whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result, the performance of mid-capitalization companies can be more volatile and they face greater risk of business
failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be
subject to credit risk with respect to the
short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial institution in which the depository account is held. Repurchase agreements are contracts in which a seller of
securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit
risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists,
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market makers, Authorized Participants, or other
participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be
subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior
investment performance is provided for the Fund because it does not have annual returns for at least one full calendar year prior to the date of this Prospectus. Updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in November 2018
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception in November 2018
|
Portfolio
Manager
|
Purchase and Sale of Fund Shares
The Fund’s shares are not
individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as creation units, each of which is
comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a
national securities exchange through a broker-dealer
and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “Consumer Staples Select
Sector Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard &
Poor’s
®
and S&P
®
are registered
trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones
Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones,
S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Consumer Staples
Select Sector Index.
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Direxion
Daily Consumer Staples Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Consumer Staples Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may
be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the Consumer Staples Select Sector Index (the “Index”). This means that the return of the Fund for a
period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher
volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the
return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(2)
|
0.11%
|
Total
Annual Fund Operating Expenses
|
1.07%
|
Expense
Cap/Reimbursement
(1,3)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.06%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(3)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other
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financial instruments that, in combination, provide
inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the Fund’s net assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with
institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is provided by S&P Dow
Jones Indices (the “Index Provider”) and includes domestic companies from the consumer staples sector which includes the following industries: food and staples retailing; household products; food products; beverages; tobacco; and
personal products. The Index is one of eleven Select Sector Indexes developed and maintained in accordance with the following criteria: (1) each of the stocks in the Index is also a constituent company of the S&P 500
®
Index; (2) each constituent in the S&P 500
®
Index is assigned to one of the Select Sector Indexes; and (3) the Index is calculated by the Index Provider using a modified “market capitalization” methodology, which is a hybrid between equal weighting and conventional capitalization
market weighting with the weighting capped for the largest stocks included in the Index. This design ensures that each of the component stocks within a Select Sector Index is represented in a proportion consistent with its percentage with respect to
the total market capitalization of such Select Sector Index.
As of December 31,
2018, the Index was comprised of 33 constituents, which had a median total market capitalization of $23.2 billion, total market capitalizations ranging from $4.9 billion to $270.6 billion and were concentrated in the consumer staples sector.
The components of the Index
and the percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its
total assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or
decrease of the value of the securities in the
Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to
future
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ETF Trust Prospectus
|
328
|
adverse performance will increase because the
shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 11.71%. The Index’s highest volatility rate for any one calendar year during the
five-year period was 14.53% and volatility for a
shorter period of time may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 6.33%. Historical Index volatility and performance are not indications of what the Index
volatility and performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving
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a high correlation with the Index. There can be no
assurance that a security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar
|
amount invested in a basket of securities representing
a particular index or an ETF that seeks to track an index.
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions,
netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
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Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance
that is greater than, or less than, the Fund’s
stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Consumer Staples Sector Risk
—
Consumer staples companies are subject to government regulation affecting their products which may negatively impact
such companies’ performance. For instance, government regulations may affect the permissibility of using various food additives and production methods of companies that make food products, which could affect company profitability. Also, the
success of food, beverages, household and personal product companies may be strongly affected by changing consumer tastes and/or interest, marketing campaigns and other factors affecting supply and demand, including performance of the overall
domestic and global economy, interest rates, competition and consumer confidence and spending. In particular, tobacco companies may be adversely affected by new laws, regulations and litigation. The consumer staples sector may also be
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adversely affected by changes or trends in commodity
prices, which may be influenced or characterized by unpredictable factors.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Mid-Capitalization
Company Risk
-
Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and
financial resources than more established, larger-capitalization companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because
these stocks are not well known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities
compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result,
the performance of mid-capitalization companies can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to
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process creation and/or redemption orders, Shares
may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior
investment performance is provided for the Fund because it does not have annual returns for at least one full calendar year prior to the date of this Prospectus. Updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in November 2018
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception in November 2018
|
Portfolio
Manager
|
Purchase and Sale of Fund Shares
The Fund’s shares are not
individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a
national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset
value (discount).
Tax
Information
The Fund intends
to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred
arrangement, such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most
other ETFs.
Payments to
Broker-Dealers and Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “Consumer Staples Select
Sector Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard &
Poor’s
®
and S&P
®
are registered
trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones
Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones,
S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Consumer Staples
Select Sector Index.
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Direxion
Daily Energy Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Energy Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier than
alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the Energy Select Sector Index (the “Index”). This means that the return of the Fund for a period longer than a trading day
will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and
greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further,
the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.20%
|
Acquired
Fund Fees and Expenses
(1)
|
0.14%
|
Total
Annual Fund Operating Expenses
|
1.09%
|
Expense
Cap/Reimbursement
(2)
|
0.00%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.09%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$111
|
$347
|
$601
|
$1,329
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 56% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is provided by S&P Dow
Jones Indices (the “Index Provider”) and includes domestic companies from the energy sector which includes the following industries: oil, gas and consumable fuels; and energy equipment and services. The Index is one of eleven Select
Sector Indexes developed and maintained in accordance with the following criteria: (1) each of the stocks in the Index is also a constituent company of the S&P 500
®
Index; (2) each constituent in the S&P 500
®
Index is assigned to one of the Select Sector Indexes; and (3) the Index is calculated by the Index Provider using a modified “market capitalization” methodology, which is a hybrid between equal weighting and conventional market
capitalization weighting with the weighting capped for the largest stocks included in the Index. This design ensures that each of the component stocks within a Select Sector Index is represented in a proportion consistent with its percentage with
respect to the total market capitalization of such Select Sector Index.
As of December 31,
2018, the Index had 30 constituents, which had a median total market capitalization of $21.3 billion, total market capitalizations ranging from $2.9 billion to $288.7 billion and were concentrated in the energy sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest
rates or indexes. Certain of the derivative
instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily
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performance of the Index reduces the amount of a
shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily
performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 21.38%. The Index’s highest volatility rate for any one calendar year during the five-year period was 25.13% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was -5.65%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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ETF Trust Prospectus
|
336
|
Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because
the Fund is leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on
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|
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Trust Prospectus
|
collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially
resulting in the Fund being over- or under-exposed
to the Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Energy Sector Risk
—
Companies that engage in energy-related businesses and companies primarily involved in the production and mining of
coal, development and production of oil, gas and consumable fuels and provide drilling and other energy resources production and distribution related services
are subject to risks of
legislative or regulatory changes, adverse market conditions and/or increased competition affecting the energy sector. The prices of the securities of energy and energy services companies may fluctuate widely due to the supply and demand,
exploration and production spending, world events and economic conditions, swift price and supply fluctuations, energy conservation, the success of exploration projects, liabilities for environmental damage and general civil liabilities and tax and
other governmental regulatory policies and legislation. Weak demand for energy companies’ products or services or for energy products and services in general, as well as negative developments in these other areas, including natural disaster
and terrorist attacks, impact energy company securities.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Direxion Shares
ETF Trust Prospectus
|
338
|
Mid-Capitalization
Company Risk
- Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than more established,
larger-capitalization companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well known to the
investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the
securities of larger companies. Adverse publicity and investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund.
As a result,
the performance
of mid-capitalization companies can be more volatile
and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments
or derivative transactions that comprise the
majority of the Fund’s trading. As such, if the Fund’s extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will fluctuate in
response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or less than net
asset value (a
339
|
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Trust Prospectus
|
discount). The
Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that large discounts or premiums to the net
asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the daily net asset value of the Fund over a
period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active
secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation
Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and ten-year periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance,
before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund
toll-free at 866-476-7523.
The
performance shown June 29, 2012 reflects the Fund’s previous daily leveraged investment objective, before fees and expenses, of 300% of the Russell
1000
®
Energy Index. After June 29, 2012, the Fund began to seek a daily leveraged investment objective, before fees and expenses, of 300% of the
Energy Select Sector Index. If the Fund had continued to seek its previous investment objective, the calendar year performance of the Fund would have varied from that shown.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 76.14% for the quarter ended December 31, 2010 and its lowest calendar quarter return was -59.19% for the quarter ended December 31, 2018. The year-to-date return
as of December 31, 2018 was -55.84%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
10
Years
|
Return
Before Taxes
|
-55.84%
|
-29.59%
|
-7.69%
|
Return
After Taxes on Distributions
|
-56.00%
|
-29.68%
|
-8.14%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-32.74%
|
-17.99%
|
-5.14%
|
Energy
Select Sector Index
(reflects no deduction for fees, expenses or taxes)
|
-18.09%
|
-5.65%
|
4.32%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
13.12%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax
returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares" is higher
because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in November 2008
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
Direxion Shares
ETF Trust Prospectus
|
340
|
creation units, each of which is comprised of 50,000
Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price
greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “Energy Select Sector
Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard &
Poor’s
®
and S&P
®
are registered
trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones
Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones,
S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Energy Select
Sector Index.
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|
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|
Direxion
Daily Energy Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Energy Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be
riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the Energy Select Sector Index (the “Index”). This means that the return of the Fund for a period longer
than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of
the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.24%
|
Acquired
Fund Fees and Expenses
(1)
|
0.14%
|
Total
Annual Fund Operating Expenses
|
1.13%
|
Expense
Cap/Reimbursement
(2)
|
-0.04%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.09%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$111
|
$355
|
$618
|
$1,371
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the
Fund’s net assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that
have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is provided by S&P Dow
Jones Indices (the “Index Provider”) and includes domestic companies from the energy sector which includes the following industries: oil, gas and consumable fuels; and energy equipment and services. The Index is one of eleven Select
Sector Indexes developed and maintained in accordance with the following criteria: (1) each of the stocks in the Index is also a constituent company of the S&P 500
®
Index; (2) each constituent in the S&P 500
®
Index is assigned to one of the Select Sector Indexes; and (3) the Index is calculated by the Index Provider using a modified “market capitalization” methodology, which is a hybrid between equal weighting and conventional market
capitalization weighting with the weighting capped for the largest stocks included in the Index. This design ensures that each of the component stocks within a Select Sector Index is represented in a proportion consistent with its percentage with
respect to the total market capitalization of such Select Sector Index.
As of December 31,
2018, the Index had 30 constituents, which had a median total market capitalization of $21.3 billion, total market capitalizations ranging from $2.9 billion to $288.7 billion and were concentrated in the energy sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because
the
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shareholder’s investment had already been
reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the
shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 21.38%. The Index’s highest volatility rate for any one calendar year during the five-year period was 25.13% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was -5.65%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus,
to the extent that the Fund invests in swaps that
use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any
financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive
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the full amount it
is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such
collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective.
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The Fund may take
or refrain from taking positions to improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Energy Sector Risk
—
Companies that engage in energy-related businesses and companies primarily involved in the production and mining of
coal, development and production of oil, gas and consumable fuels and provide drilling and other energy resources production and distribution related services
are subject to risks of
legislative or regulatory changes, adverse market conditions and/or increased competition affecting the energy sector. The prices of the securities of energy and energy services companies may fluctuate widely due to the supply and demand,
exploration and production spending, world events and economic conditions, swift price and supply fluctuations, energy conservation, the success of exploration projects, liabilities for environmental damage and general civil liabilities and tax and
other governmental regulatory policies and legislation. Weak demand for energy companies’ products or services or for energy products and services in general, as well as negative developments in these other areas, including natural disaster
and terrorist attacks, impact energy company securities.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Mid-Capitalization
Company Risk
- Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than more established,
larger-capitalization companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well known to the
investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the
securities of larger companies. Adverse publicity and investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund.
As a result,
the performance
of mid-capitalization companies can be more volatile
and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently
limited. Further, cybersecurity incidents could also
affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may
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Trust Prospectus
|
act as Authorized Participants. To the extent that
those Authorized Participants exit the business or are unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in
non-U.S. securities or other securities or instruments that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and ten-year periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance,
before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or
by calling the Fund toll-free at 866-476-7523.
The performance
shown prior to June 29, 2012 reflects the Fund’s previous daily inverse leveraged investment objective, before fees and expenses, of -300% of the Russell 1000
®
Energy Index. After June 29, 2012, the Fund began to seek a daily inverse leveraged investment objective, before fees and expenses, of -300% of the
Energy Select Sector Index. If the Fund had continued to seek its previous investment objective, the calendar year performance of the Fund would have varied from that shown.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 100.92% for the quarter ended December 31, 2018 and its lowest calendar quarter return was -50.48% for the quarter ended December 31, 2011. The year-to-date return
as of December 31, 2018 was 44.18%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
10
Years
|
Return
Before Taxes
|
44.18%
|
-8.35%
|
-35.93%
|
Return
After Taxes on Distributions
|
43.76%
|
-8.40%
|
-35.95%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
26.10%
|
-6.10%
|
-13.05%
|
Energy
Select Sector Index
(reflects no deduction for fees, expenses or taxes)
|
-18.09%
|
-5.65%
|
4.32%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
13.12%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the five-year and ten-year periods because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Direxion Shares
ETF Trust Prospectus
|
348
|
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in November 2008
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “Energy Select Sector
Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard &
Poor’s
®
and S&P
®
are registered
trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones
Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones,
S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Energy Select
Sector Index.
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Direxion
Daily Financial Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Financial Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier
than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the Russell 1000
®
Financial
Services Index (the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the
return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the
volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the
trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.20%
|
Acquired
Fund Fees and Expenses
(1)
|
0.05%
|
Total
Annual Fund Operating Expenses
|
1.00%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other
|
investment companies, including investments in money
market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund, they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that
presented in the Fund's financial highlights included in the Fund's reports to shareholders.
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$102
|
$318
|
$552
|
$1,225
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 73% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is a subset of the Russell
1000
®
Index that measures the performance of the securities classified in the financial services sector of the large-capitalization U.S. equity
market. As of December 31, 2018, Index had 254 constituents, which had an average market capitalization of $20.6 billion, median market capitalization of $7.7 billion, total capitalizations ranging from $472.5 billion to $502.6 billion and were
concentrated in the financials sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over
Direxion Shares
ETF Trust Prospectus
|
350
|
time. The Fund will concentrate its investment in a
particular industry or group of industries (
i.e.
, hold 25% or more of its total assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so
concentrated.
The Fund may
invest in the securities of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives
such as swaps on the Index, swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the
underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally
provides for less transparency than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may
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|
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Trust Prospectus
|
be significantly better or worse than the returns
shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 14.71%. The Index’s highest volatility rate for any one calendar year during the five-year period was 17.08% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 8.49%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments
of the market, which may affect the Fund’s
value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide, which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps
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ETF Trust Prospectus
|
352
|
that utilized the Index as the reference asset. Any
financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s
ability to access such collateral, the Fund may not
be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies are stayed or eliminated under
special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries
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may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the
tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly
to
competitive challenges or to changes in business,
product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’ returns. Over certain periods, the performance of
large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio
Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs.
Additionally, active market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active
trading may lead to higher transaction costs because of increased broker commissions
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resulting from such transactions. In addition, there
is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or
derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The
market prices of
Shares will fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a
premium) or less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser
believes that large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based
upon the daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the
Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the
Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and ten-year periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance,
before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund
toll-free at 866-476-7523.
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Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 78.43% for the quarter ended September 30, 2009 and its lowest calendar quarter return was -77.69% for the quarter ended March 31, 2009. The year-to-date return as
of December 31, 2018 was -33.59%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
10
Years
|
Return
Before Taxes
|
-33.59%
|
14.93%
|
10.04%
|
Return
After Taxes on Distributions
|
-33.84%
|
14.84%
|
9.96%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-19.79%
|
12.04%
|
8.27%
|
Russell
1000 Financial Services Index
(reflects no deduction for fees, expenses or taxes)
|
-8.11%
|
8.49%
|
11.66%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the one-year period because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in November 2008
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The Russell 1000
®
Financial Services Index is a trademark of Frank Russell Company (“Russell”) and has been licensed for use by the Trust. The Fund is not
sponsored, endorsed, sold or promoted by Russell. Russell makes no representation regarding the advisability of investing in the Fund.
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Direxion
Daily Financial Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Financial Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be
riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the Russell
1000
®
Financial Services Index (the “Index”). This means that the return of the Fund for a period longer than a trading day will be the
result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage
increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for
investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.12%
|
Total
Annual Fund Operating Expenses
|
1.08%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.07%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$109
|
$342
|
$595
|
$1,316
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the
Fund’s net assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that
have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is a
subset of the Russell 1000
®
Index that measures the performance of the securities classified in the financial services sector of the
large-capitalization U.S. equity market. As of December 31, 2018, Index had 254 constituents, which had an average market capitalization of $20.6 billion, median market capitalization of $7.7 billion, total capitalizations ranging from $472.5
billion to $502.6 billion and were concentrated in the financials sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund
should fall, meaning the Fund’s exposure will
need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the
close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below
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ETF Trust Prospectus
|
358
|
illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 14.71%. The Index’s highest volatility rate for any one calendar year during the five-year period was 17.08% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 8.49%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund,
see “Additional Information Regarding Investment
Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage
Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more
money in market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that
an investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial
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instruments and the Fund's transactions could
exacerbate the price increase of the securities of the Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the
Fund from achieving its inverse leveraged investment
objective, even if the Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions,
netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional
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index tracking funds. To achieve its daily inverse
investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or index declines. When the Fund shorts securities, including securities of
another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it has sold short and returning that security to the entity that lent the
security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly
to
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competitive challenges or to changes in business,
product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’ returns. Over certain periods, the performance of
large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be
subject to credit risk with respect to the
short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial institution in which the depository account is held. Repurchase agreements are contracts in which a seller of
securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit
risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists,
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market makers, Authorized Participants, or other
participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be
subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and ten-year periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance,
before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund
toll-free at 866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 48.43% for the quarter ended September 30, 2011 and its lowest calendar quarter return was -77.24% for the quarter ended June 30, 2009. The year-to-date return as
of December 31, 2018 was 16.27%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
10
Years
|
Return
Before Taxes
|
16.27%
|
-30.80%
|
-53.40%
|
Return
After Taxes on Distributions
|
15.96%
|
-30.84%
|
-53.41%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
9.60%
|
-18.54%
|
-13.36%
|
Russell
1000 Financial Services Index
(reflects no deduction for fees, expenses or taxes)
|
-8.11%
|
8.49%
|
11.66%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the five-year and ten-year periods because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in November 2008
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
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Payments to Broker-Dealers and Other
Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may
create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
Index Information
The Russell 1000
®
Financial Services Index is a trademark of Frank Russell Company (“Russell”) and has been licensed for use by the Trust. The Fund is not
sponsored, endorsed, sold or promoted by Russell. Russell makes no representation regarding the advisability of investing in the Fund.
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Direxion
Daily Gold Miners Index Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily Gold
Miners Index Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier
than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the NYSE Arca Gold Miners Index (the “Index”). This means that the return of the Fund for a period longer than a trading
day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and
greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further,
the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.16%
|
Acquired
Fund Fees and Expenses
(1)
|
0.32%
|
Total
Annual Fund Operating Expenses
|
1.23%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other
|
|
investment companies,
including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund, they will not be reflected in the expense information in the Fund's financial statements and the information presented in the
table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$125
|
$390
|
$676
|
$1,489
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 96% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is a modified market
capitalization weighted index comprised of publicly traded companies that operate globally in both developed and emerging markets, and are involved primarily in mining for gold and, to a lesser extent, in mining for silver. The Index will limit the
weight of companies whose revenues are more significantly exposed to silver mining to less than 20% of the Index at each rebalance date. The Index may include small and mid-capitalization companies and foreign issuers.
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As of December 31,
2018, the Index had 47 constituents, which had an average market capitalization of $3.9 billion, median market capitalization of $1.7 billion, total market capitalizations ranging from $438 million to $18.5 billion and were concentrated in the gold
mining industry.
The
components of the Index and the percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
,
hold 25% or more of its total assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in the Fund entails
risk. The Fund may not achieve its leveraged investment objective and there is a
risk that you
could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of
the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return
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less than 300% of
the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index
volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the returns shown below as a result of any of the factors discussed above or in “Daily Index
Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 34.36%. The Index’s highest volatility rate for any one calendar year during the five-year period was 43.80% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 0.95%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index decreases, the Fund may be one of many market participants that are attempting to sell securities of the Index. Under such circumstances, the market for investments of the Index may lack sufficient
liquidity for all market participants' trades. Therefore, the Fund may have more difficulty selling securities or financial instruments and the Fund's transactions could exacerbate the price decline of the securities of the Index. Additionally,
because the Fund is leveraged, a minor decrease in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in
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larger losses or smaller gains than directly
investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative, which may prevent the Fund from achieving its investment objective. Because derivatives often
require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures
|
may increase the Fund’s volatility. The value
of an investment in the Fund may change quickly and without warning.
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep
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leverage consistent with its daily leveraged
investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each
day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also
adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other
investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues
that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging
markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital
controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets
in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement procedures in
emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency. Emerging markets
may develop unevenly and may never fully develop.
Gold and Silver Mining Company Risk
- Because the Index is concentrated in the gold mining industry and may have significant exposure to assets in the silver mining industry, the Fund will be sensitive to changes in the overall condition
of gold- and silver-related companies. Competitive pressures may have a significant effect on the financial condition of gold- and silver-related companies. Also gold- and silver-related companies are highly dependent on the price of gold and silver
bullion, respectively, and may be adversely affected by a variety of worldwide economic, financial and
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political factors. These prices may fluctuate
substantially over short periods of time which may cause the value of the gold- and silver-related companies to be more volatile than the general market. In times of significant inflation or great economic uncertainty, gold, silver and other
precious metals may outperform traditional investments such as bonds and stocks. However, in times of stable economic growth, traditional equity and debt investments could offer greater appreciation potential and the value of gold, silver and other
precious metals may be adversely affected, which could in turn affect the Fund. If a natural disaster or other event with a significant economic impact occurs in a region in which the companies included in the Index operate, such disaster or event
could negatively impact the profitability of such companies and, in turn, impact the Fund’s return.
Mining and Metal Industry Risk
- Mining and metal companies can be significantly affected by international political and economic developments, energy conservation, the success of exploration projects, commodity prices, taxes and
government regulations. Investments in mining and metal industry companies may be speculative and subject to greater price volatility than investments in other types of companies. Increased environmental or labor costs may depress the value of
mining and metal investments. In addition, changes in international monetary policies or economic and political conditions can affect the supply of gold and precious metals, and consequently the value of mining and metal company investments.
Further, the principal supplies of metal industries may be concentrated in a small number of countries and regions.
Canadian Securities
Risk
—
The United States is Canada’s largest trading and investment partner and the Canadian economy is
significantly affected by developments in the U.S. economy. Since the implementation of North American Free Trade Agreement (“NAFTA”) in 1994 among Canada, the United States and Mexico, total two-way merchandise trade between the United
States and Canada has increased significantly. Any downturn in U.S or Mexican economic activity, which could result from the U.S. threatening
to exit NAFTA,
is likely to have an adverse impact on the Canadian economy. The Canadian economy is also dependent upon external trade with other key trading partners, including China and the European Union. In
addition, Canada is a large supplier of natural resources (
e.g.
, oil, natural gas and agricultural products). As a result, the Canadian economy is
sensitive to fluctuations in certain commodity prices.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more
limited
managerial and financial resources and often have
limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant institutional ownership and are followed by
relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure, which could increase the volatility of the
Fund’s portfolio.
Currency Exchange
Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in
securities denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S.
Dollars. Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities
markets. Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if
the Fund held a more diversified number of currencies.
Depositary Receipt Risk
—
To the extent the Fund invests in, and/or has exposure to, foreign companies, the Fund’s investment may be in
the form of depositary receipts or other securities convertible into securities of foreign issuers including American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), and Global Depositary Receipts
(“GDRs”). While the investment in ADRs, EDRs and GDRs, which are traded on exchanges and represent ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective
national markets and currencies, investments in them continue to be subject to certain of the risks associated with investing directly in foreign securities, such as political and exchange rate risks.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
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International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. When you sell your Shares, they could be worth
less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value
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of the Fund over a
period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active
secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation
Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
Performance prior to December 1,
2011 reflects the Fund’s previous investment objective where it sought daily investment results, before fees and expenses, of 200% of the performance of the Index. If the Fund had continued to seek its previous investment objective, the
calendar year performance of the Fund would have varied from that shown.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 140.48% for the quarter ended March 31, 2016 and its lowest calendar quarter return was -79.11% for the quarter ended June 30, 2013. The year-to-date return as of
December 31, 2018 was -44.79%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(12/8/2010)
|
Return
Before Taxes
|
-44.79%
|
-39.69%
|
-56.81%
|
Return
After Taxes on Distributions
|
-44.83%
|
-39.70%
|
-56.89%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-26.49%
|
-21.46%
|
-16.10%
|
NYSE
Arca Gold Miners Index
(reflects no deduction for fees, expenses or taxes)
|
-8.54%
|
0.95%
|
-11.49%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
11.61%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in December 2010
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan
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or an individual retirement account. Distributions
or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other ETFs.
Payments to Broker-Dealers and Other
Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may
create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
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Direxion
Daily Gold Miners Index Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily Gold
Miners Index Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be
riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the NYSE Arca Gold Miners Index (the “Index”). This means that the return of the Fund for a period
longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher
volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the
return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.16%
|
Acquired
Fund Fees and Expenses
(1)
|
0.14%
|
Total
Annual Fund Operating Expenses
|
1.05%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$107
|
$334
|
$579
|
$1,283
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was reflected, the Fund's portfolio turnover rate would be significantly higher.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the Fund’s net
assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is a modified market
capitalization weighted index comprised of publicly traded companies that operate globally in both developed and emerging markets, and are involved primarily in mining for gold and, to a lesser extent, in mining for silver. The Index will limit the
weight of companies whose revenues are more significantly exposed to silver mining to less than 20% of the Index at each rebalance date. The Index may include small and mid-capitalization companies and foreign issuers.
As of December 31,
2018, the Index had 47 constituents, which had an average market capitalization of $3.9 billion, median market capitalization of $1.7 billion, total market
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ETF Trust Prospectus
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|
capitalizations
ranging from $438 million to $18.5 billion and were concentrated in the gold mining industry.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program.
In addition, the Fund presents risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those
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shaded green (or
light gray) represent those scenarios where the Fund can be expected to return more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance.
The Fund’s actual returns may be significantly better or worse than the returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 34.36%. The Index’s highest volatility rate for any one calendar year during the five-year period was 43.80% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 0.95%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require
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only a limited initial investment, the use of
derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such
as swap agreements
and futures contracts, which will subject the Fund to additional risks that are different from those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to make timely
payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund,
the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are
delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also seek inverse or
“short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of the underlying
short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund may be
required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a
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limited market due
to various factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it
cannot meet its investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using
prices obtained at times other than the Fund's net
asset value calculation time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of
the daily performance of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation
to the Index due to embedded costs and other factors.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues
that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging
markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital
controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets
in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement procedures in
emerging market countries are frequently less developed
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and reliable than those in other developed
countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency. Emerging markets
may develop unevenly and may never fully develop.
Gold and Silver Mining Company Risk
- Because the Index is concentrated in the gold mining industry and may have significant exposure to assets in the silver mining industry, the Fund will be sensitive to changes in the overall condition
of gold- and silver-related companies. Competitive pressures may have a significant effect on the financial condition of gold- and silver-related companies. Also gold- and silver-related companies are highly dependent on the price of gold and silver
bullion, respectively, and may be adversely affected by a variety of worldwide economic, financial and political factors. These prices may fluctuate substantially over short periods of time which may cause the value of the gold- and silver-related
companies to be more volatile than the general market. In times of significant inflation or great economic uncertainty, gold, silver and other precious metals may outperform traditional investments such as bonds and stocks. However, in times of
stable economic growth, traditional equity and debt investments could offer greater appreciation potential and the value of gold, silver and other precious metals may be adversely affected, which could in turn affect the Fund. If a natural disaster
or other event with a significant economic impact occurs in a region in which the companies included in the Index operate, such disaster or event could negatively impact the profitability of such companies and, in turn, impact the Fund’s
return.
Mining and Metal
Industry Risk
- Mining and metal companies can be significantly affected by international political and economic developments, energy conservation, the success of exploration projects, commodity
prices, taxes and government regulations. Investments in mining and metal industry companies may be speculative and subject to greater price volatility than investments in other types of companies. Increased environmental or labor costs may depress
the value of mining and metal investments. In addition, changes in international monetary policies or economic and political conditions can affect the supply of gold and precious metals, and consequently the value of mining and metal company
investments. Further, the principal supplies of metal industries may be concentrated in a small number of countries and regions.
Canadian Securities
Risk
—
The United States is Canada’s largest trading and investment partner and the Canadian economy is
significantly affected by developments in the U.S. economy. Since the implementation of North American Free Trade Agreement (“NAFTA”) in 1994 among Canada, the United States and Mexico, total two-way merchandise trade between the United
States and Canada has increased significantly. Any downturn in U.S or Mexican economic activity, which could result from the U.S. threatening
to exit NAFTA,
is likely to have an adverse impact on the
Canadian economy. The Canadian economy is also
dependent upon external trade with other key trading partners, including China and the European Union. In addition, Canada is a large supplier of natural resources (
e.g.
, oil, natural gas and agricultural
products). As a result, the Canadian economy is sensitive to fluctuations in certain commodity prices.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
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Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and
credit
risk related to the collateral securing the
repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
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Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
Performance prior to December 1,
2011 reflects the Fund’s previous investment objective where it sought daily investment results, before fees and expenses, of -200% of the performance of the Index. If the Fund had continued to seek its previous investment objective, the
calendar year performance of the Fund would have varied from that shown.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 135.44% for the quarter ended June 30, 2013 and its lowest calendar quarter return was -80.29% for the quarter ended March 31, 2016. The year-to-date return as of
December 31, 2018 was -2.93%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(12/8/2010)
|
Return
Before Taxes
|
-2.93%
|
-59.85%
|
-36.96%
|
Return
After Taxes on Distributions
|
-3.04%
|
-59.86%
|
-37.10%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-1.72%
|
-24.46%
|
-15.23%
|
NYSE
Arca Gold Miners Index
(reflects no deduction for fees, expenses or taxes)
|
-8.54%
|
0.95%
|
-11.49%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
11.61%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax
returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares" is higher
because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in December 2010
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may
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be taxed later upon withdrawal. Distributions by the
Fund may be significantly higher than those of most other ETFs.
Payments to Broker-Dealers and Other
Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may
create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
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Direxion
Daily Healthcare Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Healthcare Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier
than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the Health Care Select Sector Index (the “Index”). This means that the return of the Fund for a period longer than a
trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the
Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.13%
|
Total
Annual Fund Operating Expenses
|
1.09%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.08%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$110
|
$346
|
$600
|
$1,328
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 43% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is provided by Standard
& Poor’s (the “Index Provider”) and includes domestic companies from the healthcare sector, which includes the following industries: pharmaceuticals; health care equipment and supplies; health care providers and services;
biotechnology; life sciences tools and services; and health care technology. The Index is one of eleven Select Sector Indexes developed and maintained in accordance with the following criteria: (1) each of the component securities in the Index is a
constituent company of the S&P 500 Index; (2) each stock in the S&P 500 Index is allocated to one of the Select Sector Indexes; and (3) the Index is calculated by the Index Provider using a modified “market capitalization”
methodology, which is a hybrid between equal weighting and conventional capitalization weighting with the weighting capped for the largest stocks included in the Index. This design ensures that each of the component stocks within a Select Sector
Index is represented in a proportion consistent with its percentage with respect to the total market capitalization of such Select Sector Index.
As of December 31,
2018, the Index had 61 constituents, which had a median total market capitalization of $32 billion, total market capitalizations ranging from $5.3 billion to $346.1 billion and were concentrated in the healthcare sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or
assets, such as stocks, bonds, or funds (including
ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s
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holding period of an investment in the Fund. If
adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s investment had already been reduced by the prior
adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s
investment has increased.
The
chart below provides examples of how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility;
b) Index performance; c) period of time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two
principal factors
–
Index volatility and Index performance
–
on Fund performance. The
chart shows estimated Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the
Index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 15.11%. The Index’s highest volatility rate for any one calendar year during the five-year period was 18.08% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 11.11%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because
the Fund is leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on
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ETF Trust Prospectus
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|
collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially
resulting in the Fund being over- or under-exposed
to the Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Healthcare Sector Risk
—
The profitability of companies in the healthcare sector may be affected by extensive, costly and uncertain government
regulation, restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient services, limited number of products, industry innovation, changes in
technologies and other market developments. Many healthcare companies are heavily dependent on patent protection. The expiration of patents may adversely affect the profitability of these companies. Many healthcare companies are subject to extensive
litigation based on product liability and similar claims. Healthcare companies are subject to competitive forces that may make it difficult to raise prices and, in fact, may result in price discounting. Many new products in the healthcare sector may
be subject to regulatory approvals. The process of obtaining such approvals may be long and costly with no guarantee that any product will come to market.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
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Mid-Capitalization
Company Risk
-
Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and
financial resources than more established, larger-capitalization companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because
these stocks are not well known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities
compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result,
the performance of mid-capitalization companies can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees
to buy the securities back at a specified time and
price. Repurchase agreements may be subject to market and credit risk related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is
no guarantee that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may
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widen and the Fund’s Shares may possibly be
subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 52.21% for the quarter ended March 31, 2013 and its lowest calendar quarter return was -32.28% for the quarter ended September 30, 2015. The year-to-date return as
of December 31, 2018 was 2.91%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(6/15/2011)
|
Return
Before Taxes
|
2.91%
|
22.73%
|
35.63%
|
Return
After Taxes on Distributions
|
2.69%
|
22.67%
|
35.34%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
1.79%
|
18.72%
|
31.15%
|
Health
Care Select Sector Index
(reflects no deduction for fees, expenses or taxes)
|
6.42%
|
11.11%
|
14.74%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
11.55%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax
returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in June 2011
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may
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be taxed later upon withdrawal. Distributions by the
Fund may be significantly higher than those of most other ETFs.
Payments to Broker-Dealers and Other
Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may
create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
Index Information
The “Health Care Select
Sector Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard &
Poor’s
®
and S&P
®
are registered
trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones
Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones,
S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Health Care Select
Sector Index.
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ETF Trust Prospectus
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|
Direxion
Daily Homebuilders & Supplies Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Homebuilders & Supplies Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund
may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the Dow Jones U.S. Select Home Construction Index (the “Index”). This means that the return of the Fund
for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods,
higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more
than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.24%
|
Acquired
Fund Fees and Expenses
(1)
|
0.04%
|
Total
Annual Fund Operating Expenses
|
1.03%
|
Expense
Cap/Reimbursement
(2)
|
-0.04%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.99%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$101
|
$324
|
$565
|
$1,256
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 38% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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Trust Prospectus
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index measures U.S companies in
the home construction sector that provide a wide range of products and services related to homebuilding, including home construction and producers, sellers and suppliers of building materials, furnishings and fixtures and also home improvement
retailers. To be included in the Index, stocks must meet minimum market capitalization and liquidity requirements and are subject to the following adjustments: 1) the weight of any individual security is restricted to 25%; 2) the aggregate weight of
individual companies in the Index with weights of 5% or more is capped at 45%; 3) the aggregate weight of the five largest companies in the Index is capped at 65%; and 4) companies classified as Building Materials & Fixtures, Furnishings, and
Home Improvement Retailers are, in aggregate, capped at 35% of the Index. The Index may include large-, mid- or small-capitalization companies.
As of December 31,
2018, the Index was comprised of 48 components with a median market capitalization of $1.7 billion, total market capitalizations ranging from $91 million to $194.1 billion and were primarily included in the consumer goods, consumer services and
industrials sectors, which include companies in the homebuilding industry.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest
rates or indexes. Certain of the derivative
instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily
Direxion Shares
ETF Trust Prospectus
|
392
|
performance of the Index reduces the amount of a
shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily
performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 20.47%. The Index’s highest volatility rate for any one calendar year during the five-year period was 24.12% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 4.68%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because
the Fund is leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
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If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
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Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
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Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on
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collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially
resulting in the Fund being over- or under-exposed
to the Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Consumer Goods Sector Risk
- Because companies in the consumer goods sector manufacture products, the success of these companies is tied closely to the performance of the overall domestic and international economy, interest
rates, competition and consumer confidence. Additionally, government regulation, including new laws, affecting the permissibility of using various production methods or other types of inputs such as materials, may adversely impact companies in the
consumer goods industry. Changes or trends in commodity prices, which may be influenced or characterized by unpredictable factors may adversely impact companies in the consumer goods sector.
Consumer Services
Industry Risk
- The success of consumer product manufacturers and retailers
(including food and drug retailers, general retailers, media,
and travel and leisure)
is tied closely to the performance of the domestic and international economy, interest rates, exchange rates, competition and consumer confidence.
The consumer services industry depends heavily on disposable household income and consumer spending. Companies in the consumer services industry may be subject to severe competition, which may also
have an adverse impact on their profitability. Changes in demographics and consumer preferences may affect the success of consumer service providers.
Homebuilding Industry Risk
- The Fund’s assets will generally be concentrated in the homebuilding industry which means the Fund will be more affected by the performance of the homebuilding industry than a fund that is more
diversified.
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The homebuilding industry includes home builders
(including manufacturers of mobile and prefabricated homes), as well as producers, sellers and suppliers of building materials, furnishings and fixtures. Companies within the industry may be significantly affected by the national, regional and local
real estate markets, changes in government spending, zoning laws, interest rates and commodity prices. This industry is also sensitive to interest rate fluctuations that can cause changes in the availability of mortgage capital and directly impact
the purchasing power of potential homebuyers. Certain segments of the homebuilding industry may be significantly affected by environmental cleanup costs and catastrophic events such as earthquakes, hurricanes and terrorist acts. The home building
industry can be significantly affected by changes in consumer confidence, demographic patterns, housing starts and the level of new and existing home sales.
Industrials Sector Risk
—
Stock prices of issuers in the industrials sector are affected by supply and demand both for their specific product or
service and for industrials sector products in general. Government regulation, world events and economic conditions will also affect the performance of investments in such issuers. Aerospace and defense companies, a component of the industrials
sector, can be significantly affected by government spending policies because companies involved in this industry rely to a significant extent on U.S. and other government demand for their products and services. Thus, the financial condition of, and
investor interest in, aerospace and defense companies are heavily influenced by government defense spending policies which are typically under pressure from efforts to control government spending budgets. Transportation companies, another component
of the industrials sector, are subject to cyclical performance and therefore investment in such companies may experience occasional sharp price movements which may result from changes in the economy, fuel prices, labor agreements and insurance
costs.
Retail Industry
Risk
- The Fund invests in, and/or has exposure to, the securities of companies in the retail industry. Retail and related industries can be significantly affected by the performance of the
domestic and international economy, consumer confidence and spending, intense competition, changes in demographics, and changing consumer tastes and preferences. In addition, the retailing industry is highly competitive and a company’s success
can be tied to its ability to anticipate changing consumer tastes.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Micro-Capitalization Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those
of larger companies. In addition, micro-cap
companies often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or
mid-capitalization. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts
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and repurchase agreements. Money market funds may be
subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial institution in which the depository account is held. Repurchase agreements
are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk related to the collateral securing the repurchase agreement. Money market
instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop
for Shares of the Fund. To the extent that exchange
specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s
Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
Total Return
for the Calendar Years Ended December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 67.44% for the quarter ended December 31, 2017 and its lowest calendar quarter return was -43.39% for the quarter ended December 31, 2018. The year-to-date return
as of December 31, 2018 was -73.87%.
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Average Annual Total
Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(8/19/2015)
|
Return
Before Taxes
|
-73.87%
|
-13.56%
|
Return
After Taxes on Distributions
|
-73.89%
|
-13.72%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-43.72%
|
-9.82%
|
Dow
Jones U.S. Select Home Construction Index
(reflects no deduction for fees, expenses or taxes)
|
-30.73%
|
1.14%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
7.64%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in August 2015
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception in August 2015
|
Portfolio
Manager
|
Purchase and Sale of Fund Shares
The Fund’s shares are not
individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as creation units, each of which is
comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may
trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily Industrials Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Industrials Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier
than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the Industrials Select Sector Index (the “Index”). This means that the return of the Fund for a period longer than a
trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the
Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.73%
|
Acquired
Fund Fees and Expenses
(1)
|
0.12%
|
Total
Annual Fund Operating Expenses
|
1.60%
|
Expense
Cap/Reimbursement
(2)
|
-0.53%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.07%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$109
|
$453
|
$821
|
$1,855
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 26% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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|
reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is provided by S&P Dow
Jones Indices (the “Index Provider”) and includes domestic companies from the industrials sector which includes the following industries: aerospace and defense; industrial conglomerates; marine; transportation infrastructure; machinery;
road and rail; air freight and logistics; commercial services and supplies; professional services; electrical equipment; construction and engineering; trading companies and distributors; airlines; and building products. The Index is one of eleven
Select Sector Indexes developed and maintained in accordance with the following criteria: (1) each of the stocks in the Index is also a constituent company of the S&P 500
®
Index; (2) each constituent in the S&P 500
®
Index is assigned to one of the Select Sector Indexes; and (3) the Index is calculated by the Index Provider using a modified “market capitalization” methodology, which is a hybrid between equal weighting and conventional market
capitalization weighting with the weighting capped for the largest stocks included in the Index. This design ensures that each of the component stocks within a Select Sector Index is represented in a proportion consistent with its percentage with
respect to the total market capitalization of such Select Sector Index.
As of December 31, 2018, the Index
was comprised of 69 constituents, which had a median total market capitalization of $18 billion, total market capitalizations ranging from $4.4 billion to $183.1 billion and were concentrated in the industrials sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on
an ETF that tracks the same Index or a substantially
similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs),
interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced
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as Index
volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during shareholder’s holding
period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s
investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance
will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 14.82%. The Index’s highest volatility rate for any one calendar year during the five-year period was 19.07% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 6.57%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because
the Fund is leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on
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collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially
resulting in the Fund being over- or under-exposed
to the Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Industrials Sector Risk
—
Stock prices of issuers in the industrials sector are affected by supply and demand both for their specific product or
service and for industrials sector products in general. Government regulation, world events and economic conditions will also affect the performance of investments in such issuers. Aerospace and defense companies, a component of the industrials
sector, can be significantly affected by government spending policies because companies involved in this industry rely to a significant extent on U.S. and other government demand for their products and services. Thus, the financial condition of, and
investor interest in, aerospace and defense companies are heavily influenced by government defense spending policies which are typically under pressure from efforts to control government spending budgets. Transportation companies, another component
of the industrials sector, are subject to cyclical performance and therefore investment in such companies may experience occasional sharp price movements which may result from changes in the economy, fuel prices, labor agreements and insurance
costs.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the
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performance of large-capitalization companies has
trailed the performance of the overall markets.
Mid-Capitalization
Company Risk
- Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than more established,
larger-capitalization companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well known to the
investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the
securities of larger companies. Adverse publicity and investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund.
As a result,
the performance
of mid-capitalization companies can be more volatile
and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution
in which the depository account is held. Repurchase
agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk related to the collateral securing the repurchase agreement.
Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the
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resulting premium or discount on the Fund’s
Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
During the period of time shown in
the bar chart, the Fund’s highest calendar quarter return was 29.56% for the quarter ended September 30, 2018 and its lowest calendar quarter return was -47.16% for the quarter ended December 31, 2018. The year-to-date return as of December
31, 2018 was -44.91%.
Average Annual
Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(5/3/2017)
|
Return
Before Taxes
|
-44.91%
|
-12.00%
|
Return
After Taxes on Distributions
|
-45.06%
|
-12.26%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-26.43%
|
-9.01%
|
Industrials
Select Sector Index
(reflects no deduction for fees, expenses or taxes)
|
-13.03%
|
0.27%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
4.96%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax
returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares" is higher
because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in May 2017
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception in May 2017
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Index Information
The “Industrials Select
Sector Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard &
Poor’s
®
and S&P
®
are registered
trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones
Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones,
S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Industrials Select
Sector Index.
Direxion Shares
ETF Trust Prospectus
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Direxion
Daily Industrials Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Industrials Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be
riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the Industrials Select Sector Index (the “Index”). This means that the return of the Fund for a period
longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher
volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the
return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.11%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the Fund’s net
assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity
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of less than 397 days and exhibit high quality
credit profiles, including U.S. government securities and repurchase agreements.
The Index is
provided by S&P Dow Jones Indices (the “Index Provider”) and includes domestic companies from the industrials sector which includes the following industries: aerospace and defense; industrial conglomerates; marine; transportation
infrastructure; machinery; road and rail; air freight and logistics; commercial services and supplies; professional services; electrical equipment; construction and engineering; trading companies and distributors; airlines; and building products.
The Index is one of eleven Select Sector Indexes developed and maintained in accordance with the following criteria: (1) each of the stocks in the Index is also a constituent company of the S&P 500
®
Index; (2) each constituent in the S&P 500
®
Index is assigned to one of the Select Sector Indexes; and (3) the Index is calculated by the Index Provider using a modified “market capitalization” methodology, which is a hybrid between equal weighting and conventional market
capitalization weighting with the weighting capped for the largest stocks included in the Index. This design ensures that each of the component stocks within a Select Sector Index is represented in a proportion consistent with its percentage with
respect to the total market capitalization of such Select Sector Index.
As of December 31, 2018, the Index
was comprised of 69 constituents, which had a median total market capitalization of $18 billion, total market capitalizations ranging from $4.4 billion to $183.1 billion and were concentrated in the industrials sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment
objective. The impact of the Index’s movements
during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased.
Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms “daily,”
“day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance
Direxion Shares
ETF Trust Prospectus
|
408
|
for periods greater than one single day can be
estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid
with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance
shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses
and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 14.82%. The Index’s highest volatility rate for any one calendar year during the five-year period was 19.07% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 6.57%. Historical Index volatility
and performance are not indications of what the
Index volatility and performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
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Market illiquidity
may cause losses for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the
Index may lack sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the
securities of the Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions,
netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
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Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance
that is greater than, or less than, the Fund’s
stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Industrials Sector Risk
—
Stock prices of issuers in the industrials sector are affected by supply and demand both for their specific product or
service and for industrials sector products in general. Government regulation, world events and economic conditions will also affect the performance of investments in such issuers. Aerospace and defense companies, a component of the industrials
sector, can be significantly affected by government spending policies because companies involved in this industry rely to a significant extent on U.S. and other government demand for their products and services. Thus, the financial condition of, and
investor interest in, aerospace and defense companies are heavily influenced by government defense spending policies which are typically under pressure from efforts to control government spending budgets. Transportation companies, another component
of the industrials sector, are subject
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to cyclical performance and therefore investment in
such companies may experience occasional sharp price movements which may result from changes in the economy, fuel prices, labor agreements and insurance costs.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Mid-Capitalization
Company Risk
- Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than more established,
larger-capitalization companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well known to the
investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the
securities of larger companies. Adverse publicity and investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund.
As a result,
the performance
of mid-capitalization companies can be more volatile
and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to
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process creation and/or redemption orders, Shares
may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “Industrials Select
Sector Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard &
Poor’s
®
and S&P
®
are registered
trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones
Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones,
S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Industrials Select
Sector Index.
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Direxion
Daily Junior Gold Miners Index Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Junior Gold Miners Index Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may
be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the MVIS Global Junior Gold Miners Index (the “Index”). This means that the return of the Fund for a period
longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher
volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the
return of the Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.14%
|
Acquired
Fund Fees and Expenses
(1)
|
0.28%
|
Total
Annual Fund Operating Expenses
|
1.17%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other
|
|
investment companies,
including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund, they will not be reflected in the expense information in the Fund's financial statements and the information presented in the
table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$119
|
$372
|
$644
|
$1,420
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 116% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index tracks the performance of
foreign and domestic micro-, small- and mid-capitalization companies that generate, or demonstrate the potential to generate, at least 50% of their revenues from, or have at least 50% of their assets related to, gold mining and/or silver mining,
hold real property or have mining projects that have the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver. In addition, stocks must meet strict size and
liquidity requirements: (1) the full market capitalization has to exceed
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ETF Trust Prospectus
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414
|
$150 million in
U.S. Dollars; (2) the three months average-daily-trading volume must be higher than $1.0 million in U.S. Dollars; and (3) the stocks must have traded at least 250,000 shares per month over the last six months. The Index includes companies from
markets that are freely investable to foreign investors, including “emerging markets,” as that term is defined by the index provider. As of December 31, 2018, the principal supplies of gold included in the Index were located in ten
countries or territories: Canada, Australia, South Africa, Peru, the United States, Jersey, Cayman Islands, the United Kingdom, China, and Turkey. The Index is reviewed and rebalanced quarterly.
As of December 31, 2018, the Index
included 69 constituents, which had an average market capitalization of $1.2 billion, total market capitalization ranging from approximately $100 million to $5.2 billion and were concentrated in the gold mining industry.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods
longer than a single day will be the result of each
day’s returns compounded over the period, which will very likely differ from 300% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the
Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses
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|
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Trust Prospectus
|
and/or actual borrowing/lending rates were reflected,
the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 38.25%. The Index’s highest volatility rate for any one calendar year during the five-year period was 47.92% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 1.09%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize
leverage. An investment in the Fund is exposed to
the risk that a decline in the daily performance of the Index will be magnified. This means that an investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing
leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying
any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index decreases, the Fund may be one of many market participants that are attempting to sell securities of the Index. Under such circumstances, the market for investments of the Index may lack sufficient
liquidity for all market participants' trades. Therefore, the Fund may have more difficulty selling securities or financial instruments and the Fund's transactions could exacerbate the price decline of the securities of the Index. Additionally,
because the Fund is leveraged, a minor decrease in the value of the Index should be expected to have a substantial adverse impact on the Fund.
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|
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery
|
of an
asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a
liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction. Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability
of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
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If there is a
significant intra-day market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales
of Shares prior to the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues
that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging
markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital
controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets
in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement procedures in
emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s
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currency. Emerging markets may develop unevenly and may
never fully develop.
Australian
Securities Risk
—
Investments in Australian issuers may subject the Fund to regulatory, political, currency,
security, and economic risk specific to Australia. The Australian economy is heavily dependent on exports from the agricultural and mining sectors. As a result, the Australian economy is susceptible to fluctuations in the commodity markets. The
Australian economy is also becoming increasingly dependent on its growing services industry. The Australian economy is dependent on trading with key trading partners, including the United States, China, Japan, Singapore and certain European
countries. Reduction in spending on Australian products and services, or changes in any of the economies, may cause an adverse impact on the Australian economy. Additionally, Australia is located in a part of the world that has historically been
prone to natural disasters, such as hurricanes and droughts, and is economically sensitive to environmental events. Any such event may adversely impact the Australian economy, causing an adverse impact on the value of the Fund.
Canadian Securities Risk
—
The United States is Canada’s largest trading and investment partner and the Canadian economy is significantly
affected by developments in the U.S. economy. Since the implementation of North American Free Trade Agreement (“NAFTA”) in 1994 among Canada, the United States and Mexico, total two-way merchandise trade between the United States and
Canada has increased significantly. Any downturn in U.S or Mexican economic activity, which could result from the U.S. threatening
to exit NAFTA,
is likely to have an adverse impact on the Canadian economy. The Canadian economy is also dependent upon external trade with other key trading partners, including China and the European Union. In
addition, Canada is a large supplier of natural resources (
e.g.
, oil, natural gas and agricultural products). As a result, the Canadian economy is
sensitive to fluctuations in certain commodity prices.
Gold and Silver Mining Company Risk
- Because the Index is concentrated in the gold mining industry and may have significant exposure to assets in the silver mining industry, the Fund will be sensitive to changes in the overall condition
of gold- and silver-related companies. Competitive pressures may have a significant effect on the financial condition of gold- and silver-related companies. Also gold- and silver-related companies are highly dependent on the price of gold and silver
bullion, respectively, and may be adversely affected by a variety of worldwide economic, financial and political factors. These prices may fluctuate substantially over short periods of time which may cause the value of the gold- and silver-related
companies to be more volatile than the general market. In times of significant inflation or great economic uncertainty, gold, silver and other precious metals may outperform traditional investments such as bonds and stocks. However, in times of
stable economic growth, traditional equity and debt investments could offer greater appreciation potential and the value of gold, silver and other precious metals may be adversely affected, which could in turn affect the Fund. If a natural disaster
or other event with a significant economic impact occurs in a region in which the companies included in the Index operate, such
disaster or event could negatively impact the
profitability of such companies and, in turn, impact the Fund’s return.
Mining and Metal Industry Risk
- Mining and metal companies can be significantly affected by international political and economic developments, energy conservation, the success of exploration projects, commodity prices, taxes and
government regulations. Investments in mining and metal industry companies may be speculative and subject to greater price volatility than investments in other types of companies. Increased environmental or labor costs may depress the value of
mining and metal investments. In addition, changes in international monetary policies or economic and political conditions can affect the supply of gold and precious metals, and consequently the value of mining and metal company investments.
Further, the principal supplies of metal industries may be concentrated in a small number of countries and regions.
Micro-Capitalization Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition, micro-cap companies
often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or mid-capitalization. As
a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater
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impact on the Fund’s net asset value and total
return than if the Fund held a more diversified number of currencies.
Depositary Receipt Risk
—
To the extent the Fund invests in, and/or has exposure to, foreign companies, the Fund’s investment may be in
the form of depositary receipts or other securities convertible into securities of foreign issuers including American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), and Global Depositary Receipts
(“GDRs”). While the investment in ADRs, EDRs and GDRs, which are traded on exchanges and represent ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective
national markets and currencies, investments in them continue to be subject to certain of the risks associated with investing directly in foreign securities, such as political and exchange rate risks.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance
its portfolio, may
be unable to accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided
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for loaned securities, a decline in the value of any
investments made with cash collateral, or a “gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following performance
information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the
Fund’s
performance from calendar year to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods.
The Fund’s past performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 171.65% for the quarter ended June 30, 2016 and its lowest calendar quarter return was -78.64% for the quarter ended December 31, 2014. The year-to-date return as
of December 31, 2018 was -48.23%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(10/3/2013)
|
Return
Before Taxes
|
-48.23%
|
-50.24%
|
-56.96%
|
Return
After Taxes on Distributions
|
-48.23%
|
-50.42%
|
-57.10%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-28.55%
|
-23.51%
|
-23.37%
|
MVIS
Global Junior Gold Miners Index
(reflects no deduction for fees, expenses or taxes)
|
-11.25%
|
1.09%
|
-3.79%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
10.00%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax
returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares" is higher
because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
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Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in October 2013
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily Junior Gold Miners Index Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Junior Gold Miners Index Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the
Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the MVIS Global Junior Gold Miners Index (the “Index”). This means that the return of the
Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding
periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or
more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.16%
|
Acquired
Fund Fees and Expenses
(1)
|
0.14%
|
Total
Annual Fund Operating Expenses
|
1.05%
|
Expense
Cap/Reimbursement
(2,3)
|
0.04%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.09%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
(3)
|
For the fiscal year ended
October 31, 2018, as a result of a portion of the Adviser's management fee and/or a previous reimbursement of Other Expenses, the Adviser recouped fees in the amount of 0.04%.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$111
|
$338
|
$583
|
$1,286
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate
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is calculated without regard to cash instruments or
derivative transactions. If the Fund's extensive use of derivatives was reflected, the Fund's portfolio turnover rate would be significantly higher.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the Fund’s net
assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index tracks
the performance of foreign and domestic micro-, small- and mid-capitalization companies that generate, or demonstrate the potential to generate, at least 50% of their revenues from, or have at least 50% of their assets related to, gold mining and/or
silver mining, hold real property or have mining projects that have the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver. In addition, stocks must meet
strict size and liquidity requirements: (1) the full market capitalization has to exceed $150 million in U.S. Dollars; (2) the three months average-daily-trading volume must be higher than $1.0 million in U.S. Dollars; and (3) the stocks must have
traded at least 250,000 shares per month over the last six months. The Index includes companies from markets that are freely investable to foreign investors, including “emerging markets,” as that term is defined by the index provider. As
of December 31, 2018, the principal supplies of gold included in the Index were located in ten countries or territories: Canada, Australia, South Africa, Peru, the United States, Jersey, Cayman Islands, the United Kingdom, China, and Turkey. The
Index is reviewed and rebalanced quarterly.
As of December 31, 2018, the Index
included 69 constituents, which had an average market capitalization of $1.2 billion, total market capitalization ranging from approximately $100 million to $5.2 billion and were concentrated in the gold mining industry.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index,
or short an ETF that tracks the same Index or a
substantially similar index. Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a
substitute for directly shorting securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact
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of compounding
will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during shareholder’s holding period of an investment in the Fund. If adverse daily performance of the
Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally,
however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides
examples of how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance;
c) period of time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 38.25%. The Index’s highest volatility rate for any one calendar year during the five-year period was 47.92% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 1.09%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus,
to the extent that the Fund invests in swaps that
use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any
financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive
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the full amount it
is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such
collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important
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to note that the correlation to these ETFs may vary
from the correlation to the Index due to embedded costs and other factors.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues
that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging
markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital
controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets
in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement procedures in
emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s
currency. Emerging markets may develop unevenly and may
never fully develop.
Australian
Securities Risk
—
Investments in Australian issuers may subject the Fund to regulatory, political, currency,
security, and economic risk specific to Australia. The Australian economy is heavily dependent on exports from the agricultural and mining sectors. As a result, the Australian economy is susceptible to fluctuations in the commodity markets. The
Australian economy is also becoming increasingly dependent on its growing services industry. The Australian economy is dependent on trading with key trading partners, including the United States, China, Japan, Singapore and certain European
countries. Reduction in spending on Australian products and services, or changes in any of the economies, may cause an adverse impact on the Australian economy. Additionally, Australia is located in a part of the world that has historically been
prone to natural disasters, such as hurricanes and droughts, and is economically sensitive to environmental events. Any such event may adversely impact the Australian economy, causing an adverse impact on the value of the Fund.
Canadian Securities Risk
—
The United States is Canada’s largest trading and investment partner and the Canadian economy is significantly
affected by developments in the U.S. economy. Since the implementation of North American Free Trade Agreement (“NAFTA”) in 1994 among Canada, the United States and Mexico, total two-way merchandise trade between the United States and
Canada has increased significantly. Any downturn in U.S or Mexican economic activity, which could result from the U.S. threatening
to exit NAFTA,
is likely to have an adverse impact on the Canadian economy. The Canadian economy is also dependent upon external trade with other key trading partners, including China and the European Union. In
addition, Canada is a large supplier of natural resources (
e.g.
, oil, natural gas and agricultural products). As a result, the Canadian economy is
sensitive to fluctuations in certain commodity prices.
Gold and Silver Mining Company Risk
- Because the Index is concentrated in the gold mining industry and may have significant exposure to assets in the silver mining industry, the Fund will be sensitive to changes in the overall condition
of gold- and silver-related companies. Competitive pressures may have a significant effect on the financial condition of gold- and silver-related companies. Also gold- and silver-related companies are highly dependent on the price of gold and silver
bullion, respectively, and may be adversely affected by a variety of worldwide economic, financial and political factors. These prices may fluctuate substantially over short periods of time which may cause the value of the gold- and silver-related
companies to be more volatile than the general market. In times of significant inflation or great economic uncertainty, gold, silver and other precious metals may outperform traditional investments such as bonds and stocks. However, in times of
stable economic growth, traditional equity and debt investments could offer greater appreciation potential and the value of gold, silver and other precious metals may be adversely affected, which could in turn affect the Fund. If a natural disaster
or other event with a significant economic impact occurs in a region in which the companies included in the Index operate, such
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disaster or event could negatively impact the
profitability of such companies and, in turn, impact the Fund’s return.
Mining and Metal Industry Risk
- Mining and metal companies can be significantly affected by international political and economic developments, energy conservation, the success of exploration projects, commodity prices, taxes and
government regulations. Investments in mining and metal industry companies may be speculative and subject to greater price volatility than investments in other types of companies. Increased environmental or labor costs may depress the value of
mining and metal investments. In addition, changes in international monetary policies or economic and political conditions can affect the supply of gold and precious metals, and consequently the value of mining and metal company investments.
Further, the principal supplies of metal industries may be concentrated in a small number of countries and regions.
Micro-Capitalization Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition, micro-cap companies
often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or mid-capitalization. As
a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater
impact on the Fund’s net asset value and total
return than if the Fund held a more diversified number of currencies.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Geographic Concentration Risk
—
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or
economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government
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agency. When you sell your Shares, they could be worth
less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value
of the Fund over a period of time. Investors
purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for
Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the
resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
Total Return
for the Calendar Years Ended December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 55.98% for the quarter ended September 30, 2018 and its lowest calendar quarter return was -84.49% for the quarter ended June 30, 2016. The year-to-date return as
of December 31, 2018 was -1.45%.
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Average Annual Total
Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(10/3/2013)
|
Return
Before Taxes
|
-1.45%
|
-74.72%
|
-70.45%
|
Return
After Taxes on Distributions
|
-1.63%
|
-74.82%
|
-70.60%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-0.83%
|
-24.78%
|
-23.67%
|
MVIS
Global Junior Gold Miners Index
(reflects no deduction for fees, expenses or taxes)
|
-11.25%
|
1.09%
|
-3.79%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
10.00%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax
returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares" is higher
because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in October 2013
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase and Sale of Fund Shares
The Fund’s shares are not
individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a
national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset
value (discount).
Tax
Information
The Fund intends
to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred
arrangement, such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most
other ETFs.
Payments to
Broker-Dealers and Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily Metals & Mining Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Metals & Mining Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be
riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the S&P Metals & Mining Select Industry Index (the “Index”). This means that the return of the Fund for
a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher
volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the
return of the Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.11%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically
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|
leveraged investment results. On a day-to-day basis,
the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit
profiles, including U.S. government securities and repurchase agreements.
The Index is a
modified equal-weighted index that is designed to measure the performance of the stocks comprising the S&P Total Market Index that are classified in the Global Industry Classification Standard (GICS) metals and mining industry. The metals and
mining industry includes the following sub-industries: aluminum; copper; diversified metals & mining; gold; precious metals & minerals; silver; and steel. To be eligible for inclusion in the Index, stocks must satisfy one of the following
combined size and liquidity criteria: (1) have a float-adjusted market capitalization above $300 million with a float-adjusted liquidity ratio (defined by dollar value traded over the previous 12 months divided by the float-adjusted market
capitalization as of the Index rebalancing reference date) above 50%; (2) have a float-adjusted market capitalization above $500 million with a float-adjusted liquidity ratio above 90%; or (3) have a float-adjusted market capitalization above $400
million with a float-adjusted liquidity ratio above 150%. The Index is rebalanced quarterly. At each rebalance date, the components are initially equal-weighted and then adjustments are made to ensure that the market capitalization weight for any
individual component does not exceed a specified value that can be traded in a single day as set by S&P on an annual basis.
As of December 31, 2018, the Index
had 29 constituents, which had a median market capitalization of $1.6 billion, total market capitalizations ranging from $330 million to $18.5 billion and were concentrated in the metals and mining industry, which is included in the materials
sector.
The components
of the Index and the percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or
more of its total assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt
to achieve its investment objective without regard
to overall market movement or the increase or decrease of the value of the securities in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the
Fund’s investment objective. The impact of the Index’s movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should
rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy
typically results in high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading
day.
Because of daily
rebalancing and the compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of
the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund
will lose money over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a
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|
shareholder’s investment, the dollar amount
lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 30.14%. The Index’s highest volatility rate for any one calendar year during the
five-year period was 40.08% and volatility for a
shorter period of time may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was -7.69%. Historical Index volatility and performance are not indications of what the Index
volatility and performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the
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Fund is forced to sell an illiquid security at an
unfavorable time or at a price that is lower than Rafferty’s judgment of the security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains
or achieving a high correlation with the Index. There can be no assurance that a security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund
may
be unable to enter into another swap agreement or
invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index later reverses all or a portion of its
movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market
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close on the first
trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will
decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may experience performance that is greater than, or less than, the Fund’s stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large
movements of assets into and out of the Fund,
potentially resulting in the Fund being over- or under-exposed to the Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment
objective. The Fund may take or refrain from taking positions to improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Materials Sector Risk
—
Companies in the materials sector could be adversely affected by commodity price volatility, exchange rate import
controls and increased competition. The production of industrial materials often exceeds demand as a result of over-building or economic downturns, leading to poor investment returns. Companies in the materials sector also are at risk for
environmental damage and product liability claims, and may be materially affected by depletion of resources, technical progress, labor relations, and governmental regulations.
Mining and Metal Industry Risk
- Mining and metal companies can be significantly affected by international political and economic developments, energy conservation, the success of exploration projects, commodity prices, taxes and
government regulations. Investments in mining and metal industry companies may be speculative and subject to greater price volatility than investments in other types of companies. Increased environmental or labor costs may depress the value of
mining and metal investments. In addition, changes in international monetary policies or economic and political conditions can affect the supply of gold and precious metals, and consequently the value of mining and metal company investments.
Further, the principal supplies of metal industries may be concentrated in a small number of countries and regions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to
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changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher
transaction costs because of increased broker
commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income when distributed to them). The Fund calculates
portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of derivative instruments were reflected, the
calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary
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market at market
prices rather than at net asset value. The market prices of Shares will fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market
may trade Shares at a price greater than net asset value (a premium) or less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares
can be created and redeemed in creation units, the Adviser believes that large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary
significantly. The Fund’s investment results are measured based upon the daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as
experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or
other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly
be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase and Sale of Fund Shares
The Fund’s shares are not
individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as creation units, each of which is
comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may
trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “S&P Metals &
Mining Select Industry Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard & Poor’s
®
and S&P
®
are registered trademarks of
Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones Trademark Holdings LLC
(“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their
respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P Metals & Mining Select
Industry Index.
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Direxion
Daily Metals & Mining Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Metals & Mining Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund
may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the S&P Metals & Mining Select Industry Index (the “Index”). This means that the return
of the Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer
holding periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much
as, or more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.11%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the Fund’s net
assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity
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of less than 397 days and exhibit high quality
credit profiles, including U.S. government securities and repurchase agreements.
The Index is a
modified equal-weighted index that is designed to measure the performance of the stocks comprising the S&P Total Market Index that are classified in the Global Industry Classification Standard (GICS) metals and mining industry. The metals and
mining industry includes the following sub-industries: aluminum; copper; diversified metals & mining; gold; precious metals & minerals; silver; and steel. To be eligible for inclusion in the Index, stocks must satisfy one of the following
combined size and liquidity criteria: (1) have a float-adjusted market capitalization above $300 million with a float-adjusted liquidity ratio (defined by dollar value traded over the previous 12 months divided by the float-adjusted market
capitalization as of the Index rebalancing reference date) above 50%; (2) have a float-adjusted market capitalization above $500 million with a float-adjusted liquidity ratio above 90%; or (3) have a float-adjusted market capitalization above $400
million with a float-adjusted liquidity ratio above 150%. The Index is rebalanced quarterly. At each rebalance date, the components are initially equal-weighted and then adjustments are made to ensure that the market capitalization weight for any
individual component does not exceed a specified value that can be traded in a single day as set by S&P on an annual basis.
As of December 31, 2018, the Index
had 29 constituents, which had a median market capitalization of $1.6 billion, total market capitalizations ranging from $330 million to $18.5 billion and were concentrated in the metals and mining industry, which is included in the materials
sector.
The components
of the Index and the percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or
more of its total assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions
the Fund’s portfolio so that its exposure to
the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has
fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure
will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the
close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
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The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 30.14%. The Index’s highest volatility rate for any one calendar year during the five-year period was 40.08% and volatility for a shorter period of time
may have been substantially higher. The Index’s
annualized performance for the five-year period
ended December 31, 2018 was -7.69%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such
as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no
assurance
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that a security that is deemed liquid when purchased
will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar
|
amount invested in a basket of securities representing
a particular index or an ETF that seeks to track an index.
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions,
netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
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Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance
that is greater than, or less than, the Fund’s
stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve
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the tax efficiency or to comply with various
regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Materials Sector Risk
—
Companies in the materials sector could be adversely affected by commodity price volatility, exchange rate import
controls and increased competition. The production of industrial materials often exceeds demand as a result of over-building or economic downturns, leading to poor investment returns. Companies in the materials sector also are at risk for
environmental damage and product liability claims, and may be materially affected by depletion of resources, technical progress, labor relations, and governmental regulations.
Mining and Metal Industry Risk
- Mining and metal companies can be significantly affected by international political and economic developments, energy conservation, the success of exploration projects, commodity prices, taxes and
government regulations. Investments in mining and metal industry companies may be speculative and subject to greater price volatility than investments in other types of companies. Increased environmental or labor costs may depress the value of
mining and metal investments. In addition, changes in international monetary policies or economic and political conditions can affect the supply of gold and precious metals, and consequently the value of mining and metal company investments.
Further, the principal supplies of metal industries may be concentrated in a small number of countries and regions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to
the
Fund. While the Fund has established business
continuity plans and risk management systems seeking to address system breaches or failures, these plans and systems are inherently limited. Further, cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading
to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they
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invest. There is no guarantee that money market
instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons.
Extraordinary market volatility can lead to trading
halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange on which they trade, and the listing requirements may be amended
from time to time.
Fund
Performance
No prior
investment performance is provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Index Information
The “S&P Metals &
Mining Select Industry Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard & Poor’s
®
and S&P
®
are registered trademarks of
Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones Trademark Holdings LLC
(“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their
respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P Metals & Mining Select
Industry Index.
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Direxion
Daily Natural Gas Related Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Natural Gas Related Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be
riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the ISE-Revere Natural Gas
Index
TM
(the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading
day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of
compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest
for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.25%
|
Acquired
Fund Fees and Expenses
(1)
|
0.09%
|
Total
Annual Fund Operating Expenses
|
1.09%
|
Expense
Cap/Reimbursement
(2)
|
-0.05%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.04%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$106
|
$342
|
$596
|
$1,324
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 44% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.The Index is composed of equity securities of issuers involved in the exploration and production of
natural gas. Because the Fund attempts to track the Index, it seeks exposure to the securities of such issuers that comprise the Index. The Fund’s performance is thereby not intended to reflect changes in the spot price of natural gas as a
commodity, but instead is intended to reflect the performance of the securities of the issuers included in the Index, whose business operations may or may not be affected by changes in the spot price of natural gas.
The Index is developed and owned by
the International Securities Exchange, LLC (“ISE”), and is calculated and maintained by NASDAQ. The Index is designed to take advantage of both event-driven news and long term trends in the natural gas industry. Equity securities are
selected for inclusion in the Index using a quantitative ranking and screening system that begins with the universe of equity securities of issuers that are involved in the exploration and production of natural gas and that satisfy market
capitalization, liquidity and weighting concentration requirements.
After application of the screens, the
remaining equity securities are divided into two groups, one for equity securities issued by master limited partnerships (“MLPs”) and one for equity securities issued by entities that are not master limited partnerships
(“non-MLPs”). The Index is allocated 85% to equity securities issued by non-MLPs, and the remaining 15% consists of equity securities issued by MLPs.
The Index uses a
linear-based capitalization-weighted methodology for each of the MLP and non-MLP groups of constituents that initially ranks the equity securities based on market capitalization and average daily trading volume, and then adjusts the combined
rankings of each equity security by a factor relating to its market capitalization. The resulting linear weight distribution prevents a few large component stocks from dominating the Index while allowing smaller companies to adequately influence
Index performance.
As of
December 31, 2018, the Index was comprised of 34 stocks which had an average market capitalization of $4.9
billion, median market capitalization of $2.7
billion, total market capitalizations ranging from $479.6 million to $24.1 billion and were concentrated in companies in the natural gas industry, which is included in the energy sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the
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Fund. The Fund is
not a complete investment program. In addition, the Fund presents risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an
investment in the Fund.
Effects
of Compounding and Market Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a
trading day will be the result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant
impact on funds that are leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect
of compounding becomes more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of
the Index during shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar
loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost
due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those
shaded green (or light gray) represent those
scenarios where the Fund can be expected to return more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns
may be significantly better or worse than the returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 39.91%. The Index’s highest volatility rate for any one calendar year during the five-year period was 51.98% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was -30.40%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
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To fully
understand the risks of using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may
not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty
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or its affiliate
becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by
the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise
remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other
jurisdictions.
In addition, the
Fund may enter into swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single
counterparty. Further, there is a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares
intra-day may experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs,
financing costs related to the use of derivatives,
income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of
investment exposure to such stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into
and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily
leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the
Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues
that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging
markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater
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risk of capital controls through such measures as
taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets in emerging market countries may
trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement procedures in emerging market countries are
frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency. Emerging markets
may develop unevenly and may never fully develop.
Energy Sector Risk
—
Companies that engage in energy-related businesses and companies primarily involved in the production and mining of
coal, development and production of oil, gas and consumable fuels and provide drilling and other energy resources production and distribution related services are subject to risks of legislative or regulatory changes, adverse market conditions
and/or increased competition affecting the energy sector. The prices of the securities of energy and energy services companies may fluctuate widely due to the supply and demand, exploration and production spending, world events and economic
conditions, swift price and supply fluctuations, energy conservation, the success of exploration projects, liabilities for environmental damage and general civil liabilities and tax and other governmental regulatory policies and legislation. Weak
demand for energy companies’ products or services or for energy products and services in general, as well as negative developments in these other areas, including natural disaster and terrorist attacks, impact energy company
securities.
Natural Gas Industry Risk
- The Fund will invest in, and/or have exposure to, securities issued by companies primarily involved in the natural gas industry. The profitability of companies engaged in the exploration and
production of natural gas may be adversely affected by changes in worldwide energy prices, exploration and production spending, government policies and regulation, economic conditions and world events. Natural gas companies also could be adversely
affected by commodity price volatility, changes in exchange rates, interest rates, imposition of import controls, increased competition, depletion of resources, development of alternative energy sources, technological developments and labor
relations and may have significant capital investments in, or engage in transactions involving, emerging market countries, which may heighten these risks. In addition, the natural gas companies must comply with a broad range of environmental laws
and regulations. Additional or more stringent environmental laws and regulations may be enacted in the future and such changes could have a material adverse effect on natural gas companies’ profitability. Finally, natural gas companies compete
with other fuel companies, such as coal and oil companies, which
also may adversely affect the profitability of natural
gas companies.
MLP Risk
—
Investments in common units of MLPs involve risks that differ from investments in common stock. Holders of MLP common
units are subject to certain risks inherent in the structure of MLPs, including (i) tax risks, (ii) risk related to limited control of management or the general partner or managing member, (iii) limited rights to vote on matters affecting the MLP,
except with respect to extraordinary transactions, (iv) conflicts of interest between the general partner or managing member and its affiliates, on the one hand, and the limited partners or members, on the other hand, including those arising from
incentive distribution payments or corporate opportunities, and (v) cash flow risks. MLP common units can be affected by macro-economic and other factors affecting the stock market in general, expectations of interest rates, investor sentiment
towards MLPs or the energy sector, changes in a particular issuer’s financial condition, or unfavorable or unanticipated poor performance of a particular issuer (in the case of MLPs, generally measured in terms of distributable cash flow).
Prices of common units of individual MLPs also can be affected by unique fundamentals, including cash flow growth, cash generating power and distribution coverage.
The Fund currently qualifies as, and
intends to continue to qualify as, a registered investment company under Subchapter M of the Internal Revenue Code of 1985, as amended (the “IRC”) and as such, may not invest more than 25% of its net assets in the securities of MLPs. If
the Fund exceeds this limitation, it may no longer qualify under the IRC as a registered investment company and may be subject to taxation as a corporation instead of a registered investment company.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face
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greater risk of business failure, which could increase
the volatility of the Fund’s portfolio.
Currency Exchange
Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in
securities denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S.
Dollars. Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities
markets. Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if
the Fund held a more diversified number of currencies.
Depositary Receipt Risk
—
To the extent the Fund invests in, and/or has exposure to, foreign companies, the Fund’s investment may be in
the form of depositary receipts or other securities convertible into securities of foreign issuers including American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), and Global Depositary Receipts
(“GDRs”). While the investment in ADRs, EDRs and GDRs, which are traded on exchanges and represent ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective
national markets and currencies, investments in them continue to be subject to certain of the risks associated with investing directly in foreign securities, such as political and exchange rate risks.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in
financial losses to the Fund.
While the Fund
has
established business continuity plans and risk management systems seeking to address system
breaches or failures, these plans and systems are
inherently limited. Further, cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
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Authorized Participants Concentration
Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are unable to
process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments that have
lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available
on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Performance prior to December 1,
2011 reflects the Fund’s previous investment objective where it sought daily investment results, before fees and expenses, of 200% of the performance of the Index. If the Fund had continued to seek its previous investment objective, the
calendar year performance of the Fund would have varied from that shown.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 55.19% for the quarter ended September 30, 2013 and its lowest calendar quarter return was -83.82% for the quarter ended September 30, 2015. The year-to-date return
as of December 31, 2018 was -79.74%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(7/14/2010)
|
Return
Before Taxes
|
-79.74%
|
-80.21%
|
-62.31%
|
Return
After Taxes on Distributions
|
-79.74%
|
-80.21%
|
-62.31%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-47.21%
|
-24.94%
|
-15.56%
|
ISE-Revere
Natural Gas Index
(reflects no deduction for fees, expenses or taxes)
|
-34.54%
|
-30.40%
|
-17.10%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
12.60%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax
returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares" is higher
because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
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Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in July 2010
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
International Securities Exchange,
LLC (“Licensor”) and the ISE-Revere Natural Gas Index
TM
are trademarks of Licensor and have been licensed for use for certain purposes by the
Trust. The Fund is not sponsored, endorsed, sold, or promoted by Licensor, and Licensor makes no representation regarding the advisability of trading in such products.
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Direxion
Daily Natural Gas Related Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Natural Gas Related Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund
may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the ISE-Revere Natural Gas Index
TM
(the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading day’s
compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of compounding
on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest for periods
less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.56%
|
Acquired
Fund Fees and Expenses
(1)
|
0.14%
|
Total
Annual Fund Operating Expenses
|
1.45%
|
Expense
Cap/Reimbursement
(2)
|
-0.36%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.09%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$111
|
$423
|
$758
|
$1,704
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the
Fund’s net assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that
have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.The Index is composed of equity securities of issuers involved in the exploration and production of
natural gas. Because the Fund attempts to track the Index, it seeks exposure to the securities of such issuers that comprise the Index. The Fund’s performance is thereby not intended to reflect changes in the spot price of natural gas as a
commodity, but instead is intended to reflect the performance of the securities of the issuers included in the Index, whose business operations may or may not be affected by changes in the spot price of natural gas.
The Index is
developed and owned by the International Securities Exchange, LLC (“ISE”), and is calculated and maintained by NASDAQ. The Index is designed to take advantage of both event-driven news and long term trends in the natural gas industry.
Equity securities are selected for inclusion in the Index using a quantitative ranking and screening system that begins with the universe of equity securities of issuers that are involved in the exploration and production of natural gas and that
satisfy market capitalization, liquidity and weighting concentration requirements.
After application of the screens, the
remaining equity securities are divided into two groups, one for equity securities issued by master limited partnerships (“MLPs”) and one for equity securities issued by entities that are not master limited partnerships
(“non-MLPs”). The Index is allocated 85% to equity securities issued by non-MLPs, and the remaining 15% consists of equity securities issued by MLPs.
The Index uses a
linear-based capitalization-weighted methodology for each of the MLP and non-MLP groups of constituents that initially ranks the equity securities based on market capitalization and average daily trading volume, and then adjusts the combined
rankings of each equity security by a factor relating to its market capitalization. The resulting linear weight distribution prevents a few large component stocks from dominating the Index while allowing smaller companies to adequately influence
Index performance.
As of
December 31, 2018, the Index was comprised of 34 stocks which had an average market capitalization of $4.9 billion, median market capitalization of $2.7 billion, total market capitalizations ranging from $479.6 million to $24.1 billion and were
concentrated in companies in the natural gas industry, which is included in the energy sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors
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closely review all of
the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of
the performance of the Index. The table below is
intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the returns shown below as a result of any of the factors discussed above
or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 39.91%. The Index’s highest volatility rate for any one calendar year during the five-year period was 51.98% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was -30.40%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
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Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require
only a limited initial investment, the use of
derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such
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as swap agreements
and futures contracts, which will subject the Fund to additional risks that are different from those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to make timely
payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund,
the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are
delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also seek inverse or
“short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of the underlying
short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund may be
required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a
limited market due
to various factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it
cannot meet its investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or
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industries may be different from that of the Index.
In addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Emerging Markets Risk
—
Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers
located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market
shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies that concentrate in only a few industries, security issues
that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign nationals who have inside information. Additionally, emerging
markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed markets. Emerging markets often have greater risk of capital
controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large amounts of foreign trade and investment. Local securities markets
in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Settlement procedures in
emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency. Emerging markets
may develop unevenly and may never fully develop.
Energy Sector Risk
—
Companies that engage in energy-related businesses and companies primarily involved in the production and mining of
coal, development and production of oil, gas and consumable fuels and provide drilling and other energy resources production and distribution related services are subject to risks of legislative or regulatory changes, adverse market conditions
and/or increased competition affecting the energy sector. The prices of the securities of energy and energy services companies may fluctuate widely due to the supply and demand, exploration and production
spending, world events and economic conditions,
swift price and supply fluctuations, energy conservation, the success of exploration projects, liabilities for environmental damage and general civil liabilities and tax and other governmental regulatory policies and legislation. Weak demand for
energy companies’ products or services or for energy products and services in general, as well as negative developments in these other areas, including natural disaster and terrorist attacks, impact energy company securities.
Natural Gas Industry Risk
- The Fund will invest in, and/or have exposure to, securities issued by companies primarily involved in the natural gas industry. The profitability of companies engaged in the exploration and
production of natural gas may be adversely affected by changes in worldwide energy prices, exploration and production spending, government policies and regulation, economic conditions and world events. Natural gas companies also could be adversely
affected by commodity price volatility, changes in exchange rates, interest rates, imposition of import controls, increased competition, depletion of resources, development of alternative energy sources, technological developments and labor
relations and may have significant capital investments in, or engage in transactions involving, emerging market countries, which may heighten these risks. In addition, the natural gas companies must comply with a broad range of environmental laws
and regulations. Additional or more stringent environmental laws and regulations may be enacted in the future and such changes could have a material adverse effect on natural gas companies’ profitability. Finally, natural gas companies compete
with other fuel companies, such as coal and oil companies, which also may adversely affect the profitability of natural gas companies.
MLP Risk
—
Investments in common units of MLPs involve risks that differ from investments in common stock. Holders of MLP
common units are subject to certain risks inherent in the structure of MLPs, including (i) tax risks, (ii) risk related to limited control of management or the general partner or managing member, (iii) limited rights to vote on matters affecting the
MLP, except with respect to extraordinary transactions, (iv) conflicts of interest between the general partner or managing member and its affiliates, on the one hand, and the limited partners or members, on the other hand, including those arising
from incentive distribution payments or corporate opportunities, and (v) cash flow risks. MLP common units can be affected by macro-economic and other factors affecting the stock market in general, expectations of interest rates, investor sentiment
towards MLPs or the energy sector, changes in a particular issuer’s financial condition, or unfavorable or unanticipated poor performance of a particular issuer (in the case of MLPs, generally measured in terms of distributable cash flow).
Prices of common units of individual MLPs also can be affected by unique fundamentals, including cash flow growth, cash generating power and distribution coverage.
The Fund currently qualifies as, and
intends to continue to qualify as, a registered investment company under Subchapter M of the Internal Revenue Code of 1985, as amended (the “IRC”) and as such, may not invest more than 25% of its net assets in the securities of MLPs. If
the Fund exceeds this
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limitation, it may no longer qualify under the IRC
as a registered investment company and may be subject to taxation as a corporation instead of a registered investment company.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may be exposed to a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund
held a more diversified number of currencies.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the
NYSE Arca, Inc. is open, there are likely to be
deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be
greater than those experienced by other ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its
index.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total
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return may fluctuate more or fall greater in times of
weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they
trade, and the listing requirements may be amended from
time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
Total Return
for the Calendar Years Ended December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 186.34% for the quarter ended December 31, 2018 and its lowest calendar quarter return was -63.01% for the quarter ended March 31, 2016. The year-to-date return as
of December 31, 2018 was 125.71%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(12/3/2015)
|
Return
Before Taxes
|
125.71%
|
-30.11%
|
Return
After Taxes on Distributions
|
125.16%
|
-30.17%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
74.24%
|
-20.66%
|
ISE-Revere
Natural Gas Index
(reflects no deduction for fees, expenses or taxes)
|
-34.54%
|
-16.52%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.45%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax
returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares" is higher for
the since inception period because the calculation recognizes a capital loss upon the redemption of Fund shares.
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Trust Prospectus
|
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in December 2015
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception in December 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
International Securities Exchange,
LLC (“Licensor”) and the ISE-Revere Natural Gas Index
TM
are trademarks of Licensor and have been licensed for use for certain purposes by the
Trust. The Fund is not sponsored, endorsed, sold, or promoted by Licensor, and Licensor makes no representation regarding the advisability of trading in such products.
Direxion Shares
ETF Trust Prospectus
|
464
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
S&P Oil & Gas Exp. & Prod. Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a
result, the Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index (the
“Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index
for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index
may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.22%
|
Total
Annual Fund Operating Expenses
|
1.18%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.17%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$119
|
$374
|
$648
|
$1,431
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 119% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
465
|
Direxion Shares ETF
Trust Prospectus
|
reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is provided by Standard
& Poor’s (the “Index Provider”) and includes domestic companies from the oil and gas exploration and production sub-industry. The Index is designed to measure the performance of a sub-industry or group of sub-industries
determined based on the Global Industry Classification Standards (“GICS”). Companies in the Index are classified using the GICS classifications which are determined primarily based on a company’s revenues, however, earnings and
market perception are also considered by GICS. The Index consists of constituents of the S&P Total Market Index (“S&P TMI”) that belong to the GICS oil & gas exploration & production sub-industry that satisfy the
following criteria: (1) have a float-adjusted market capitalization above $300 million with a float-adjusted liquidity ratio (defined by dollar value traded over the previous 12 months divided by the float-adjusted market capitalization as of the
Index rebalancing reference date) above 50%; have a float-adjusted market capitalization above $500 million with a float-adjusted liquidity ratio above 90%; or have a float-adjusted market capitalization above $400 million with a float-adjusted
liquidity ratio above 150%; and (2) are U.S.-based companies. The market capitalization threshold may be relaxed to ensure that there are at least 22 stocks in the Index as of the rebalancing effective date. Rebalancing is done quarterly. The
S&P TMI tracks all U.S. common stocks listed on the New York Stock Exchange (including the NYSE Arca, Inc. and NYSE Amex), the NASDAQ Global Select Market, the NASDAQ Select Market and the NASDAQ Capital Market.
As of December 31, 2018, the Index
was comprised of 69 constituents, which had a median total market capitalization of $2 billion, total market capitalizations ranging from $273 million to $288.7 billion and were concentrated in the energy sector, the GICS sector in which the oil and
gas exploration and production industry was included.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group
of industries) to approximately the same extent as the
Index is so concentrated.
The
Fund may invest in the securities of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize
derivatives such as swaps on the Index, swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive
value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which
generally provides for less transparency than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over
Direxion Shares
ETF Trust Prospectus
|
466
|
the period, which
is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are leveraged and that rebalance daily. Particularly during periods
of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes more pronounced as Index volatility and the holding period
increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during shareholder’s holding period of an investment in the Fund. If
adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s investment had already been reduced by the prior
adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s
investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 34.92%. The Index’s highest volatility rate for any one calendar year during the five-year period was 41.30% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was -16.32%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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|
Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because
the Fund is leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on
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collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially
resulting in the Fund being over- or under-exposed
to the Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Energy Sector Risk
—
Companies that engage in energy-related businesses and companies primarily involved in the production and mining of
coal, development and production of oil, gas and consumable fuels and provide drilling and other energy resources production and distribution related services
are subject to risks of
legislative or regulatory changes, adverse market conditions and/or increased competition affecting the energy sector. The prices of the securities of energy and energy services companies may fluctuate widely due to the supply and demand,
exploration and production spending, world events and economic conditions, swift price and supply fluctuations, energy conservation, the success of exploration projects, liabilities for environmental damage and general civil liabilities and tax and
other governmental regulatory policies and legislation. Weak demand for energy companies’ products or services or for energy products and services in general, as well as negative developments in these other areas, including natural disaster
and terrorist attacks, impact energy company securities.
Oil and Gas Industry Risk
- The Fund will focus on investing in, and/or obtaining exposure to, the securities of companies in the oil and gas exploration and production industries. Companies in these industries develop and
produce crude oil and natural gas and provide drilling and other energy resources production and distribution related services. Stock prices for these types of companies are affected by supply and demand both for their specific product or services
and for energy products in general. The price of oil and gas, exploration and production spending, government regulation,
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world events and economic conditions will affect the
performance of these companies. Correspondingly, securities of companies in the energy field are subject to swift price and supply fluctuations caused by events relating to international politics, energy conservation, the success of exploration
products and tax and other governmental regulatory policies. Weak demand for the companies’ products or services or for energy products and services in general, as well as negative developments in these other areas, may adversely impact a
company’s performance. Oil and gas exploration and production can be significantly affected by natural disasters as well as changes in exchange rates, interest rates, government regulation, world events and economic conditions. These companies
may be at risk for environmental damages claims.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Micro-Capitalization Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition, micro-cap companies
often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or mid-capitalization. As
a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches of the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business
operations, potentially resulting in financial losses to the Fund. While the Fund has established business continuity plans and risk management systems seeking to address system
breaches or failures, these plans and systems are
inherently limited. Further, cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks,
are subject to market risks that may cause their
prices
to fluctuate over time.
Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
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Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market.
There can be no assurance that Shares will continue
to meet the listing requirements of the exchange on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
Total Return
for the Calendar Years Ended December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 70.44% for the quarter ended June 30, 2018 and its lowest calendar quarter return was -80.31% for the quarter ended December 31, 2018. The year-to-date return as of
December 31, 2018 was -74.27%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(5/28/2015)
|
Return
Before Taxes
|
-74.27%
|
-59.08%
|
Return
After Taxes on Distributions
|
-74.28%
|
-59.23%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-43.96%
|
-30.56%
|
S&P
Oil & Gas Exploration & Production Select Industry Index
(reflects no deduction for fees, expenses or taxes)
|
-28.02%
|
-14.93%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
6.90%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax
returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions
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and Sale of Fund Shares" is higher because the
calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in May 2015
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing
through a tax-deferred arrangement, such as a 401(k)
plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other ETFs.
Payments to Broker-Dealers and Other
Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may
create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
Index Information
The “S&P Oil & Gas
Exploration & Production Select Industry Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard & Poor’s
®
and S&P
®
are registered trademarks of
Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones Trademark Holdings LLC
(“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their
respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P Oil & Gas Exploration
& Production Select Industry Index.
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Direxion
Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
S&P Oil & Gas Exp. & Prod. Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As
a result, the Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the S&P Oil & Gas Exploration & Production Select Industry Index (the
“Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index
for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index
may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.23%
|
Acquired
Fund Fees and Expenses
(1)
|
0.12%
|
Total
Annual Fund Operating Expenses
|
1.10%
|
Expense
Cap/Reimbursement
(2)
|
-0.03%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.07%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$109
|
$347
|
$603
|
$1,338
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the
Fund’s net assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that
have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is
provided by Standard & Poor’s (the “Index Provider”) and includes domestic companies from the oil and gas exploration and production sub-industry. The Index is designed to measure the performance of a sub-industry or group of
sub-industries determined based on the Global Industry Classification Standards (“GICS”). Companies in the Index are classified using the GICS classifications which are determined primarily based on a company’s revenues, however,
earnings and market perception are also considered by GICS. The Index consists of constituents of the S&P Total Market Index (“S&P TMI”) that belong to the GICS oil & gas exploration & production sub-industry that satisfy
the following criteria: (1) have a float-adjusted market capitalization above $300 million with a float-adjusted liquidity ratio (defined by dollar value traded over the previous 12 months divided by the float-adjusted market capitalization as of
the Index rebalancing reference date) above 50%; have a float-adjusted market capitalization above $500 million with a float-adjusted liquidity ratio above 90%; or have a float-adjusted market capitalization above $400 million with a float-adjusted
liquidity ratio above 150%; and (2) are U.S.-based companies. The market capitalization threshold may be relaxed to ensure that there are at least 22 stocks in the Index as of the rebalancing effective date. Rebalancing is done quarterly. The
S&P TMI tracks all U.S. common stocks listed on the New York Stock Exchange (including the NYSE Arca, Inc. and NYSE Amex), the NASDAQ Global Select Market, the NASDAQ Select Market and the NASDAQ Capital Market.
As of December 31, 2018, the Index
was comprised of 69 constituents, which had a median total market capitalization of $2 billion, total market capitalizations ranging from $273 million to $288.7 billion and were concentrated in the energy sector, the GICS sector in which the oil and
gas exploration and production industry was included.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain inverse leveraged
exposure by investing in a combination of financial instruments, such as swaps
or futures
contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index,
or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index. Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds,
or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily.
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Particularly
during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes more pronounced as Index volatility and the holding
period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during shareholder’s holding period of an investment in the
Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s investment had already been reduced by
the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the
shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 34.92%. The Index’s highest volatility rate for any one calendar year during the five-year period was 41.30% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was -16.32%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus,
to the extent that the Fund invests in swaps that
use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any
financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive
Direxion Shares
ETF Trust Prospectus
|
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|
the full amount it
is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such
collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective.
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The Fund may take or refrain from taking positions
to improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Energy Sector Risk
—
Companies that engage in energy-related businesses and companies primarily involved in the production and mining of
coal, development and production of oil, gas and consumable fuels and provide drilling and other energy resources production and distribution related services
are subject to risks of
legislative or regulatory changes, adverse market conditions and/or increased competition affecting the energy sector. The prices of the securities of energy and energy services companies may fluctuate widely due to the supply and demand,
exploration and production spending, world events and economic conditions, swift price and supply fluctuations, energy conservation, the success of exploration projects, liabilities for environmental damage and general civil liabilities and tax and
other governmental regulatory policies and legislation. Weak demand for energy companies’ products or services or for energy products and services in general, as well as negative developments in these other areas, including natural disaster
and terrorist attacks, impact energy company securities.
Oil and Gas Industry Risk
- The Fund will focus on investing in, and/or obtaining exposure to, the securities of companies in the oil and gas exploration and production industries. Companies in these industries develop and
produce crude oil and natural gas and provide drilling and other energy resources production and distribution related services. Stock prices for these types of companies are affected by supply and demand both for their specific product or services
and for energy products in general. The price of oil and gas, exploration and production spending, government regulation, world events and economic conditions will affect the performance of these companies. Correspondingly, securities of companies
in the energy field are subject to swift price and supply fluctuations caused by events relating to international politics, energy conservation, the success of exploration products and tax and other governmental regulatory policies. Weak demand for
the companies’ products or services or for energy products and services in general, as well as negative developments in these other areas, may adversely impact a company’s performance. Oil and gas exploration and production can be
significantly affected by natural disasters as well as changes in exchange rates, interest rates, government regulation, world events and economic conditions. These companies may be at risk for environmental damages claims.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Micro-Capitalization Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition, micro-cap companies
often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or mid-capitalization. As
a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Direxion Shares
ETF Trust Prospectus
|
478
|
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience
the same investment results as experienced by those
creating and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants
are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to
trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
Total Return
for the Calendar Years Ended December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 224.17% for the quarter ended December 31, 2018 and its lowest calendar quarter return was -51.50% for the quarter ended June 30, 2018. The year-to-date return as
of December 31, 2018 was 49.10%.
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Trust Prospectus
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Average Annual Total
Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(5/28/2015)
|
Return
Before Taxes
|
49.10%
|
-25.08%
|
Return
After Taxes on Distributions
|
48.56%
|
-25.15%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
28.96%
|
-17.21%
|
S&P
Oil & Gas Exploration & Production Select Industry Index
(reflects no deduction for fees, expenses or taxes)
|
-28.02%
|
-14.93%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
6.90%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the since inception period because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in May 2015
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each
of which is comprised of 50,000 Shares. Retail
investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net
asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “S&P Oil & Gas
Exploration & Production Select Industry Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard & Poor’s
®
and S&P
®
are registered trademarks of
Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones Trademark Holdings LLC
(“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their
respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P Oil & Gas Exploration
& Production Select Industry Index.
Direxion Shares
ETF Trust Prospectus
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480
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Direxion
Daily Pharmaceutical & Medical Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Pharmaceutical & Medical Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund
may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the Dynamic Pharmaceutical Intellidex Index (the “Index”). This means that the return of the Fund for a
period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher
volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the
return of the Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
1.23%
|
Acquired
Fund Fees and Expenses
(1)
|
0.04%
|
Total
Annual Fund Operating Expenses
|
2.02%
|
Expense
Cap/Reimbursement
(2)
|
-1.03%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.99%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$101
|
$534
|
$993
|
$2,265
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. The Fund’s portfolio turnover rate was 152% of the average value of its portfolio for the fiscal
period from the Fund’s inception on November 15, 2017 through October 31, 2018. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of
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Trust Prospectus
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derivatives was reflected, the Fund's portfolio
turnover rate would be significantly higher.
Principal Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index consists of common shares
of companies that are principally engaged in research, development, manufacture, sale or distribution of pharmaceuticals and drugs of all types. The Index may include pharmaceutical companies and other companies that facilitate the testing or
regulatory approval of drugs. NYSE Arca, Inc. (the “Index Provider”) begins with the 2,000 largest companies listed on both the NYSE, NYSE American and NASDAQ exchanges and then uses a proprietary model that ranks the stocks for capital
appreciation potential. The Index Provider then divides the companies into two market capitalization groups, larger and smaller. The Index Provider then identifies a specified number of companies from each group for inclusion in the Index. The
larger market capitalization companies will represent 40% of the Index and the smaller market capitalization companies will represent 60% of the Index when the Index is rebalanced.
As of December 31, 2018, the Index
was comprised of 30 constituents, which had an average market capitalization of $58.1 billion, market capitalizations ranging from $740.1 million to $346.1 billion and were concentrated in the pharmaceutical and biotechnology industries, which are
included in the healthcare sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest
rates or indexes. Certain of the derivative
instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily
Direxion Shares
ETF Trust Prospectus
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482
|
performance of the Index reduces the amount of a
shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily
performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 19.96%. The Index’s highest volatility rate for any one calendar year during the five-year period was 23.66% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 6.01%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Trust Prospectus
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because
the Fund is leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on
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ETF Trust Prospectus
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collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially
resulting in the Fund being over- or under-exposed
to the Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Biotechnology Industry Risk
- Companies within the biotech industry invest heavily in research and development, which may not lead to commercially successful products. The biotech industry is also subject to significant
governmental regulation, which may delay or inhibit the release of new products. Many biotech companies are dependent upon their ability to use and enforce intellectual property rights and patents. Any impairment or expiration of such rights may
have adverse financial consequences for these companies. Biotech stocks, especially those of smaller, less-seasoned companies, tend to be more volatile than the overall market. Biotech companies can be significantly affected by technological change
and obsolescence, product liability lawsuits and consequential high insurance costs.
Healthcare Sector Risk
—
The profitability of companies in the healthcare sector may be affected by extensive, costly and uncertain government
regulation, restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient services, limited number of products, industry innovation, changes in
technologies and other market developments. Many healthcare companies are heavily dependent on patent protection. The expiration of patents may adversely affect the profitability of these companies. Many healthcare companies are subject to extensive
litigation based on product liability and similar claims. Healthcare companies are subject to competitive forces that may make it difficult to raise prices and, in fact, may result in price discounting. Many new products in the
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healthcare sector may be subject to regulatory
approvals. The process of obtaining such approvals may be long and costly with no guarantee that any product will come to market.
Pharmaceutical Industry Risk
- The profitability of these companies is highly dependent on the development, procurement and marketing of drugs and the development, protection and exploitation of intellectual property rights and
other proprietary information. These companies may be significantly affected by the expiration of patents or the loss of, or the inability to enforce, intellectual property rights. Research and other costs associated with developing or procuring new
drugs and the related intellectual property rights can be significant and may not be successful. Many pharmaceutical companies face intense competition from new products and less costly generic products, which may make it difficult to raise the
prices of their products and may result in price discounting. In addition, the process for obtaining regulatory approval from the U.S. Food and Drug Administration or other governmental regulatory authorities is long and costly and there is no
assurance that the necessary approvals will be obtained or maintained by these companies.
These companies may be adversely
affected by government regulation and changes in reimbursement rates from third-party payors, such as Medicare, Medicaid and other government-sponsored programs, private health insurance plans and health maintenance organizations. The profitability
of these companies may be dependent on a relatively limited number of products. Additionally, their products can become obsolete due to industry innovation, changes in technologies or other market developments.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price.
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Repurchase agreements may be subject to market and
credit risk related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain
a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
During the period of time shown in
the bar chart, the Fund’s highest calendar quarter return was 28.69% for the quarter ended September 30, 2018 and its lowest calendar quarter return was -41.33% for the quarter ended December 31, 2018. The year-to-date return as of December
31, 2018 was -19.57%.
Average Annual
Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(11/15/17)
|
Return
Before Taxes
|
-19.57%
|
-11.72%
|
Return
After Taxes on Distributions
|
-19.74%
|
-11.90%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-11.49%
|
-8.91%
|
Dynamic
Pharmaceutical Intellidex Index
(reflects no deduction for fees, expenses or taxes)
|
-1.01%
|
1.78%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
-0.54%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ
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from those shown, and after-tax returns are not
relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares" is higher because the
calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in November 2017
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception in November 2017
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily Pharmaceutical & Medical Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Pharmaceutical & Medical Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result,
the Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the Dynamic Pharmaceutical Intellidex Index (the “Index”). This means that the return of
the Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding
periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or
more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.11%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the Fund’s net
assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity
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of less than 397 days and exhibit high quality
credit profiles, including U.S. government securities and repurchase agreements.
The Index consists
of common shares of companies that are principally engaged in research, development, manufacture, sale or distribution of pharmaceuticals and drugs of all types. The Index may include pharmaceutical companies and other companies that facilitate the
testing or regulatory approval of drugs. NYSE Arca, Inc. (the “Index Provider”) begins with the 2,000 largest companies listed on both the NYSE, NYSE American and NASDAQ exchanges and then uses a proprietary model that ranks the stocks
for capital appreciation potential. The Index Provider then divides the companies into two market capitalization groups, larger and smaller. The Index Provider then identifies a specified number of companies from each group for inclusion in the
Index. The larger market capitalization companies will represent 40% of the Index and the smaller market capitalization companies will represent 60% of the Index when the Index is rebalanced.
As of December 31, 2018, the Index
was comprised of 30 constituents, which had an average market capitalization of $58.1 billion, market capitalizations ranging from $740.1 million to $346.1 billion and were concentrated in the pharmaceutical and biotechnology industries, which are
included in the healthcare sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if
the Index has risen on a given day, net assets of
the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period
from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid
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with respect to securities in the Index. The chart
below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no
dividends were paid with respect to the securities included in the Index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were
reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 19.96%. The Index’s highest volatility rate for any one calendar year during the five-year period was 23.66% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 6.01%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity
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for all market participants' trades. Therefore, the
Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the Index. Additionally, because the Fund is leveraged, a minor increase in the
value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest
in other derivatives to achieve exposure consistent
with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions,
netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional
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investments.
Shareholders should lose money when the Index rises, which is a result that is the opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may
enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or index declines. When the Fund shorts securities, including securities of another investment company, it borrows
shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close
to purchases and sales of Shares prior to the close of
regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Biotechnology Industry Risk
- Companies within the biotech industry invest heavily in research and development, which may not lead to commercially successful products. The biotech industry is also subject to significant
governmental regulation, which may delay or inhibit the release of new products. Many biotech companies are dependent upon their ability to use and enforce intellectual property rights and patents. Any impairment or expiration of such rights may
have adverse financial consequences for these companies. Biotech stocks, especially those of smaller, less-seasoned companies, tend to be more volatile than the overall market. Biotech companies can be significantly affected by technological change
and obsolescence, product liability lawsuits and consequential high insurance costs.
Healthcare Sector Risk
—
The profitability of companies in the healthcare sector may be affected by extensive, costly and uncertain government
regulation, restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient services, limited number of products, industry innovation, changes in
technologies and other market developments. Many healthcare companies
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are heavily dependent on patent protection. The
expiration of patents may adversely affect the profitability of these companies. Many healthcare companies are subject to extensive litigation based on product liability and similar claims. Healthcare companies are subject to competitive forces that
may make it difficult to raise prices and, in fact, may result in price discounting. Many new products in the healthcare sector may be subject to regulatory approvals. The process of obtaining such approvals may be long and costly with no guarantee
that any product will come to market.
Pharmaceutical Industry Risk
- The profitability of these companies is highly dependent on the development, procurement and marketing of drugs and the development, protection and exploitation of intellectual property rights and
other proprietary information. These companies may be significantly affected by the expiration of patents or the loss of, or the inability to enforce, intellectual property rights. Research and other costs associated with developing or procuring new
drugs and the related intellectual property rights can be significant and may not be successful. Many pharmaceutical companies face intense competition from new products and less costly generic products, which may make it difficult to raise the
prices of their products and may result in price discounting. In addition, the process for obtaining regulatory approval from the U.S. Food and Drug Administration or other governmental regulatory authorities is long and costly and there is no
assurance that the necessary approvals will be obtained or maintained by these companies.
These companies may be adversely
affected by government regulation and changes in reimbursement rates from third-party payors, such as Medicare, Medicaid and other government-sponsored programs, private health insurance plans and health maintenance organizations. The profitability
of these companies may be dependent on a relatively limited number of products. Additionally, their products can become obsolete due to industry innovation, changes in technologies or other market developments.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger
companies. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure, which could increase
the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be
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subject to credit risk with respect to the
short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial institution in which the depository account is held. Repurchase agreements are contracts in which a seller of
securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit
risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists,
market makers, Authorized Participants, or other
participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be
subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
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Payments to Broker-Dealers and Other
Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may
create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
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Direxion
Daily Preferred Stock Bull 3X Shares
Important Information
Regarding the Fund
The
Direxion Daily Preferred Stock Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the
Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the Indxx US High Yield, Low Volatility Preferred Stock Index (the “Index”). This means that the
return of the Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer
holding periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much
as, or more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage and are willing to
monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will lose money if
the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.11%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other financial
instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically
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leveraged investment results. On a day-to-day basis,
the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit
profiles, including U.S. government securities and repurchase agreements.
The Index is designed to measure the
performance of the preferred stocks listed on United States stock exchanges that have the highest yielding dividends and lowest volatility as determined by Indxx (the “Index Provider”). The Index ranks each security in the Indxx US
Preferred Stock Index based on the security’s dividend and volatility. The 50 securities with the highest dividend rankings and the lowest volatility are included in the Index. As of the date of this Prospectus, the Index had not commenced
operations.
The components of
the Index and the percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more
of its total assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s
returns compounded over the period, which will very
likely differ from 300% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is
even possible that the Fund will lose money over time while the Index's performance increases.
Principal Investment Risks
An investment in the Fund entails
risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not traditionally
associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses
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and/or actual borrowing/lending rates were reflected,
the estimated returns would be different than those shown.
As shown in the chart below, the Fund
would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss of value in the Fund,
even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas shaded red (or dark gray)
represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return more than 300% of the
performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the returns shown below as a
result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index
had not commenced operations as of the date of this Prospectus and therefore historical Index volatility and performance are not yet available. In the future, historical Index volatility and performance will be presented in this section. Historical
Index volatility and performance are not indications of what the Index volatility and performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index such as swaps, may differ from the volatility of the
Index.
For information regarding
the effects of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note
Regarding the Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will
be magnified. This means that an investment in the
Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose an amount
greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference
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assets and the derivative, which may prevent the
Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
|
If the Index has a
dramatic move that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event,
the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even
if the Index later reverses all or a portion of its movement.
|
•
|
Futures
Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an
imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a
closing transaction. Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly
volatile and the use of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts, which will subject the Fund to additional risks that are different from those
associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the
agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment
held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its
leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions
adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement.
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Because of this, it is unlikely that the Fund will
be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory
restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Preferred Stock Risk
—
A preferred stock has characteristics of a bond and a common stock. It may offer the higher yield of a bond and has
priority over common stock in the receipt of dividends or in any residual assets after payment to creditors should the issuer be dissolved. However, it does not have the same seniority as a bond and, unlike common stock, its participation in the
issuer’s growth may be limited. Preferred stock is subject to many of the risks associated with debt instruments, including interest rate risk. As interest rates rise, the value of preferred stocks is likely to decline.
In addition, preferred stocks may not pay a
dividend; an issuer may suspend payment of dividends on preferred stocks, may call or redeem its preferred stock, or convert it to common stock at any time.
Small- and/or Mid-Capitalization Company
Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial
resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant institutional ownership and
are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure, which could increase
the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches of the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business
operations, potentially resulting in financial losses to the Fund. While the Fund has established business continuity plans and risk management systems seeking to address system breaches or failures, these plans and systems are inherently limited.
Further, cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary
income
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when distributed to them). The Fund calculates
portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of derivative instruments were reflected, the
calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will fluctuate in
response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the
secondary market may trade Shares at a price greater
than net asset value (a premium) or less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in
creation units, the Adviser believes that large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s
investment results are measured based upon the daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating
and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are
unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading
halts and/or delisting.
Trading
Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market
volatility or other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of
the exchange on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a
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national securities exchange through a broker-dealer
and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily MSCI Real Estate Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
MSCI Real Estate Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be
riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the MSCI US REIT Index
SM
(the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the
Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the
Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage and are willing to
monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will lose money if
the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.23%
|
Acquired
Fund Fees and Expenses
(1)
|
0.09%
|
Total
Annual Fund Operating Expenses
|
1.07%
|
Expense
Cap/Reimbursement
(2)
|
-0.03%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.04%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$106
|
$337
|
$587
|
$1,303
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 149% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is a free float-adjusted
market capitalization weighted index that is comprised of equity real estate investment trusts (“REITs”) that are included in the MSCI USA Investable Market Index, with the exception of specialty equity REITs that do not generate a
majority of their revenue and income from real estate rental and leasing operations. The Index represents approximately 99% of the U.S. REIT universe.
As of December 31, 2018, the Index
was comprised of 153 constituents which had an average market capitalization of $5.1 billion, total market capitalizations ranging from $261.2 million to $51.9 billion and were concentrated in the real estate sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets
each trading day, Rafferty positions the
Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For
example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the
Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period from the close of the
markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
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The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 14.46%. The Index’s highest volatility rate for any one calendar year during the five-year period was 16.98% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended
December 31, 2018 was 7.80%. Historical Index
volatility and performance are not indications of what the Index volatility and performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the
Index.
For information
regarding the effects of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special
Note Regarding the Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced
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to sell the security at a loss. Such a situation may
prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the
Fund from achieving its leveraged investment
objective, even if the Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure.
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Conversely, if the
Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may experience performance that is greater than, or less than, the Fund’s stated
multiple of the Index.
If there
is a significant intra-day market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and
sales of Shares prior to the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as
expected, thus affecting the Fund’s
performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges, their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and
other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the
Fund’s performance.
Real Estate Sector Risk
- The Fund will focus its investments in, and/or have exposure to, securities issued by commercial and residential real estate companies. Real estate securities are subject to risks similar to those
associated with direct ownership of real estate, including changes in local and general economic conditions, vacancy rates, interest rates, zoning laws, rental income, property taxes, operating expenses and losses from casualty or condemnation. An
investment in a real estate investment trust is subject to additional risks, including poor performance by the manager of the real estate investment trust, adverse tax consequences, and limited diversification resulting from being invested in a
limited number or type of properties or a narrow geographic area.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Micro-Capitalization Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition, micro-cap companies
often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or mid-capitalization. As
a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting
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in more volatile performance. These companies may
face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution
in which the depository account is held. Repurchase
agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk related to the collateral securing the repurchase agreement.
Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the
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resulting premium or discount on the Fund’s
Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 46.87% for the quarter ended December 31, 2014 and its lowest calendar quarter return was -46.11% for the quarter ended September 30, 2011. The year-to-date return
as of December 31, 2018 was -25.02%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(7/16/2009)
|
Return
Before Taxes
|
-25.02%
|
12.78%
|
28.48%
|
Return
After Taxes on Distributions
|
-25.40%
|
12.62%
|
27.76%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-14.48%
|
10.27%
|
24.76%
|
MSCI
US REIT Index
(reflects no deduction for fees, expenses or taxes)
|
-4.57%
|
7.80%
|
14.46%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
13.35%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the one-year period because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in July 2009
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing
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through a tax-deferred arrangement, such as a 401(k)
plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other ETFs.
Payments to Broker-Dealers and Other
Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may
create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
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Direxion
Daily MSCI Real Estate Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
MSCI Real Estate Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may
be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the MSCI US REIT
Index
SM
(the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading
day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of
compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest
for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of leverage and
shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day,
the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment within a
single day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to
achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.57%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.47%
|
Expense
Cap/Reimbursement
(2)
|
-0.37%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$112
|
$428
|
$768
|
$1,726
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the
Fund’s net assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that
have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is a
free float-adjusted market capitalization weighted index that is comprised of equity real estate investment trusts (“REITs”) that are included in the MSCI USA Investable Market Index, with the exception of specialty equity REITs that do
not generate a majority of their revenue and income from real estate rental and leasing operations. The Index represents approximately 99% of the U.S. REIT universe.
As of December 31, 2018, the Index
was comprised of 153 constituents which had an average market capitalization of $5.1 billion, total market capitalizations ranging from $261.2 million to $51.9 billion and were concentrated in the real estate sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the
day will affect whether the Fund’s portfolio
needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has risen on a given day, net assets of
the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period
from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated
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given any set of assumptions for the following
factors: a) Index volatility; b) Index performance; c) period of time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below
illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated Fund returns for a number of combinations of Index volatility and Index performance over a one-year period.
Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund
expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 14.46%. The Index’s highest volatility rate for any one calendar year during the five-year period was 16.98% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 7.80%. Historical Index volatility and performance are not indications of what the Index
volatility and performance will be in the future.
The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many
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market participants that are attempting to transact
in the securities of the Index. Under such circumstances, the market for investments of the Index may lack sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or
financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial
adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may
permit the counterparty to immediately close out the
swap transaction with the Fund. In that event, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from
achieving its inverse leveraged investment objective, even if the Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions,
netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most
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assets are expected to rise in value and short
positions are expected to depreciate in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises,
which is a result that is the opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular
security, basket of securities or index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by
purchasing the security that it has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the
Fund may not meet its investment objective or
rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Real Estate Sector Risk
- The Fund will focus its investments in, and/or have exposure to, securities issued by commercial and residential real estate companies. Real estate securities are subject to risks similar to those
associated with direct ownership of real estate, including changes in local and general economic conditions, vacancy rates, interest rates, zoning laws, rental income, property taxes, operating expenses and losses from casualty or condemnation. An
investment in a real estate investment trust is subject to additional risks, including poor performance by the manager of the real estate investment trust, adverse tax consequences, and limited diversification resulting from being invested in a
limited number or type of properties or a narrow geographic area.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by
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well-managed smaller and mid-size companies, which
may affect the companies’ returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Micro-Capitalization Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition, micro-cap companies
often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or mid-capitalization. As
a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained.
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There may,
however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in
the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To the
extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount
on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 33.44% for the quarter ended June 30, 2015 and its lowest calendar quarter return was -46.73% for the quarter ended December 31, 2011. The year-to-date return as of
December 31, 2018 was 4.97%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(7/16/2009)
|
Return
Before Taxes
|
4.97%
|
-29.77%
|
-48.60%
|
Return
After Taxes on Distributions
|
4.77%
|
-29.79%
|
-48.61%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
2.93%
|
-18.12%
|
-14.02%
|
MSCI
US REIT Index
(reflects no deduction for fees, expenses or taxes)
|
-4.57%
|
7.80%
|
14.46%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
13.35%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the five-year and since inception periods because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in July 2009
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or
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investments made through tax-deferred arrangements
may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other ETFs.
Payments to Broker-Dealers and Other
Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may
create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
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Direxion
Daily Regional Banks Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Regional Banks Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be
riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the S&P Regional Banks Select Industry Index (the “Index”). This means that the return of the Fund for a
period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher
volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the
return of the Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.22%
|
Acquired
Fund Fees and Expenses
(1)
|
0.05%
|
Total
Annual Fund Operating Expenses
|
1.02%
|
Expense
Cap/Reimbursement
(2)
|
-0.02%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.00%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$102
|
$323
|
$561
|
$1,246
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 76% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is a modified
equal-weighted index that is designed to measure performance of the stocks comprising the S&P Total Market Index that are classified in the Global Industry Classification Standard (GICS) regional banks sub-industry. To be eligible for inclusion
in the Index, stocks must satisfy one of the following combined size and liquidity criteria: (1) have a float-adjusted market capitalization above $300 million with a float-adjusted liquidity ratio (defined by dollar value traded over the previous
12 months divided by the float-adjusted market capitalization as of the Index rebalancing reference date) above 50%; (2) have a float-adjusted market capitalization above $500 million with a float-adjusted liquidity ratio above 90%; or (3) have a
float-adjusted market capitalization above $400 million with a float-adjusted liquidity ratio above 150%. The Index is rebalanced quarterly.
As of December 31, 2018, the Index
had 128 constituents with a median total market capitalization of $2 billion, total market capitalizations ranging from $383 million to $53.9 billion and were concentrated in the financials sector which includes the banking industry.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in
which the Fund may invest may be traded in the
over-the-counter market, which generally provides for less transparency than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a
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shareholder’s investment, any further adverse
daily performance will lead to a smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a
shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 21.27%. The Index’s highest volatility rate for any one calendar year during the five-year period was 25.79% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 5.08%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because
the Fund is leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on
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collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially
resulting in the Fund being over- or under-exposed
to the Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Banking Industry Risk
–
The Fund may invest in, and/or have exposure to, the
banking industry. Companies within the banking industry can be significantly affected by extensive governmental regulation, which may limit both the amounts and types of loans and other financial commitments they can make and the interest rates and
fees they can charge and amount of capital they must maintain. Profitability is largely dependent on the availability and cost of capital funds and can fluctuate significantly when interest rates change. Credit losses resulting from financial
difficulties of borrowers can negatively impact the sector. Banks may also be subject to severe price competition. These risks can be exacerbated if a particular region in which a bank operates experiences economic decline. The regional banking
industry is highly competitive and thus, failure to maintain or increase market share may result in regional bank failures or mergers with larger, or multi-national banks.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices
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|
they can charge, the amount of capital they must
maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for financial companies, including effects that are not intended by such regulation. The impact of more stringent
capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience
technology malfunctions and disruptions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks,
are subject to market risks that may cause their
prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
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Authorized Participants Concentration
Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are unable to
process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments that have
lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available
on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
The performance
shown prior to December 1, 2016 reflects the Fund’s previous daily leveraged investment objective, before fees and expenses, of 300% of the Solactive US Regional Bank Index. After December 1, 2016, the Fund began to seek a daily leveraged
investment objective, before fees and expenses, of 300% of the S&P Regional Banks Select Industry Index. If the Fund had continued to seek its previous investment objective, the calendar year performance of the Fund would have varied from that
shown.
Total Return for the
Calendar Years Ended December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 103.62% for the quarter ended December 31, 2016 and its lowest calendar quarter return was -53.74% for the quarter ended December 31, 2018. The year-to-date return
as of December 31, 2018 was -56.21%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(8/19/2015)
|
Return
Before Taxes
|
-56.21%
|
-6.53%
|
Return
After Taxes on Distributions
|
-56.39%
|
-6.67%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-33.13%
|
-4.83%
|
S&P
Regional Banks Select Industry Index
(reflects no deduction for fees, expenses or taxes)
|
-18.77%
|
4.46%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
7.64%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
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|
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|
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in August 2015
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “S&P Regional Banks
Select Industry Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard & Poor’s
®
and S&P
®
are registered trademarks of
Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones Trademark Holdings LLC
(“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their
respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P Regional Banks Select
Industry Index.
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Direxion
Daily Regional Banks Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Regional Banks Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may
be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the S&P Regional Banks Select Industry Index (the “Index”). This means that the return of the
Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding
periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or
more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
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0.75%
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Distribution
and/or Service (12b-1) Fees
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0.00%
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Other
Expenses of the Fund
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1.02%
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Acquired
Fund Fees and Expenses
(1)
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0.12%
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Total
Annual Fund Operating Expenses
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1.89%
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Expense
Cap/Reimbursement
(2)
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-0.82%
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Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
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1.07%
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(1)
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"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
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(2)
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Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
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Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
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Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
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3
Years
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5
Years
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10
Years
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$109
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$514
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$945
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$2,145
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Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the
Fund’s net assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that
have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is a
modified equal-weighted index that is designed to measure performance of the stocks comprising the S&P Total Market Index that are classified in the Global Industry Classification Standard (GICS) regional banks sub-industry. To be eligible for
inclusion in the Index, stocks must satisfy one of the following combined size and liquidity criteria: (1) have a float-adjusted market capitalization above $300 million with a float-adjusted liquidity ratio (defined by dollar value traded over the
previous 12 months divided by the float-adjusted market capitalization as of the Index rebalancing reference date) above 50%; (2) have a float-adjusted market capitalization above $500 million with a float-adjusted liquidity ratio above 90%; or (3)
have a float-adjusted market capitalization above $400 million with a float-adjusted liquidity ratio above 150%. The Index is rebalanced quarterly.
As of December 31, 2018, the Index
had 128 constituents with a median total market capitalization of $2 billion, total market capitalizations ranging from $383 million to $53.9 billion and were concentrated in the financials sector which includes the banking industry.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because
the
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shareholder’s investment had already been
reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the
shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
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-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
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-60%
|
180%
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1371.5%
|
973.9%
|
248.6%
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-46.5%
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-96.1%
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-50%
|
150%
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653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
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3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
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-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 21.27%. The Index’s highest volatility rate for any one calendar year during the five-year period was 25.79% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 5.08%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus,
to the extent that the Fund invests in swaps that
use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any
financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
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Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
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If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
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Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
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Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive
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the full amount it
is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such
collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective.
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The Fund may take or refrain from taking positions
to improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Banking Industry Risk
–
The Fund may invest in, and/or have exposure to, the
banking industry. Companies within the banking industry can be significantly affected by extensive governmental regulation, which may limit both the amounts and types of loans and other financial commitments they can make and the interest rates and
fees they can charge and amount of capital they must maintain. Profitability is largely dependent on the availability and cost of capital funds and can fluctuate significantly when interest rates change. Credit losses resulting from financial
difficulties of borrowers can negatively impact the sector. Banks may also be subject to severe price competition. These risks can be exacerbated if a particular region in which a bank operates experiences economic decline. The regional banking
industry is highly competitive and thus, failure to maintain or increase market share may result in regional bank failures or mergers with larger, or multi-national banks.
Financials Sector Risk
—
Performance of companies in the financials sector may be materially impacted by many factors, including but not limited
to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is largely dependent on the availability and cost of capital and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which
may adversely impact the scope of their activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for
financial companies, including effects that are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector
as a whole cannot be predicted. The financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these
stocks are not well-known to the investing public,
do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger
companies. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of
business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
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Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market.
There can be no assurance that Shares will continue
to meet the listing requirements of the exchange on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
The performance
shown prior to December 1, 2016 reflects the Fund’s previous daily inverse leveraged investment objective, before fees and expenses, of -300% of the Solactive US Regional Bank Index. After December 1, 2016, the Fund began to seek a daily
inverse leveraged investment objective, before fees and expenses, of -300% of the S&P Regional Banks Select Industry Index. If the Fund had continued to seek its previous investment objective, the calendar year performance of the Fund would have
varied from that shown.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 82.70% for the quarter ended December 31, 2018 and its lowest calendar quarter return was -56.73% for the quarter ended December 31, 2016. The year-to-date return
as of December 31, 2018 was 53.82%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(8/19/2015)
|
Return
Before Taxes
|
53.82%
|
-33.76%
|
Return
After Taxes on Distributions
|
53.48%
|
-34.22%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
31.77%
|
-22.15%
|
S&P
Regional Banks Select Industry Index
(reflects no deduction for fees, expenses or taxes)
|
-18.77%
|
4.46%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
7.64%
|
Direxion Shares
ETF Trust Prospectus
|
534
|
After-tax returns
are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown,
and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares"
is higher for the since inception period because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in August 2015
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those
distributions will be subject to federal income tax
and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be
taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other ETFs.
Payments to Broker-Dealers and Other
Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may
create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
Index Information
The “S&P Regional Banks
Select Industry Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard & Poor’s
®
and S&P
®
are registered trademarks of
Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones Trademark Holdings LLC
(“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their
respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P Regional Banks Select
Industry Index.
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|
Direxion
Daily Retail Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Retail Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier than
alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the S&P Retail Select Industry Index (the “Index”). This means that the return of the Fund for a period longer than a
trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the
Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.26%
|
Acquired
Fund Fees and Expenses
(1)
|
0.04%
|
Total
Annual Fund Operating Expenses
|
1.05%
|
Expense
Cap/Reimbursement
(2)
|
-0.06%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.99%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$101
|
$328
|
$574
|
$1,277
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 81% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
Direxion Shares
ETF Trust Prospectus
|
536
|
reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is a modified
equal-weighted index that is designed to measure performance of the stocks comprising the S&P Total Market Index that are classified in the Global Industry Classification Standard (GICS) retail sub-industry. To be eligible for inclusion in the
Index, stocks must satisfy one of the following combined size and liquidity criteria: (1) have a float-adjusted market capitalization above $300 million with a float-adjusted liquidity ratio (defined by dollar value traded over the previous 12
months divided by the float-adjusted market capitalization as of the Index rebalancing reference date) above 50%; (2) have a float-adjusted market capitalization above $500 million with a float-adjusted liquidity ratio above 90%; or (3) have a
float-adjusted market capitalization above $400 million with a float-adjusted liquidity ratio above 150%. The Index is rebalanced quarterly.
As of December 31, 2018, the Index
had 95 constituents with a median total market capitalization of $2.1 billion, total market capitalizations ranging from $326 million to $735.4 billion and were concentrated in the retail industry, which is included in the consumer discretionary
sector.
The components
of the Index and the percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or
more of its total assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-
counter market, which generally provides for less
transparency than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily
537
|
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Trust Prospectus
|
performance will lead to a smaller dollar loss
because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due
to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 18.06%. The Index’s highest volatility rate for any one calendar year during the five-year period was 20.76% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was -0.03%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because
the Fund is leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on
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collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially
resulting in the Fund being over- or under-exposed
to the Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Consumer Discretionary Sector Risk
—
Because companies in the consumer discretionary sector manufacture products and provide discretionary services directly
to the consumer, the success of these companies is tied closely to the performance of the overall domestic and international economy, interest rates, competition and consumer confidence. Success depends heavily on disposable household income and
consumer spending. Also, companies in the consumer discretionary sector may be subject to severe competition, which may have an adverse impact on a company’s profitability. Changes in demographics and consumer tastes also can affect the demand
for, and success of, consumer discretionary products in the marketplace.
Retail Industry Risk
- The Fund invests in, and/or has exposure to, the securities of companies in the retail industry. Retail and related industries can be significantly affected by the performance of the domestic and
international economy, consumer confidence and spending, intense competition, changes in demographics, and changing consumer tastes and preferences. In addition, the retailing industry is highly competitive and a company’s success can be tied
to its ability to anticipate changing consumer tastes.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by
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well-managed smaller and mid-size companies, which
may affect the companies’ returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or Mid-Capitalization Company
Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial
resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant institutional ownership and
are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure, which could increase
the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary
income
when distributed to them). The Fund calculates
portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of derivative instruments were reflected, the
calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will fluctuate in
response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the
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secondary market
may trade Shares at a price greater than net asset value (a premium) or less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares
can be created and redeemed in creation units, the Adviser believes that large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary
significantly. The Fund’s investment results are measured based upon the daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as
experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or
other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly
be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
Performance prior to December 1,
2011 reflects the Fund’s previous investment objective where it sought daily investment results, before fees and expenses, of 200% of the performance of the Russell 1000
®
Retail Index. If the Fund had continued to seek its previous investment objective, the calendar year performance of the Fund would have varied from
that shown.
Additionally, the
performance shown from December 1, 2011 to December 1, 2016 reflects the Fund’s previous daily leveraged investment objective, before fees and expenses, of 300% of the Russell 1000
®
Retail Index. After December 1, 2016, the Fund began to seek a daily leveraged
investment objective, before fees and expenses, of
300% of the S&P Retail Select Industry Index. If the Fund had continued to seek its previous investment objective, the calendar year performance of the Fund would have varied from that shown.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 49.52% for the quarter ended March 31, 2012 and its lowest calendar quarter return was -51.36% for the quarter ended December 31, 2018. The year-to-date return as
of December 31, 2018 was -35.02%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(7/14/2010)
|
Return
Before Taxes
|
-35.02%
|
3.72%
|
28.01%
|
Return
After Taxes on Distributions
|
-35.22%
|
3.47%
|
27.32%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-20.65%
|
2.84%
|
24.10%
|
S&P
Retail Select Industry Index
(reflects no deduction for fees, expenses or taxes)
|
-7.88%
|
-0.03%
|
11.20%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
12.60%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax
returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares" is higher for
the one-year period because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
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|
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in July 2010
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “S&P Retail Select
Industry Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard & Poor’s
®
and S&P
®
are registered trademarks of
Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones Trademark Holdings LLC
(“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their
respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P Retail Select Industry
Index.
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Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
Important Information
Regarding the Fund
The
Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other
exchange-traded funds. As a result, the Fund may be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the Indxx Global Robotics and Artificial Intelligence Thematic Index
(the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the
Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the
Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not suitable for all
investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage and are willing to
monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund will lose money if
the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
1.59%
|
Acquired
Fund Fees and Expenses
(1)
|
0.54%
|
Total
Annual Fund Operating Expenses
|
2.88%
|
Expense
Cap/Reimbursement
(2)
|
-1.39%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.49%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$152
|
$761
|
$1,396
|
$3,105
|
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. The Fund’s portfolio turnover rate was 75% of the average value of its portfolio for the fiscal
period from the Fund’s inception on April 19, 2018 through October 31, 2018. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives
was
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|
reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is designed to provide
exposure to exchange-listed companies in developed markets that are expected to benefit from the adoption and utilization of robotics and/or artificial intelligence, including companies involved in developing industrial robots and production
systems, automated inventory management, unmanned vehicles, voice/image/text recognition, and medical robots or robotic instruments (collectively, “Robotics & Artificial Intelligence Companies”), as defined by Indxx (the “Index
Provider”). Companies must have a minimum market capitalization of $100 million and a minimum average daily turnover for the last 6 months greater than, or equal to, $2 million in order to be eligible for inclusion in the Index. From the
eligible universe, the Index Provider identifies Robotics & Artificial Intelligence Companies that generate revenue from four robotics and artificial intelligence market segments (“Segments”): (1) industrial applications of robots
and robotic products and services, (2) developing and/or producing unmanned vehicles, drones and robots for both military and consumer applications, including hardware and software therefor, (3) developing robots and artificial intelligence for
non-industrial applications, such as agriculture, healthcare consumer applications, and entertainment, and (4) developing applications, technologies, and products that use artificial intelligence for data analysis, predictive analytics, task
automation, and other applications.
For the second step of the process,
companies are grouped into the following three categories based on revenue: (i) ”Pure-Play”-the company generates a majority of its revenue (over 50%) from one of the Segments, (ii) “Quasi-Play”-the Company has a diversified
revenue stream but generates at least 10% (but less than 50%) of its revenue from the Segments, and (iii) “Marginal”-the Company has a diversified revenue stream but generates between 1-10% of its revenue from a distinct business unit in
the Segments.
Finally, the top
100 “pure-play” companies by market capitalization are selected to form the Index. If fewer than 100 “pure-play” companies are eligible for inclusion, the Index will include “quasi-play” companies. If fewer than
30 companies meet the above criteria of “pure-play” and
“quasi-play,” “marginal”
company securities will be included in the Index so the number of constituents of the Index reaches 30.
The Index is reviewed semi-annually and
is reconstituted and rebalanced annually.
Companies from the following
countries were eligible for inclusion in the Index: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland, South Korea, Taiwan, the United Kingdom, and the United States.
As of December 31, 2018, the Index
consisted of 35 securities, which had an average market capitalization of $10.3 billion, median market capitalization of $1.3 billion, total capitalizations ranging from $63.6 million to $81.4 billion and were concentrated in the industrials and
information technology sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
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Because of daily
rebalancing and the compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of
the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund
will lose money over time while the Index's performance increases.
Principal Investment Risks
An investment in the Fund entails
risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks not traditionally
associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index;
(ii) there were no Fund expenses; and (iii)
borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the chart below, the Fund
would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss of value in the Fund,
even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas shaded red (or dark gray)
represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return more than 300% of the
performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the returns shown below as a
result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The
Index’s annualized historical volatility rate for the five year period ended December 31, 2018 was 15.12%. The Index’s highest volatility rate for any one calendar year during the five-year period was 19.65% and volatility for a shorter
period of time may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 5.80%. Historical Index volatility and performance are not indications of what the Index volatility and
performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose
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more money in market conditions that are adverse to
its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an investment in the Fund will be reduced
by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose an amount greater than its net
assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index decreases, the Fund may be one of many market participants that are attempting to sell securities of the Index. Under such circumstances, the market for investments of the Index may lack sufficient
liquidity for all market participants' trades. Therefore, the Fund may have more difficulty selling securities or financial instruments and the Fund's transactions could exacerbate the price decline of the securities of the Index. Additionally,
because the Fund is leveraged, a minor decrease in the value of the Index
should be expected to have a substantial adverse impact
on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
|
If
the Index has a dramatic move that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund.
In that event, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment
objective, even if the Index later reverses all or a portion of its movement.
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Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts, which will subject the Fund to additional risks that are different from those
associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the
agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment
held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its
leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions
adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience
performance that is greater than, or less than, the
Fund’s stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve
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the tax efficiency or to comply with various
regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Robotics & Artificial Intelligence
Company Risk
—
Robotics and artificial intelligence companies may have limited product lines, markets, financial resources or personnel. These companies
typically face intense competition and potentially rapid product obsolescence. These companies are also heavily dependent on intellectual property rights and may be adversely affected by loss or impairment of those rights. There can be no assurance
these companies will be able to successfully protect their intellectual property to prevent the misappropriation of their technology, or that competitors will not develop technology that is substantially similar or superior to such companies’
technology. Robotics and artificial intelligence companies typically engage in significant amounts of spending on research and development, and there is no guarantee that the products or services produced by these companies will be successful.
Robotics and artificial intelligence companies, especially smaller companies, tend to be more volatile than companies that do not rely heavily on technology.
Industrials Sector Risk
—
Stock prices of issuers in the industrials sector are affected by supply and demand both for their specific product or
service and for industrials sector products in general. Government regulation, world events and economic conditions will also affect the performance of investments in such issuers. Aerospace and defense companies, a component of the industrials
sector, can be significantly affected by government spending policies because companies involved in this industry rely to a significant extent on U.S. and other government demand for their products and services. Thus, the financial condition of, and
investor interest in, aerospace and defense companies are heavily influenced by government defense spending policies which are typically under pressure from efforts to control government spending budgets. Transportation companies,
another component of the industrials sector, are
subject to cyclical performance and therefore investment in such companies may experience occasional sharp price movements which may result from changes in the economy, fuel prices, labor agreements and insurance costs.
Information Technology Sector Risk
—
The value of stocks of information technology companies and companies that rely heavily on technology is particularly
vulnerable to rapid changes in technology product cycles, rapid product obsolescence, government regulation and competition, both domestically and internationally, including competition from competitors with lower production costs. Information
technology companies and companies that rely heavily on technology, especially those of smaller, less-seasoned companies, tend to be more volatile than the overall market. Information technology companies are heavily dependent on patent and
intellectual property rights, the loss or impairment of which may adversely affect profitability. Additionally, companies in the information technology sector may face dramatic and often unpredictable changes in growth rates and competition for the
services of qualified personnel.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Micro-Capitalization Company Risk
- Stock prices of micro-cap companies are significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition, micro-cap companies
often have limited product lines, narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or mid-capitalization. As
a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Small- and/or Mid-Capitalization Company
Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial
resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant institutional ownership and
are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure, which could increase
the volatility of the Fund’s portfolio.
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Foreign Securities
Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in
domestic instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other
countries. The laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs. Additionally, the performance of a fund that tracks an index that includes securities from a market that closes before or after the New York Stock Exchange can vary from the performance of its index.
Cybersecurity Risk
-
Failures or breaches of the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business
operations, potentially resulting in financial losses to the Fund. While the Fund has established business continuity plans and risk management systems seeking to address system breaches or failures, these plans and systems are inherently limited.
Further, cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains
(which will be taxable to shareholders as ordinary
income when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use
of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will fluctuate in
response to changes in the value of the Fund’s holdings and supply and demand
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for Shares. Shareholders that purchase or sell
Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset
value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and
the net asset value vary significantly. The Fund’s investment results are measured based upon the daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the
same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers,
Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the
Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it does not have annual returns for at least one full calendar year prior to the date of this Prospectus. Updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in April 2018
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception in April 2018
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily Semiconductor Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Semiconductor Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier
than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the PHLX Semiconductor Sector Index (the “Index”). This means that the return of the Fund for a period longer than a
trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the
Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.18%
|
Acquired
Fund Fees and Expenses
(1)
|
0.05%
|
Total
Annual Fund Operating Expenses
|
0.98%
|
Expense
Cap/Reimbursement
(2,3)
|
0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.99%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
(3)
|
For the fiscal year ended
October 31, 2018, as a result of a portion of the Adviser's management fee and/or a previous reimbursement of Other Expenses, the Adviser recouped fees in the amount of 0.01%.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$101
|
$313
|
$543
|
$1,202
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 101% of the average
value of its portfolio. However, this portfolio turnover rate
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is calculated without regard to cash instruments or
derivative transactions. If the Fund's extensive use of derivatives was reflected, the Fund's portfolio turnover rate would be significantly higher.
Principal Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index measures the performance of
domestic companies engaged in the design, distribution, manufacture and sale of semiconductors. As of December 31, 2018, the Index had 30 constituents, which had an average market capitalization of $37.4 billion, total market capitalizations ranging
from $3.4 billion to $214.2 billion and were concentrated in the semiconductor industry.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs
to be re-positioned. For example, if the Index has
risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure
will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day
to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a)
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Trust Prospectus
|
Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 22.34%. The Index’s highest volatility rate for any one calendar year during the five-year period was 28.26% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 18.78%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility
of ETFs or instruments that reflect the value of the
Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no
assurance
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that a security that is deemed liquid when purchased
will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience
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performance that is
greater than, or less than, the Fund’s stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their
shares may trade at a discount or a premium.
Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not be able to liquidate its holdings in ETFs at an
optimal price or time, which may adversely affect the Fund’s performance.
Semiconductor Industry Risk
- The Fund is subject to the risk that companies that are in the semiconductor industry may be similarly affected by particular economic or market events, which may, in certain circumstances, cause the
value of securities of all companies in the semiconductor sector of the market to decrease. Specific risks faced by companies in the semiconductor industry include, but are not limited to: intense competition, both domestically and internationally,
including competition from subsidized foreign competitors with lower production costs; securities prices may fluctuate widely due to risks of rapid obsolescence of products; economic performance of the customers of semiconductor companies; research
costs and the risks that their products may not prove commercially successful; capital equipment expenditures could be substantial and suffer from rapid obsolescence; and thin capitalization and limited product lines, markets, financial resources or
personnel.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Mid-Capitalization
Company Risk
- Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than more established,
larger-capitalization companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well known to the
investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the
securities of larger companies. Adverse publicity and investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund.
As a result,
the performance
of mid-capitalization companies can be more volatile
and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system
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breaches or
failures, these plans and systems are inherently limited. Further, cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio
Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs.
Additionally, active market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active
trading may lead to higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders
as ordinary income when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s
extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market.
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There can be no assurance that Shares will continue
to meet the listing requirements of the exchange on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 72.59% for the quarter ended September 30, 2016 and its lowest calendar quarter return was -49.98% for the quarter ended September 30, 2011. The year-to-date return
as of December 31, 2018 was -38.94%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(3/11/2010)
|
Return
Before Taxes
|
-38.94%
|
38.64%
|
28.02%
|
Return
After Taxes on Distributions
|
-39.12%
|
38.01%
|
27.69%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-22.95%
|
32.52%
|
24.43%
|
PHLX
Semiconductor Sector Index
(reflects no deduction for fees, expenses or taxes)
|
-6.05%
|
18.78%
|
16.18%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
11.60%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax
returns
depend on an investor’s tax situation and may differ from those shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In
addition, the "Return After Taxes on Distributions and Sale of Fund Shares" is higher for the one-year period because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in March 2010
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Direxion
Daily Semiconductor Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Semiconductor Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be
riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the PHLX Semiconductor Sector Index (the “Index”). This means that the return of the Fund for a period
longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher
volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the
return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.13%
|
Total
Annual Fund Operating Expenses
|
1.09%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.08%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$110
|
$346
|
$600
|
$1,328
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the
Fund’s net assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that
have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index measures
the performance of domestic companies engaged in the design, distribution, manufacture and sale of semiconductors. As of December 31, 2018, the Index had 30 constituents, which had an average market capitalization of $37.4 billion, total market
capitalizations ranging from $3.4 billion to $214.2 billion and were concentrated in the semiconductor industry.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be
reduced. This re-positioning strategy may result in
high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility
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and Index performance
–
on Fund performance. The chart shows estimated Fund returns for a number of combinations of Index volatility and Index performance over a one-year period.
Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund
expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 22.34%. The Index’s highest volatility rate for any one calendar year during the five-year period was 28.26% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 18.78%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment
Techniques and Policies” in the Fund’s
statutory prospectus, and “Special Note Regarding the Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate
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the price increase of the securities of the Index.
Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment
objective, even if the Index later reverses all or a
portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions,
netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment
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objective, the Fund may enter into short positions,
which are designed to provide the Fund gains when the price of a particular security, basket of securities or index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or
investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that
is the opposite from traditional index funds. There
is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the
Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is
volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Semiconductor Industry Risk
- The Fund is subject to the risk that companies that are in the semiconductor industry may be similarly affected by particular economic or market events, which may, in certain circumstances, cause the
value of securities of all companies in the semiconductor sector of the market to decrease. Specific risks faced by companies in the semiconductor industry include, but are not limited to: intense competition, both domestically and internationally,
including competition from subsidized foreign competitors with lower production costs; securities prices may fluctuate widely due to risks of rapid obsolescence of products; economic performance of the customers of semiconductor companies; research
costs and the risks that their products may not prove commercially successful; capital equipment expenditures could be substantial and suffer from rapid obsolescence; and thin capitalization and limited product lines, markets, financial resources or
personnel.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
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Mid-Capitalization
Company Risk
- Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and financial resources than more established,
larger-capitalization companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks are not well known to the
investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the
securities of larger companies. Adverse publicity and investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund.
As a result,
the performance
of mid-capitalization companies can be more volatile
and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees
to buy the securities back at a specified time and
price. Repurchase agreements may be subject to market and credit risk related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is
no guarantee that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may
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ETF Trust Prospectus
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564
|
widen and the Fund’s Shares may possibly be
subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 37.26% for the quarter ended September 30, 2011 and its lowest calendar quarter return was -47.08% for the quarter ended March 31, 2012. The year-to-date return as
of December 31, 2018 was -19.62%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(3/11/2010)
|
Return
Before Taxes
|
-19.62%
|
-55.41%
|
-55.01%
|
Return
After Taxes on Distributions
|
-19.89%
|
-55.44%
|
-55.14%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-11.63%
|
-24.13%
|
-14.87%
|
PHLX
Semiconductor Sector Index
(reflects no deduction for fees, expenses or taxes)
|
-6.05%
|
18.78%
|
16.18%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
11.60%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax
returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares" is higher
because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in March 2010
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may
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be taxed later upon withdrawal. Distributions by the
Fund may be significantly higher than those of most other ETFs.
Payments to Broker-Dealers and Other
Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may
create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
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Direxion
Daily Technology Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Technology Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier
than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the Technology Select Sector Index (the “Index”). This means that the return of the Fund for a period longer than a
trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the
Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.20%
|
Acquired
Fund Fees and Expenses
(1)
|
0.13%
|
Total
Annual Fund Operating Expenses
|
1.08%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other
|
|
investment companies,
including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund, they will not be reflected in the expense information in the Fund's financial statements and the information presented in the
table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$110
|
$343
|
$595
|
$1,317
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 41% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is provided by S&P Dow
Jones Indices (the “Index Provider”) and includes domestic companies from the technology sector which includes the following industries: information technology hardware, storage, and peripherals; software; communications equipment;
semiconductors and semiconductor equipment; IT services; and electrical equipment, instruments and components. The Index is one of eleven Select Sector Indexes developed and maintained in accordance with the following criteria: (1) each of the
stocks in the Index is also a constituent company of the S&P 500
®
Index; (2) each constituent in the S&P 500
®
Index is
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assigned to one of the Select Sector Indexes; and
(3) the Index is calculated by the Index Provider using a modified “market capitalization” methodology, which is a hybrid between equal weighting and conventional market capitalization weighting with the weighting capped for the largest
stocks included in the Index. This design ensures that each of the component stocks within a Select Sector Index is represented in a proportion consistent with its percentage with respect to the total market capitalization of such Select Sector
Index.
As of December 31,
2018, the Index was comprised of 68 constituents with a median total market capitalization of $18.8 billion, total market capitalizations ranging from $4.7 billion to $785 billion and were concentrated in the information technology sector.
The components of the Index
and the percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its
total assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely
differ from 300% of the return of the Index over the
same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money over time while
the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
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As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 16.47%. The Index’s highest volatility rate for any one calendar year during the five-year period was 23.32% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 13.74%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will
be magnified. This means that an investment in the
Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose an amount
greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference
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assets and the derivative, which may prevent the
Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement.
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Because of this, it is unlikely that the Fund will
be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory
restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Information Technology Sector Risk
—
The value of stocks
of information technology
companies
and companies that rely heavily on technology is particularly vulnerable to rapid changes in technology product cycles,
rapid product obsolescence,
government regulation and competition,
both domestically and
internationally,
including competition from competitors with lower production
costs.
Information technology companies
and companies that rely heavily on technology,
especially those of
smaller,
less-seasoned companies,
tend to be more volatile than the overall market.
Information technology companies are heavily
dependent on patent and intellectual property rights, the loss or impairment of which may adversely affect profitability. Additionally, companies in the information technology sector may face dramatic and often unpredictable changes in growth rates
and competition for the services of qualified personnel.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Mid-Capitalization
Company Risk
-
Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and
financial resources than more established, larger-capitalization companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because
these stocks are not well known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities
compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result,
the performance of mid-capitalization companies can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity
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securities in which the Fund invests will cause the net
asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given
the fact that Shares can be created and redeemed in
creation units, the Adviser believes that large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s
investment results are measured based upon the daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating
and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are
unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading
halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and ten-year periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance,
before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund
toll-free at 866-476-7523.
The
performance shown prior to June 29, 2012 reflects the Fund’s previous daily leveraged investment objective, before fees and expenses, of 300% of the Russell 1000
®
Technology Index. After June 29, 2012, the Fund began to seek a daily leveraged investment objective, before fees and expenses, of 300% of the
Technology Select Sector Index. If the Fund had continued to seek its previous investment objective, the calendar year performance of the Fund would have varied from that shown.
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Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 79.51% for the quarter ended March 31, 2012 and its lowest calendar quarter return was -49.23% for the quarter ended December 31, 2018. The year-to-date return as
of December 31, 2018 was -24.04%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
10
Years
|
Return
Before Taxes
|
-24.04%
|
30.11%
|
41.16%
|
Return
After Taxes on Distributions
|
-24.12%
|
30.08%
|
40.08%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-14.19%
|
25.22%
|
36.54%
|
Technology
Select Sector Index
(reflects no deduction for fees, expenses or taxes)
|
-1.43%
|
13.74%
|
17.10%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
13.12%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the one-year period because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in December 2008
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase and Sale of Fund Shares
The Fund’s shares are not
individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as creation units, each of which is
comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may
trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “Technology Select Sector
Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard &
Poor’s
®
and S&P
®
are registered
trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones
Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones,
S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Technology Select
Sector Index.
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Direxion
Daily Technology Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Technology Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be
riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the Technology Select Sector Index (the “Index”). This means that the return of the Fund for a period
longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher
volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the
return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.29%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.19%
|
Expense
Cap/Reimbursement
(2)
|
-0.09%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$112
|
$369
|
$646
|
$1,435
|
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average value of its portfolio.
However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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ETF Trust Prospectus
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|
reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the
Fund’s net assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that
have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is
provided by S&P Dow Jones Indices (the “Index Provider”) and includes domestic companies from the technology sector which includes the following industries: information technology hardware, storage, and peripherals; software;
communications equipment; semiconductors and semiconductor equipment; IT services; and electrical equipment, instruments and components. The Index is one of eleven Select Sector Indexes developed and maintained in accordance with the following
criteria: (1) each of the stocks in the Index is also a constituent company of the S&P 500
®
Index; (2) each constituent in the S&P 500
®
Index is assigned to one of the Select Sector Indexes; and (3) the Index is calculated by the Index Provider using a modified “market
capitalization” methodology, which is a hybrid between equal weighting and conventional market capitalization weighting with the weighting capped for the largest stocks included in the Index. This design ensures that each of the component
stocks within a Select Sector Index is represented in a proportion consistent with its percentage with respect to the total market capitalization of such Select Sector Index.
As of December 31, 2018, the Index
was comprised of 68 constituents with a median total market capitalization of $18.8 billion, total market capitalizations ranging from $4.7 billion to $785 billion and were concentrated in the information technology sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such
as stocks, bonds, or funds (including ETFs),
interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s
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|
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Trust Prospectus
|
holding period of an investment in the Fund. If
adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s investment had already been reduced by the prior
adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s
investment has increased.
The
chart below provides examples of how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility;
b) Index performance; c) period of time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two
principal factors
–
Index volatility and Index performance
–
on Fund performance. The
chart shows estimated Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the
Index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those
shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 16.47%. The Index’s highest volatility rate for any one calendar year during the five-year period was 23.32% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 13.74%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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|
Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus,
to the extent that the Fund invests in swaps that
use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any
financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive
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|
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|
the full amount it
is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are delays in the Fund’s ability to access such
collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective.
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The Fund may take or refrain from taking positions
to improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Information Technology Sector Risk
—
The value
of stocks of information technology companies and
companies that rely
heavily on technology is particularly vulnerable to rapid changes in technology product cycles, rapid product obsolescence,
government regulation and competition,
both domestically and internationally, including competition from competitors with lower production
costs. Information technology
companies and companies that rely heavily on technology, especially those of smaller,
less-seasoned
companies, tend to be more volatile than the overall market. Information
technology companies are heavily dependent on patent and intellectual property rights, the loss or impairment of
which may adversely affect profitability. Additionally, companies in the information technology sector may face dramatic and often unpredictable changes in growth rates and competition for the services of qualified personnel.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Mid-Capitalization
Company Risk
-
Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and
financial resources than more established, larger-capitalization companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because
these stocks are not well known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities
compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result,
the performance of mid-capitalization companies can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade
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at a discount to net asset value. Authorized
Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and ten-year periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance,
before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund
toll-free at 866-476-7523.
The performance shown prior to June
29, 2012 reflects the Fund’s previous daily inverse leveraged investment objective,
before fees and
expenses, of -300% of the Russell 1000
®
Technology Index. After June 29, 2012, the Fund began to seek a daily inverse leveraged investment
objective, before fees and expenses, of -300% of the Technology Select Sector Index. If the Fund had continued to seek its previous investment objective, the calendar year performance of the Fund would have varied from that shown.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 52.07% for the quarter ended December 31, 2018 and its lowest calendar quarter return was -48.26% for the quarter ended June 30, 2009. The year-to-date return as of
December 31, 2018 was -19.29%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
10
Years
|
Return
Before Taxes
|
-19.29%
|
-41.82%
|
-50.61%
|
Return
After Taxes on Distributions
|
-19.57%
|
-41.86%
|
-50.62%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-11.44%
|
-22.00%
|
-13.35%
|
Technology
Select Sector Index
(reflects no deduction for fees, expenses or taxes)
|
-1.43%
|
13.74%
|
17.10%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
13.12%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax
returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares" is higher
because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
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Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in December 2008
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “Technology Select Sector
Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard &
Poor’s
®
and S&P
®
are registered
trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones
Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones,
S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Technology Select
Sector Index.
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Direxion
Daily Transportation Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Transportation Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be
riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the Dow Jones Transportation Average
TM
(the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading day’s
compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of compounding
on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest for periods
less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.62%
|
Acquired
Fund Fees and Expenses
(1)
|
0.03%
|
Total
Annual Fund Operating Expenses
|
1.40%
|
Expense
Cap/Reimbursement
(2)
|
-0.42%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.98%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$100
|
$402
|
$726
|
$1,643
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is provided by Dow Jones
U.S. Index (the “Index Provider”) and measures the performance of large, well-known companies within the transportation industry (e.g. shipping, railroad companies, airlines, etc.). Components are selected through a discretionary process
with no predetermined, objective criteria. Stocks are selected typically only if the company has an excellent reputation, the company demonstrates sustained growth and is believed to be of interest to a large number of investors. The Index is price
weighted and rebalanced as needed by the Index Provider.
As of December 31, 2018 the Index
consisted of 20 components that had a median total market capitalization of $11.7 billion, total market capitalizations ranging from $1.4 billion to $101.8 billion and were concentrated in the transportation industry which is included in the
industrials and consumer services sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt
to achieve its investment objective without regard
to overall market movement or the increase or decrease of the value of the securities in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the
Fund’s investment objective. The impact of the Index’s movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should
rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy
typically results in high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading
day.
Because of daily
rebalancing and the compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of
the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund
will lose money over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a
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shareholder’s investment, the dollar amount
lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 17.61%. The Index’s highest volatility rate for any one calendar year during the
five-year period was 20.73% and volatility for a
shorter period of time may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 5.85%. Historical Index volatility and performance are not indications of what the Index
volatility and performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the
Direxion Shares
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584
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Fund is forced to sell an illiquid security at an
unfavorable time or at a price that is lower than Rafferty’s judgment of the security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains
or achieving a high correlation with the Index. There can be no assurance that a security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund
may
be unable to enter into another swap agreement or
invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index later reverses all or a portion of its
movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market
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close on the first
trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will
decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may experience performance that is greater than, or less than, the Fund’s stated multiple of the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index.
Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax
efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its
investment in other investment companies. If the
other investment company fails to achieve its investment objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of
ETFs are listed and traded on national stock exchanges, their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally,
depending on the demand in the market, the Fund may not be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Consumer Services Industry Risk
- The success of consumer product manufacturers and retailers
(including food
and
drug retailers, general retailers,
media, and travel and leisure) is tied closely to the performance of the domestic and international economy, interest rates, exchange rates, competition
and consumer confidence. The consumer services industry depends heavily on disposable household income and consumer spending. Companies in the consumer services industry may be subject to severe competition, which may also have an adverse impact on
their profitability. Changes in demographics and consumer preferences may affect the success of consumer service providers.
Industrials Sector Risk
—
Stock prices of issuers in the industrials sector are affected by supply and demand both for their specific product or
service and for industrials sector products in general. Government regulation, world events and economic conditions will also affect the performance of investments in such issuers. Aerospace and defense companies, a component of the industrials
sector, can be significantly affected by government spending policies because companies involved in this industry rely to a significant extent on U.S. and other government demand for their products and services. Thus, the financial condition of, and
investor interest in, aerospace and defense companies are heavily influenced by government defense spending policies which are typically under pressure from efforts to control government spending budgets. Transportation companies, another component
of the industrials sector, are subject to cyclical performance and therefore investment in such companies may experience occasional sharp price movements which may result from changes in the economy, fuel prices, labor agreements and insurance
costs.
Transportation
Industry Risk
- The transportation industry may be adversely affected by economic changes, increases in fuel and operating costs, labor relations and insurance costs. Transportation companies may
also be subject to significant government regulation and oversight, which may adversely affect their businesses.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the
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ETF Trust Prospectus
|
586
|
performance of large-capitalization companies has
trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees
to buy the securities back at a specified time and
price. Repurchase agreements may be subject to market and credit risk related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is
no guarantee that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may
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Trust Prospectus
|
widen and the Fund’s Shares may possibly be
subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before
and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at
866-476-7523.
During the period of time shown in
the bar chart, the Fund’s highest calendar quarter return was 30.58% for the quarter ended September 30, 2018 and its lowest calendar quarter return was -51.03% for the quarter ended December 31, 2018. The year-to-date return as of December
31, 2018 was -44.47%.
Average Annual
Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(5/3/2017)
|
Return
Before Taxes
|
-44.47%
|
-10.36%
|
Return
After Taxes on Distributions
|
-44.61%
|
-12.47%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-26.23%
|
-8.23%
|
Dow
Jones Transportation AverageTM
(reflects no deduction for fees, expenses or taxes)
|
-12.33%
|
1.65%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
4.96%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not
reflect the impact of state and local taxes. Actual
after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual
retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares" is higher because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in May 2017
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception in May 2017
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “Dow Jones Transportation
Average
TM
” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed
Direxion Shares
ETF Trust Prospectus
|
588
|
for use by Rafferty. Standard & Poor’s
®
and S&P
®
are registered trademarks of
Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones Trademark Holdings LLC
(“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their
respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Dow Jones Transportation Average
TM
.
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Direxion
Daily Transportation Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Transportation Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may
be riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the Dow Jones Transportation Average
TM
(the “Index”). This means that the return of the Fund for a period longer than a trading day will be the result of each trading day’s
compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the Index and greater leverage increase the impact of compounding
on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the Index. Further, the return for investors that invest for periods
less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.11%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
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Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
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Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the Fund’s net
assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity
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of less than 397 days and exhibit high quality
credit profiles, including U.S. government securities and repurchase agreements.
The Index is
provided by Dow Jones U.S. Index (the “Index Provider”) and measures the performance of large, well-known companies within the transportation industry (e.g. shipping, railroad companies, airlines, etc.). Components are selected through a
discretionary process with no predetermined, objective criteria. Stocks are selected typically only if the company has an excellent reputation, the company demonstrates sustained growth and is believed to be of interest to a large number of
investors. The Index is price weighted and rebalanced as needed by the Index Provider.
As of December 31, 2018 the Index
consisted of 20 components that had a median total market capitalization of $11.7 billion, total market capitalizations ranging from $1.4 billion to $101.8 billion and were concentrated in the transportation industry which is included in the
industrials and consumer services sectors.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be
increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on
one trading day to the close of the markets on the next
trading day.
Because of daily
rebalancing and the compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of
the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund
will lose money over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year
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period. Performance shown in the chart assumes that:
(i) no dividends were paid with respect to the securities included in the Index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates
were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
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-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 17.61%. The Index’s highest volatility rate for any one calendar year during the five-year period was 20.73% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 5.85%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the
Funds” in the Fund’s Statement of Additional
Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value
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of the Index should be expected to have a substantial
adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
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Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
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If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
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Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
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Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions,
netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines.
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When the Fund shorts securities, including
securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it has sold short and returning that security to the entity
that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse
leveraged investment objective. The target amount of
portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or
under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to
the required levels.
The Fund
may have difficulty achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or
illiquidity in the markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that
of the Index. In addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or
under-exposed to the Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from
taking positions to improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Consumer Services Industry Risk
- The success of consumer product manufacturers and retailers
(including food
and
drug retailers, general retailers,
media, and travel and leisure) is tied closely to the performance of the domestic and international economy, interest rates, exchange rates, competition
and consumer confidence. The consumer services industry depends heavily on disposable household income and consumer spending. Companies in the consumer services industry may be subject to severe competition, which may also have an adverse impact on
their profitability. Changes in demographics and consumer preferences may affect the success of consumer service providers.
Industrials Sector Risk
—
Stock prices of issuers in the industrials sector are affected by supply and demand both for their specific product or
service and for industrials sector products in general. Government regulation, world events and economic conditions will also affect the performance of investments in such issuers. Aerospace and defense companies, a component of the industrials
sector, can be significantly affected by government spending policies because companies involved in this industry rely to a significant extent on U.S. and other government demand for their products and services. Thus, the financial condition of, and
investor interest in, aerospace and defense companies are heavily influenced by government defense spending policies which are typically under pressure from efforts to control government spending budgets. Transportation companies, another component
of the industrials sector, are subject to cyclical performance and therefore investment in such companies may experience occasional sharp price movements
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which may result from changes in the economy, fuel
prices, labor agreements and insurance costs.
Transportation
Industry Risk
- The transportation industry may be adversely affected by economic changes, increases in fuel and operating costs, labor relations and insurance costs. Transportation companies may
also be subject to significant government regulation and oversight, which may adversely affect their businesses.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Small- and/or
Mid-Capitalization Company Risk
—
Small- and mid-capitalization companies often have narrower markets for their goods and/or services and more limited
managerial and financial resources and often have limited product lines, services, markets, financial resources or are dependent on a small management group. Because these stocks are not well-known to the investing public, do not have significant
institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund resulting in more volatile performance. These companies may face greater risk of business failure,
which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity
securities in which the Fund invests will cause the net
asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
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Authorized Participants Concentration
Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are unable to
process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments that have
lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “Dow Jones Transportation
Average
TM
” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard &
Poor’s
®
and S&P
®
are registered
trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones
Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones,
S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Dow Jones
Transportation Average
TM
.
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Direxion
Daily Utilities Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Utilities Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier
than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the Utilities Select Sector Index (the “Index”). This means that the return of the Fund for a period longer than a
trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the
Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.69%
|
Acquired
Fund Fees and Expenses
(1)
|
0.12%
|
Total
Annual Fund Operating Expenses
|
1.56%
|
Expense
Cap/Reimbursement
(2)
|
-0.49%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.07%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$109
|
$445
|
$804
|
$1,815
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 44% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is provided by S&P Dow
Jones Indices (the “Index Provider”) and includes domestic companies from the utilities sector which includes the following industries: electric utilities; multi-utilities; water utilities; independent power producers and energy traders;
and gas utilities. The Index is one of eleven Select Sector Indexes developed and maintained in accordance with the following criteria: (1) each of the stocks in the Index is also a constituent company of the S&P 500
®
Index; (2) each constituent in the S&P 500
®
Index is assigned to one of the Select Sector Indexes; and (3) the Index is calculated by the Index Provider using a modified “market capitalization” methodology, which is a hybrid between equal weighting and conventional market
capitalization weighting with the weighting capped for the largest stocks included in the Index. This design ensures that each of the component stocks within a Select Sector Index is represented in a proportion consistent with its percentage with
respect to the total market capitalization of such Select Sector Index. The Index is rebalanced quarterly.
As of December 31, 2018, the Index
was comprised of 29 constituents, which had a median total market capitalization of $19.2 billion, total market capitalizations ranging from $6.8 billion to $83.1 billion and were concentrated in the utilities sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in the stocks of a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments
that derive value from the underlying reference
asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less
transparency than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund
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ETF Trust Prospectus
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598
|
is held and the
volatility of the Index during shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a
smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the
dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 14.53%. The Index’s highest volatility rate for any one calendar year during the five-year period was 17.26% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 10.76%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
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Historically,
market cycles have included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because
the Fund is leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on
Direxion Shares
ETF Trust Prospectus
|
600
|
collateral if such
remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Intra-Day Investment Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an investment in the
Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the Fund’s net
assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares intra-day may
experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition,
the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially
resulting in the Fund being over- or under-exposed
to the Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Utilities Sector Risk
–
Utility companies are affected by supply and demand,
operating costs, government regulation, environmental factors, liabilities for environmental damage and general liabilities, and rate caps or rate changes. Although rate changes of a regulated utility usually fluctuate in approximate correlation
with financing costs, due to political and regulatory factors, rate changes ordinarily occur only following a delay after the changes in financing costs. This factor will tend to favorably affect a regulated utility company’s earnings and
dividends in times of decreasing costs, but conversely, will tend to adversely affect earnings and dividends when costs are rising. The value of regulated utility equity securities may tend to have an inverse relationship to the movement of interest
rates. Certain utility companies have experienced full or partial deregulation in recent years. These utilities are frequently more similar to industrial companies in that they are subject to greater competition and have been permitted by regulators
to diversify outside of their original geographic regions and their traditional lines of business. These opportunities may permit certain utility companies to earn more than their traditional regulated rates of return. Some companies, however, may
be forced to defend their core business and may be less profitable. In addition, natural disasters, terrorist attacks, government intervention or other factors may render a utility company’s equipment unusable or obsolete which may negatively
impact profitability.
Utility companies may be adversely
affected by increases in fuel and other operating costs, high costs of borrowing
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to finance capital construction during inflationary
periods, restrictions on operations and increased costs and delays associated with compliance with environmental and nuclear safety regulations, and difficulties involved in obtaining natural gas for resale or fuel for generating electricity at
reasonable prices. Additionally, these companies may be subject to risks related to the construction and operation of nuclear power plants, the effects of energy conservation and the effects of regulatory changes.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Mid-Capitalization
Company Risk
-
Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and
financial resources than more established, larger-capitalization companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because
these stocks are not well known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities
compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result,
the performance of mid-capitalization companies can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has
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agreed to pay a borrower. These events could also
trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year and since inception periods compare with
those of one or more broad-based market indexes for
the same periods. The Fund’s past performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
During the period of time shown in
the bar chart, the Fund’s highest calendar quarter return was 8.43% for the quarter ended June 30, 2018 and its lowest calendar quarter return was -12.57% for the quarter ended March 31, 2018. The year-to-date return as of December 31, 2018
was -1.24%.
Average Annual Total
Returns
(for the periods ended December 31, 2018)
|
1
Year
|
Since
Inception
(5/3/2017)
|
Return
Before Taxes
|
-1.24%
|
5.12%
|
Return
After Taxes on Distributions
|
-1.70%
|
4.74%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-0.60%
|
3.83%
|
Utilities
Select Sector Index
(reflects no deduction for fees, expenses or taxes)
|
4.13%
|
5.48%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
4.96%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the one-year period because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
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Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in May 2017
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception in May 2017
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as
creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather
than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “Utilities Select Sector
Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard &
Poor’s
®
and S&P
®
are registered
trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones
Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones,
S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Utilities Select
Sector Index.
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Direxion
Daily Utilities Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily
Utilities Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be
riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the Utilities Select Sector Index (the “Index”). This means that the return of the Fund for a period
longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher
volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the
return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(1)
|
0.21%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.11%
|
Expense
Cap/Reimbursement
(2)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
Estimated for the Fund's
current fiscal year.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the Fund’s net
assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity
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of less than 397 days and exhibit high quality
credit profiles, including U.S. government securities and repurchase agreements.
The Index is
provided by S&P Dow Jones Indices (the “Index Provider”) and includes domestic companies from the utilities sector which includes the following industries: electric utilities; multi-utilities; water utilities; independent power
producers and energy traders; and gas utilities. The Index is one of eleven Select Sector Indexes developed and maintained in accordance with the following criteria: (1) each of the stocks in the Index is also a constituent company of the S&P
500
®
Index; (2) each constituent in the S&P
500
®
Index is assigned to one of the Select Sector Indexes; and (3) the Index is calculated by the Index Provider using a modified “market
capitalization” methodology, which is a hybrid between equal weighting and conventional market capitalization weighting with the weighting capped for the largest stocks included in the Index. This design ensures that each of the component
stocks within a Select Sector Index is represented in a proportion consistent with its percentage with respect to the total market capitalization of such Select Sector Index. The Index is rebalanced quarterly.
As of December 31, 2018, the Index
was comprised of 29 constituents, which had a median total market capitalization of $19.2 billion, total market capitalizations ranging from $6.8 billion to $83.1 billion and were concentrated in the utilities sector.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment in a particular industry or group of industries (
i.e.
, hold 25% or more of its total
assets in investments that provide inverse exposure to a particular industry or group of industries) to approximately the same extent as the Index is so concentrated.
The Fund may gain
inverse leveraged exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate
characteristics similar to those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index.
Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting
securities in order to gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s
movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given
day, net assets of the Fund should rise, meaning
that the Fund’s exposure will need to be increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in
high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time;
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|
d) financing rates associated with inverse leveraged
exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows
estimated Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii)
there were no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 14.53%. The Index’s highest volatility rate for any one calendar year during the five-year period was 17.26% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 10.76%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility
of ETFs or instruments that reflect the value of the
Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the
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securities of the Index. Under such circumstances,
the market for investments of the Index may lack sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could
exacerbate the price increase of the securities of the Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap
transaction with the Fund. In that event, the Fund
may be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if
the Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions,
netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are
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|
expected to depreciate in value. Short positions
therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the opposite from traditional index
tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or index declines. When the Fund
shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it has sold short and returning
that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance
its portfolio appropriately. Additionally, the Fund
may close to purchases and sales of Shares prior to the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Utilities Sector Risk
–
Utility companies are affected by supply and demand,
operating costs, government regulation, environmental factors, liabilities for environmental damage and general liabilities, and rate caps or rate changes. Although rate changes of a regulated utility usually fluctuate in approximate correlation
with financing costs, due to political and regulatory factors, rate changes ordinarily occur only following a delay after the changes in financing costs. This factor will tend to favorably affect a regulated utility company’s earnings and
dividends in times of decreasing costs, but conversely, will tend to adversely affect earnings and dividends when costs are rising. The value of regulated utility equity securities may tend to have an inverse relationship to the movement of interest
rates. Certain utility companies have experienced full or partial deregulation in recent years. These utilities are frequently more similar to industrial companies in that they are subject to greater competition and have been permitted by regulators
to diversify outside of their original geographic regions and their traditional lines of business. These opportunities may permit certain utility companies to earn more than their traditional regulated rates of return. Some companies,
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however, may be forced to defend their core business
and may be less profitable. In addition, natural disasters, terrorist attacks, government intervention or other factors may render a utility company’s equipment unusable or obsolete which may negatively impact profitability.
Utility companies may be adversely
affected by increases in fuel and other operating costs, high costs of borrowing to finance capital construction during inflationary periods, restrictions on operations and increased costs and delays associated with compliance with environmental and
nuclear safety regulations, and difficulties involved in obtaining natural gas for resale or fuel for generating electricity at reasonable prices. Additionally, these companies may be subject to risks related to the construction and operation of
nuclear power plants, the effects of energy conservation and the effects of regulatory changes.
Large-Capitalization Company Risk
—
Large-capitalization companies may be less able to adapt to changing market conditions or to respond quickly to
competitive challenges or to changes in business, product, financial, or market conditions and may not be able to maintain growth at rates that may be achieved by well-managed smaller and mid-size companies, which may affect the companies’
returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Mid-Capitalization
Company Risk
-
Mid-capitalization companies often have narrower markets for their goods and/or services and more limited managerial and
financial resources than more established, larger-capitalization companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because
these stocks are not well known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities
compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether or not it is based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result,
the performance of mid-capitalization companies can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s portfolio.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable
to buy or sell
certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments, may incur significant tracking differences with its Index, and/or may incur
substantial losses and may limit or stop purchases of the Fund.
Equity Securities Risk
—
Investments in, and/or exposure to, publicly issued equity securities, including common stocks, are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities, which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a
Direxion Shares
ETF Trust Prospectus
|
610
|
timely manner or at all. The Fund could also lose
money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a “gap” between the return on cash collateral reinvestments and any fees
the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date
of this Prospectus. Upon commencement of operations,
updated performance will be available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
The “Utilities Select Sector
Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard &
Poor’s
®
and S&P
®
are registered
trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones
Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones,
S&P, or
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|
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their respective affiliates and none of such parties
make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Utilities Select Sector Index.
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|
Direxion
Daily 7-10 Year Treasury Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily 7-10
Year Treasury Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier
than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index (the “Index”). This means that the return of the Fund for a period longer
than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of
the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.76%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.66%
|
Expense
Cap/Reimbursement
(2)
|
-0.56%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.10%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$112
|
$469
|
$849
|
$1,918
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is a market value weighted
index that includes publicly issued U.S. Treasury securities that have a remaining maturity of greater than seven years and less than or equal to ten years. Eligible securities must be fixed rate, denominated in U.S. dollars, and have $300 million
or more of outstanding face value, excluding amounts held by the Federal Reserve. Securities excluded from the Index are zero-coupon STRIPS, inflation linked securities, floating rate notes, cash management and Treasury bills, and any government
agency debt issued with or without a government guarantee. The Index is not adjusted for securities that may become eligible or ineligible for inclusion in the Index intra-month. The Index is reconstituted and rebalanced on the last business day of
each month. The Index was comprised of 20 constituents as of December 31, 2018.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning
that the Fund’s exposure will need to be
increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e)
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other Fund expenses; and f) dividends or interest
paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance
shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or
actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 5.07%. The Index’s highest volatility rate for any one calendar year during the five-year period was 6.48% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 2.97%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
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Market illiquidity
may cause losses for the Fund. To the extent that a Fund's Index decreases, the Fund may be one of many market participants that are attempting to sell securities of the Index. Under such circumstances, the market for investments of the Index may
lack sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty selling securities or financial instruments and the Fund's transactions could exacerbate the price decline of the securities of the Index.
Additionally, because the Fund is leveraged, a minor decrease in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
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Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares
intra-day may experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities
or derivatives held by the Fund. The Fund may not
have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not
included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index. Activities surrounding periodic Index reconstitutions and other Index
rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax efficiency or to comply with various regulatory restrictions, either of
which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Debt Instrument Risk
—
The value of debt instruments may increase or decrease as a result of the following: market fluctuations; changes in
interest rates; actual or perceived inability of issuers, guarantors, or liquidity providers to make scheduled principal or interest payments; or illiquidity in debt securities markets. Debt instruments are also impacted by political, regulatory,
market and economic developments that impact the market in general and specific economic sectors, industries or segments of the fixed income market. In general, rising interest rates lead to a decline in the value of debt securities and debt
securities with longer durations tend to be more sensitive to interest rate changes usually making their prices more volatile than those of securities with shorter durations. To the extent that interest rates rise, certain underlying obligations may
be paid off substantially slower than originally anticipated and the value of those securities may fall. Declining interest rates may lead to prepayment of obligations and cause reduced rates of return due to reinvestment of interest and principal
payments at lower interest rates.
U.S. Government Securities Risk
—
A security backed by the U.S. Treasury or the full faith and credit of the United
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States is
guaranteed only as to the timely payment of interest and principal when held to maturity. The market prices for such securities are not guaranteed and will fluctuate. In addition, because many types of U.S. government securities trade actively
outside the United States, their prices may rise and fall as changes in global economic conditions affect the demand for these securities. In addition, U.S. Treasury obligations may differ from other securities in their interest rates, maturities,
times of issuance and other characteristics. Changes in the financial condition or credit rating of the U.S government may cause the value of U.S. Treasury obligations to decline.
Credit Risk
—
The Fund could lose money if the issuer or guarantor of a debt security goes bankrupt or is unable or unwilling to
make interest payments and/or repay principal. Changes in an issuer’s financial strength or in an issuer’s or debt security’s credit rating also may affect a security’s value and thus have an impact on Fund net asset value
and performance. Generally, the longer the maturity and the lower the credit quality of a security, the more sensitive it is to credit risk.
Interest Rate Risk
—
When interest rates
increase, fixed income securities or
instruments held
by the Fund will generally decline in value. The historically low interest rate environment,
together with recent
modest rate increases, heightens the risks associated with rising interest rates. A rising interest rate environment may adversely impact the liquidity of fixed-income securities and lead to increased volatility of fixed-income markets. Long-term
fixed income securities or instruments will normally have more price volatility because of this risk than short-term fixed income securities or instruments. The risks associated with changing interest rates may have unpredictable effects on the
markets and the Fund’s investments. Fluctuations in interest rates may also affect the liquidity of fixed income securities and instruments held by the Fund.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. When you sell your Shares, they could be worth
less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value
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of the Fund over a
period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active
secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation
Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
The performance shown prior to
September 13, 2010 reflects the Fund’s previous investment objective where it sought daily investment results, before fees and expenses, of 300 of the performance of the NYSE Current 10-Year U.S. Treasury Index. If the Fund had continued to
seek its previous investment objective, the calendar year performance of the Fund would have varied from that shown.
Additionally, the
performance shown from September 13, 2010 to May 2, 2016 reflects the Fund’s previous daily leveraged investment objective, before fees and expenses, of 300% of the NYSE 7-10 Year Treasury Bond Index. After May 2, 2016, the Fund began to seek
a daily leveraged investment objective, before fees and expenses, of 300% of the ICE U.S. Treasury 7-10 Year Bond Index. If the Fund had continued to seek its previous investment objective, the calendar year performance of the Fund would have varied
from that shown.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 33.33% for the quarter ended September 30, 2011 and its lowest calendar quarter return was -16.80% for the quarter ended December 31, 2016. The year-to-date return
as of December 31, 2018 was -0.71%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(4/16/2009)
|
Return
Before Taxes
|
-0.71%
|
6.32%
|
6.19%
|
Return
After Taxes on Distributions
|
-0.99%
|
5.50%
|
5.32%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-0.25%
|
4.57%
|
4.54%
|
ICE
U.S. Treasury 7-10 Year Bond Index
(reflects no deduction for fees, expenses or taxes)
|
0.90%
|
2.97%
|
3.29%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
14.12%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the one-year period because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in April 2009
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
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Purchase and Sale of Fund Shares
The Fund’s shares are not
individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as creation units, each of which is
comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may
trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
Interactive Data Pricing and
Reference Data, LLC
. Neither Rafferty nor the Fund is sponsored, endorsed, sold or promoted by Interactive Data Pricing and Reference Data, LLC or its affiliates (“Vendor”). Vendor makes no
representation or warranty regarding the advisability of investing in securities generally, in the Fund particularly, or the ability of the ICE U.S. Treasury 7-10 Year Bond Index to track general financial market performance.
VENDOR MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE ICE INDEX OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL VENDOR HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE,
INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
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Direxion
Daily 7-10 Year Treasury Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily 7-10
Year Treasury Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be
riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the ICE U.S. Treasury 7-10 Year Bond Index (the “Index”). This means that the return of the Fund for a
period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher
volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the
return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.30%
|
Acquired
Fund Fees and Expenses
(1)
|
0.12%
|
Total
Annual Fund Operating Expenses
|
1.17%
|
Expense
Cap/Reimbursement
(2)
|
-0.10%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.07%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$109
|
$362
|
$634
|
$1,411
|
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was
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Trust Prospectus
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reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the
Fund’s net assets (plus borrowing for investment purposes). In addition, the Fund may invest a portion of its assets in a long position in the Direxion Daily 7-10 Year Treasury Bear 1X Shares (the "Underlying Fund"), another series of the
Direxion Shares ETF Trust managed by the Adviser. On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is a
market value weighted index that includes publicly issued U.S. Treasury securities that have a remaining maturity of greater than seven years and less than or equal to ten years. Eligible securities must be fixed rate, denominated in U.S. dollars,
and have $300 million or more of outstanding face value, excluding amounts held by the Federal Reserve. Securities excluded from the Index are zero-coupon STRIPS, inflation linked securities, floating rate notes, cash management and Treasury bills,
and any government agency debt issued with or without a government guarantee. The Index is not adjusted for securities that may become eligible or ineligible for inclusion in the Index intra-month. The Index is reconstituted and rebalanced on the
last business day of each month. The Index was comprised of 20 constituents as of December 31, 2018.
The Fund may gain inverse leveraged
exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate characteristics similar to
those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index. Derivatives are financial
instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting securities in order to
gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. The Fund may also invest in the Underlying Fund. The Underlying Fund's investment objective is to provide inverse exposure to the Index utilizing an investment strategy and investments that are similar to the Fund. At the close of the
markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the
Index’s movements during the day will affect
whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has
risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated
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ETF Trust Prospectus
|
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|
given any set of assumptions for the following
factors: a) Index volatility; b) Index performance; c) period of time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below
illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated Fund returns for a number of combinations of Index volatility and Index performance over a one-year period.
Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund
expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 5.07%. The Index’s highest volatility rate for any one calendar year during the five-year period was 6.48% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 2.97%. Historical Index volatility and performance are not indications of what the Index
volatility and performance will be in the future.
The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many
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market participants that are attempting to transact
in the securities of the Index. Under such circumstances, the market for investments of the Index may lack sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or
financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial
adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may
permit the counterparty to immediately close out the
swap transaction with the Fund. In that event, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from
achieving its inverse leveraged investment objective, even if the Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions,
netting of obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most
Direxion Shares
ETF Trust Prospectus
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624
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assets are expected to rise in value and short
positions are expected to depreciate in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises,
which is a result that is the opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular
security, basket of securities or index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by
purchasing the security that it has sold short and returning that security to the entity that lent the security.
The Fund may also
seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of
the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund
may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited market due to various
factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it cannot meet its
investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the
Fund may not meet its investment objective or
rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
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Other Investment
Companies (including ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company
and as a result, Fund shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund
must rely on the other investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to
achieve its investment objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on
national stock exchanges, their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the
market, the Fund may not be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Underlying Fund Investment Risk
–
The Fund may invest a portion of its assets in the Underlying Fund, an ETF traded in the secondary market. The
performance of the Fund may be impacted by the performance of the market price of the shares of the Underlying Fund. The Fund’s net asset value is expected to change with a change in the value of the Underlying Fund’s shares, which are
impacted by the value of the Underlying Fund’s investments. An investment in the Fund may entail more fees and expenses. Please also see “Other Investment Companies (including ETFs) Risk” and “Market Price Variance
Risk.” Further, to the extent that the Adviser does not waive fees in an amount equal to the fees it earns from the Fund’s investment in the Underlying Fund, the Adviser is subject to a conflict of interest when investing the
Fund’s assets in the Underlying Fund as it will earn advisory fees from both the Fund and the Underlying Fund.
Debt Instrument Risk
—
The value of debt instruments may increase or decrease as a result of the following: market fluctuations; changes
in interest rates; actual or perceived inability of issuers, guarantors, or liquidity providers to make scheduled principal or interest payments; or illiquidity in debt securities markets. Debt instruments are also impacted by political, regulatory,
market and economic developments that impact the market in general and specific economic sectors, industries or segments of the fixed income market. In general, rising interest rates lead to a decline in the value of debt securities and debt
securities with longer durations tend to be more sensitive to interest rate changes usually making their prices more volatile than those of securities with shorter durations. To the extent that interest rates rise, certain underlying obligations may
be paid off substantially slower than originally anticipated and the value of those securities may fall. Declining interest rates may lead to prepayment of obligations and cause reduced rates of return due to reinvestment of interest and principal
payments at lower interest rates.
U.S. Government Securities Risk
—
A security backed by the U.S. Treasury or the full faith and credit of the United States is guaranteed only as to the
timely payment of interest and principal when held to maturity. The market prices for such securities are not guaranteed and will fluctuate. In addition, because many types of U.S. government securities trade actively outside the United States,
their prices may rise and fall as changes in global economic conditions affect the demand for these securities. In addition, U.S. Treasury obligations may differ from other securities in their interest rates, maturities, times of issuance and other
characteristics. Changes in the financial condition or credit rating of the U.S government may cause the value of U.S. Treasury obligations to decline.
Credit Risk
—
The Fund could lose money if the issuer or guarantor of a debt security goes bankrupt or is unable or unwilling to
make interest payments and/or repay principal. Changes in an issuer’s financial strength or in an issuer’s or debt security’s credit rating also may affect a security’s value and thus have an impact on Fund net asset value
and performance. Generally, the longer the maturity and the lower the credit quality of a security, the more sensitive it is to credit risk.
Interest Rate Risk
—
When interest rates
increase, fixed income securities or
instruments held
by the Fund will generally decline in value. The historically low interest rate environment,
together with recent
modest rate increases, heightens the risks associated with rising interest rates. A rising interest rate environment may adversely impact the liquidity of fixed-income securities and lead to increased volatility of fixed-income markets. Long-term
fixed income securities or instruments will normally have more price volatility because of this risk than short-term fixed income securities or instruments. The risks associated with changing interest rates may have unpredictable effects on the
markets and the Fund’s investments. Fluctuations in interest rates may also affect the liquidity of fixed income securities and instruments held by the Fund.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
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ETF Trust Prospectus
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626
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Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained.
There may, however, be times when the market price
and the net asset value vary significantly. The Fund’s investment results are measured based upon the daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience
the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market
makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and
the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
The performance shown prior to
September 13, 2010 reflects the Fund’s previous investment objective where it sought daily investment results, before fees and expenses, of -300 of the performance of the NYSE Current 10-Year U.S. Treasury Index. If the Fund had continued to
seek its previous investment objective, the calendar year performance of the Fund would have varied from that shown.
Additionally, the
performance shown from September 13, 2010 to May 2, 2016 reflects the Fund’s previous daily inverse leveraged investment objective, before fees and expenses, of -300% of the NYSE 7-10 Year Treasury Bond Index. After May 2, 2016, the Fund began
to seek a daily inverse leveraged investment objective, before fees and expenses, of -300% of the ICE U.S. Treasury 7-10 Year Bond Index. If the Fund had continued to seek its previous investment objective, the calendar year performance of the Fund
would have varied from that shown.
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Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 17.97% for the quarter ended December 31, 2016 and its lowest calendar quarter return was -27.73% for the quarter ended September 30, 2011. The year-to-date return
as of December 31, 2018 was -0.85%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(4/16/2009)
|
Return
Before Taxes
|
-0.85%
|
-11.72%
|
-13.21%
|
Return
After Taxes on Distributions
|
-0.97%
|
-11.74%
|
-13.49%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-0.50%
|
-8.36%
|
-8.14%
|
ICE
U.S. Treasury 7-10 Year Bond Index
(reflects no deduction for fees, expenses or taxes)
|
0.90%
|
2.97%
|
3.29%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
14.12%
|
After-tax returns are calculated
using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax
returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund Shares" is higher
because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in April 2009
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase and Sale of Fund Shares
The Fund’s shares are not
individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a
national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset
value (discount).
Tax
Information
The Fund intends
to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred
arrangement, such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most
other ETFs.
Payments to
Broker-Dealers and Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
Interactive Data Pricing and
Reference Data, LLC
. Neither Rafferty nor the Fund is sponsored, endorsed, sold or promoted by Interactive Data Pricing and Reference Data, LLC or its affiliates (“Vendor”). Vendor makes no
representation or warranty regarding the advisability of investing in securities generally, in the Fund particularly, or the ability of the ICE U.S. Treasury 7-10 Year Bond Index to track general financial market performance.
VENDOR MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE ICE INDEX OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL VENDOR HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE,
INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Direxion Shares
ETF Trust Prospectus
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628
|
Direxion
Daily 20+ Year Treasury Bull 3X Shares
Important Information Regarding the
Fund
The Direxion Daily 20+
Year Treasury Bull 3X Shares (the “Fund”) seeks
daily leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be riskier
than alternatives that do not use leverage because the Fund’s objective is to magnify the daily performance of the ICE U.S. Treasury 20+ Year Bond Index (the “Index”). This means that the return of the Fund for a period longer than
a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from 300% of the return of the Index for that period. As a consequence, longer holding periods, higher volatility of the
Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a trading day will not be 300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (3X) investment results, understand the risks associated with the use of leverage
and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a single day, the Fund
will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance increases. An investor could lose the full principal value of his/her investment within a single
day.
Investment
Objective
The Fund seeks
daily investment results, before fees and expenses, of 300% of the daily performance of the Index.
The Fund does not seek to achieve its stated investment objective for a period of time different than a trading
day.
Fees and Expenses of the
Fund
This table describes the
fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.17%
|
Acquired
Fund Fees and Expenses
(1)
|
0.15%
|
Total
Annual Fund Operating Expenses
|
1.07%
|
Expense
Cap/Reimbursement
(2,3)
|
0.02%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
1.09%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
(2)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its
management fee and/or reimburse the Fund for Other Expenses through September 1, 2020, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable,
among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
|
|
Any expense waiver
or reimbursement is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
(3)
|
For the fiscal year ended
October 31, 2018, as a result of a portion of the Adviser's management fee and/or a previous reimbursement of Other Expenses, the Adviser recouped fees in the amount of 0.02%.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$111
|
$342
|
$592
|
$1,307
|
Portfolio Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average
value of its portfolio. However, this portfolio turnover rate
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Trust Prospectus
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is calculated without regard to cash instruments or
derivative transactions. If the Fund's extensive use of derivatives was reflected, the Fund's portfolio turnover rate would be significantly higher.
Principal Investment Strategy
The Fund, under
normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the Index, exchange-traded funds ("ETFs") that track the Index and other
financial instruments that provide daily leveraged exposure to the Index or to ETFs that track the Index. The financial instruments in which the Fund normally invests include swap agreements and futures contracts which are intended to produce
economically leveraged investment results. On a day-to-day basis, the Fund is expected to hold ETFs and money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is a market value weighted
index that includes publicly issued U.S. Treasury securities that have a remaining maturity of greater than 20 years. Eligible securities must be fixed rate, denominated in U.S. dollars, and have $300 million or more of outstanding face value,
excluding amounts held by the Federal Reserve. Securities excluded from the Index are zero-coupon STRIPS, inflation linked securities, floating rate notes, cash management and Treasury bills, and any government agency debt issued with or without a
government guarantee. The Index is not adjusted for securities that may become eligible or ineligible for inclusion in the Index intra-month. The Index is reconstituted and rebalanced on the last business day of each month. As of December 31, 2018,
the Index was comprised of 40 constituents.
The Fund may invest in the securities
of the Index, a representative sample of the securities in the Index that has aggregate characteristics similar to those of the Index, an ETF that tracks the Index or a substantially similar index, or utilize derivatives such as swaps on the Index,
swaps on an ETF that tracks the same Index or a substantially similar index as the Fund, or futures contracts that provide leveraged exposure to the above. Derivatives are financial instruments that derive value from the underlying reference asset
or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. Certain of the derivative instruments in which the Fund may invest may be traded in the over-the-counter market, which generally provides for less transparency
than exchange-traded derivative instruments.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities in the Index. At
the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment objective. The impact of the Index’s movements during the day will affect
whether the Fund’s portfolio needs
to be re-positioned. For example, if the Index has
risen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure
will need to be reduced. This re-positioning strategy typically results in high portfolio turnover. The terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day
to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance increases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents risks
not traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from 300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from 300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a)
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Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than 300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than 300% of the performance of the Index. The table below is intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the
returns shown below as a result of any of the factors discussed above or in “Daily Index Correlation/Tracking Risk” below.
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 11.77%. The Index’s highest volatility rate for any one calendar year during the five-year period was 15.74% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 6.32%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility
of ETFs or instruments that reflect the value of the
Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a decline in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily decline in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically
lose an amount greater than its net assets in the event of an Index decline of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn, which may adversely impact the Fund. Because the Fund is
leveraged, a minor downturn or market correction which impacts the securities in the Index should be expected to have a substantial adverse impact on the Fund. .
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no
assurance
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that a security that is deemed liquid when purchased
will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index decreases, the Fund may be one of many market participants that are attempting to sell securities of the Index. Under such circumstances, the market for investments of the Index may lack sufficient
liquidity for all market participants' trades. Therefore, the Fund may have more difficulty selling securities or financial instruments and the Fund's transactions could exacerbate the price decline of the securities of the Index. Additionally,
because the Fund is leveraged, a minor decrease in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly investing in securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a
combination of swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance
of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a
degree of correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar
|
amount invested in a basket of securities representing
a particular index or an ETF that seeks to track an index.
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its leveraged investment objective, even if the Index
later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy. Futures markets are highly volatile and the use of
futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such as swap agreements and futures contracts,
which will subject
the Fund to additional risks that are different from
those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to
make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations
to the Fund, the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or
there are delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
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Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor that purchases shares
intra-day may experience performance that is greater than, or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant decrease, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with
the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s
movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near
the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using prices obtained at times other than the Fund's net asset value calculation
time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of the daily performance
of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation to the Index due to
embedded costs and other factors.
The Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities
or derivatives held by the Fund. The Fund may not
have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not
included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index. Activities surrounding periodic Index reconstitutions and other Index
rebalancing events may hinder the Fund’s ability to meet its daily leveraged investment objective. The Fund may take or refrain from taking positions to improve the tax efficiency or to comply with various regulatory restrictions, either of
which may negatively impact the Fund’s correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Debt Instrument Risk
—
The value of debt instruments may increase or decrease as a result of the following: market fluctuations; changes in
interest rates; actual or perceived inability of issuers, guarantors, or liquidity providers to make scheduled principal or interest payments; or illiquidity in debt securities markets. Debt instruments are also impacted by political, regulatory,
market and economic developments that impact the market in general and specific economic sectors, industries or segments of the fixed income market. In general, rising interest rates lead to a decline in the value of debt securities and debt
securities with longer durations tend to be more sensitive to interest rate changes usually making their prices more volatile than those of securities with shorter durations. To the extent that interest rates rise, certain underlying obligations may
be paid off substantially slower than originally anticipated and the value of those securities may fall. Declining interest rates may lead to prepayment of obligations and cause reduced rates of return due to reinvestment of interest and principal
payments at lower interest rates.
U.S. Government Securities Risk
—
A security backed by the U.S. Treasury or the full faith and credit of the United
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States is
guaranteed only as to the timely payment of interest and principal when held to maturity. The market prices for such securities are not guaranteed and will fluctuate. In addition, because many types of U.S. government securities trade actively
outside the United States, their prices may rise and fall as changes in global economic conditions affect the demand for these securities. In addition, U.S. Treasury obligations may differ from other securities in their interest rates, maturities,
times of issuance and other characteristics. Changes in the financial condition or credit rating of the U.S government may cause the value of U.S. Treasury obligations to decline.
Credit Risk
—
The Fund could lose money if the issuer or guarantor of a debt security goes bankrupt or is unable or unwilling to
make interest payments and/or repay principal. Changes in an issuer’s financial strength or in an issuer’s or debt security’s credit rating also may affect a security’s value and thus have an impact on Fund net asset value
and performance. Generally, the longer the maturity and the lower the credit quality of a security, the more sensitive it is to credit risk.
Interest Rate Risk
—
When interest rates
increase, fixed income securities or
instruments held
by the Fund will generally decline in value. The historically low interest rate environment,
together with recent
modest rate increases, heightens the risks associated with rising interest rates. A rising interest rate environment may adversely impact the liquidity of fixed-income securities and lead to increased volatility of fixed-income markets. Long-term
fixed income securities or instruments will normally have more price volatility because of this risk than short-term fixed income securities or instruments. The risks associated with changing interest rates may have unpredictable effects on the
markets and the Fund’s investments. Fluctuations in interest rates may also affect the liquidity of fixed income securities and instruments held by the Fund.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. When you sell your Shares, they could be worth
less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a
“gap” between the return on cash collateral reinvestments and any fees the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value
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of the Fund over a
period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund. There is no guarantee that an active
secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s Shares and/or create or redeem Creation
Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following
performance information provides some indication of the risks of investing in the Fund by demonstrating how its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year
to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past
performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future. Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling
the Fund toll-free at 866-476-7523.
The performance shown prior to
September 13, 2010 reflects the Fund’s previous investment objective where it sought daily investment results, before fees and expenses, of 300 of the performance of the NYSE Current 30-Year U.S. Treasury Index. If the Fund had continued to
seek its previous investment objective, the calendar year performance of the Fund would have varied from that shown.
Additionally, the
performance shown from September 13, 2010 to May 2, 2016 reflects the Fund’s previous daily leveraged investment objective, before fees and expenses, of 300% of the NYSE 20 Year Plus Treasury Bond Index. After May 2, 2016, the Fund began to
seek a daily leveraged investment objective, before fees and expenses, of 300% of the ICE U.S. Treasury 20+ Year Bond Index. If the Fund had continued to seek its previous investment objective, the calendar year performance of the Fund would have
varied from that shown.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 104.10% for the quarter ended September 30, 2011 and its lowest calendar quarter return was -34.54% for the quarter ended December 31, 2016. The year-to-date return
as of December 31, 2018 was -12.06%.
Average Annual Total Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(4/16/2009)
|
Return
Before Taxes
|
-12.06%
|
12.88%
|
4.82%
|
Return
After Taxes on Distributions
|
-12.39%
|
12.78%
|
4.07%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
-6.93%
|
10.33%
|
3.42%
|
ICE
U.S. Treasury 20+ Year Bond Index
(reflects no deduction for fees, expenses or taxes)
|
-1.98%
|
6.32%
|
4.82%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
14.12%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the one-year period because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in April 2009
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
635
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Purchase and Sale of Fund Shares
The Fund’s shares are not
individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for cash or a deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as creation units, each of which is
comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may
trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
Interactive Data Pricing and
Reference Data, LLC
. Neither Rafferty nor the Fund is sponsored, endorsed, sold or promoted by Interactive Data Pricing and Reference Data, LLC or its affiliates (“Vendor”). Vendor makes no
representation or warranty regarding the advisability of investing in securities generally, in the Fund particularly, or the ability of the ICE U.S. Treasury 20+ Year Bond Index to track general financial market performance.
VENDOR MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE ICE INDEX OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL VENDOR HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE,
INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
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Direxion
Daily 20+ Year Treasury Bear 3X Shares
Important Information Regarding the
Fund
The Direxion Daily 20+
Year Treasury Bear 3X Shares (the “Fund”) seeks
daily inverse leveraged
investment results and is very different from most other exchange-traded funds. As a result, the Fund may be
riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the daily inverse performance of the ICE U.S. Treasury 20+ Year Bond Index (the “Index”). This means that the return of the Fund for a
period longer than a trading day will be the result of each trading day’s compounded return over the period, which will very likely differ from -300% of the return of the Index for that period. As a consequence, longer holding periods, higher
volatility of the Index and greater leverage increase the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as, or more than, the
return of the Index. Further, the return for investors that invest for periods less than a trading day will not be -300% of the performance of the Index for the trading day.
The Fund is not
suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged (-3X) investment results, understand the risks associated with the use of
leverage and shorting and are willing to monitor their portfolios frequently. The Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For periods longer than a
single day, the Fund will lose money if the Index’s performance is flat, and it is possible that the Fund will lose money even if the Index’s performance decreases. An investor could lose the full principal value of his/her investment
within a single day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 300% of the
inverse (or opposite)
of the daily performance of the Index.
The Fund does not seek to achieve its stated
investment objective for a period of time different than a trading day.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing Shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
|
0.15%
|
Acquired
Fund Fees and Expenses
(1)
|
0.12%
|
Total
Annual Fund Operating Expenses
|
1.02%
|
(1)
|
"Acquired Fund Fees and
Expenses" include fees and expenses incurred indirectly by the Fund as a result of investments in other investment companies, including investments in money market funds. Because Acquired Fund Fees and Expenses are not borne directly by the Fund,
they will not be reflected in the expense information in the Fund's financial statements and the information presented in the table will differ from that presented in the Fund's financial highlights included in the Fund's reports to shareholders.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1
Year
|
3
Years
|
5
Years
|
10
Years
|
$104
|
$325
|
$563
|
$1,248
|
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 0% of the average
value of its portfolio. However, this portfolio turnover rate is calculated without regard to cash instruments or derivative transactions. If the Fund's extensive use of derivatives was reflected, the Fund's portfolio turnover rate would be
significantly higher.
Principal
Investment Strategy
The Fund,
under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the
Fund’s net assets (plus borrowing for investment purposes). In addition, the Fund may invest a portion of its assets in a long position in the Direxion Daily 20+ Year Treasury Bear 1X Shares (the "Underlying Fund"), another series of the
Direxion Shares ETF Trust managed by the Adviser. On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have
terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is a market value weighted
index that includes publicly issued U.S. Treasury securities that have a remaining maturity of greater than 20 years. Eligible securities must be fixed rate, denominated in U.S. dollars, and have $300 million or more of outstanding face value,
excluding amounts held by the Federal Reserve. Securities excluded from the Index are zero-coupon STRIPS, inflation linked securities, floating rate notes, cash management and Treasury bills, and any government agency debt issued with or without a
government guarantee. The Index is not adjusted for
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securities that
may become eligible or ineligible for inclusion in the Index intra-month. The Index is reconstituted and rebalanced on the last business day of each month. As of December 31, 2018, the Index was comprised of 40 constituents.
The Fund may gain inverse leveraged
exposure by investing in a combination of financial instruments, such as swaps or futures contracts that provide short exposure to the Index, to a representative sample of the securities in the Index that has aggregate characteristics similar to
those of the Index or to an ETF that tracks the same Index or a substantially similar index, or the Fund may short securities of the Index, or short an ETF that tracks the same Index or a substantially similar index. Derivatives are financial
instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting securities in order to
gain inverse leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated inverse leveraged investment objective. The Fund will attempt to achieve its investment objective without regard to overall market movement or the increase or decrease of the value of the securities
in the Index. The Fund may also invest in the Underlying Fund. The Underlying Fund's investment objective is to provide inverse exposure to the Index utilizing an investment strategy and investments that are similar to the Fund. At the close of the
markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s inverse leveraged investment objective. The impact of the Index’s movements during the day will
affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Fund’s exposure will need to be increased. Conversely, if the Index
has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in high portfolio turnover. The terms “daily,” “day,” and
“trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
Because of daily rebalancing and the
compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money
over time while the Index's performance decreases.
Principal Investment Risks
An investment in
the Fund entails risk. The Fund may not achieve its inverse leveraged investment objective and there is a risk that you could lose all of your money invested in the Fund. The Fund is not a complete investment program. In addition, the Fund presents
risks not traditionally associated with most mutual funds and ETFs. It is important that investors
closely review all of the risks listed below and
understand them before making an investment in the Fund.
Effects of Compounding and Market
Volatility Risk
-
The Fund has a daily leveraged investment objective and the Fund’s performance for periods greater than a trading day will be the
result of each day's returns compounded over the period, which is very likely to differ from -300% of the Index’s performance, before fees and expenses. Compounding affects all investments, but has a more significant impact on funds that are
leveraged and that rebalance daily. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a trading day to vary from -300% of the performance of the Index. The effect of compounding becomes
more pronounced as Index volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Index during
shareholder’s holding period of an investment in the Fund. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the
shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the dollar amount lost due to future
adverse performance will increase because the shareholder’s investment has increased.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain inverse leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown.
As shown in the
chart below, the Fund would be expected to lose 31.3% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. At higher ranges of volatility, there is a chance of a near complete loss
of value in the Fund, even if the Index’s return is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 100% of its value, even if the cumulative Index return for the year was 0%. Areas
shaded red (or dark gray) represent those scenarios where the Fund can be expected to return less than -300% of the performance of the Index and those shaded green (or light gray) represent those scenarios where the Fund can be expected to return
more than -300% of
Direxion Shares
ETF Trust Prospectus
|
638
|
the performance of the Index. The table below is
intended to isolate the effect of Index volatility and performance on the Fund’s performance. The Fund’s actual returns may be significantly better or worse than the returns shown below as a result of any of the factors discussed above
or in “Daily Inverse Index Correlation/Tracking Risk” below.
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The Index’s
annualized historical volatility rate for the five year period ended December 31, 2018 was 11.77%. The Index’s highest volatility rate for any one calendar year during the five-year period was 15.74% and volatility for a shorter period of time
may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2018 was 6.32%. Historical Index volatility and performance are not indications of what the Index volatility and performance
will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Leverage Risk
—
The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in
market conditions that are adverse to its investment objective than a fund that does not utilize leverage. An investment in the Fund is exposed to the risk that a rise in the daily performance of the Index will be magnified. This means that an
investment in the Fund will be reduced by an amount equal to 3% for every 1% daily rise in the Index, not including the costs of financing leverage and other operating expenses, which would further reduce its value. The Fund could theoretically lose
an amount greater than its net assets in the event of an Index rise of more than 33%. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
—
Market risks include political, regulatory, market and economic developments, including developments that impact
specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide,
which could have an adverse effect on the Fund.
Historically, market cycles have
included long term positive and negative periods. Since approximately 2008, the market has largely moved upward and accordingly, the market may be poised for a correction or downturn.
Aggressive Investment Techniques Risk
—
The Fund uses investment techniques that may result in significant losses.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the
United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the
security’s true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index. There can be no assurance that a
security that is deemed liquid when purchased will continue to be liquid.
Market illiquidity may cause losses
for the Fund. To the extent that a Fund's Index increases, the Fund may be one of many market participants that are attempting to transact in the securities of the Index. Under such circumstances, the market for investments of the Index may lack
sufficient liquidity for all market participants' trades. Therefore, the Fund may have more difficulty transacting in the securities or financial instruments and the Fund's transactions could exacerbate the price increase of the securities of the
Index. Additionally, because the Fund is leveraged, a minor increase in the value of the Index should be expected to have a substantial adverse impact on the Fund.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly shorting securities or other ordinary investments, including risk related to the market, leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of
availability, counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. The use of derivatives may result in larger losses or smaller gains than directly shorting securities. When the Fund uses derivatives, there may be imperfect correlation between the value of the reference assets and the derivative,
which may prevent the Fund from achieving its investment objective. Because derivatives often require
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only a limited initial investment, the use of
derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The reference ETF may not closely track the performance of the Index due
to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as a reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of inverse
correlation with the Index as it would if the Fund used swaps that utilized the Index as the reference asset. Any financing, borrowing or other costs associated with using derivatives may also reduce the Fund’s return.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index or an ETF that seeks to track an index.
|
If the Index has a dramatic move
that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may
be unable to enter into another swap agreement or invest in other derivatives to achieve exposure consistent with the Fund’s investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the
Index later reverses all or a portion of its movement.
•
|
Futures Contracts.
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction.
Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment strategy. Futures markets are highly volatile and the use
of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
|
Counterparty Risk
—
The Fund may invest in financial instruments involving third parties
(
i.e.
, counterparties) such
as swap agreements
and futures contracts, which will subject the Fund to additional risks that are different from those associated with ordinary securities transactions. The Fund is exposed to the risk that a counterparty may be unwilling or unable to make timely
payments to meet its contractual obligations or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty or its affiliate becomes insolvent, bankrupt or defaults on its payment obligations to the Fund,
the Fund may not receive the full amount it is entitled to receive and the value of an investment held by the Fund may decline. Additionally, if any collateral posted by the counterparty for the benefit of the Fund is insufficient or there are
delays in the Fund’s ability to access such collateral, the Fund may not be able to achieve its inverse leveraged investment objective. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of
obligations and realization on collateral if such remedies are stayed or eliminated under special resolutions adopted in the United States, the European Union and various other jurisdictions.
In addition, the Fund may enter into
swap agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Shorting Risk
–
A short position is a financial arrangement in which the
short position appreciates in value when a reference asset falls in value and depreciates in value when the reference asset rises in value. Over the long term, most assets are expected to rise in value and short positions are expected to depreciate
in value. Short positions therefore may be riskier and more speculative than traditional investments.
Shareholders should lose money when the Index rises, which is a result that is the
opposite from traditional index tracking funds. To achieve its daily inverse investment objective, the Fund may enter into short positions, which are designed to provide the Fund gains when the price of a particular security, basket of securities or
index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the security that it
has sold short and returning that security to the entity that lent the security.
The Fund may also seek inverse or
“short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of the underlying
short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be limited or the Fund may be
required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a
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ETF Trust Prospectus
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640
|
limited market due
to various factors, including regulatory action, the Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. The Fund may not be able to issue additional Creation Units during period when it
cannot meet its investment objective due to these factors. Any income, dividends or payments by the assets underlying the Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs and may incur additional brokerage costs related to buying and selling securities to achieve its investment
objective.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index rises, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Thus, an investor
that purchases shares
intra-day may experience
performance that is greater
than,
or less than, the Fund’s stated multiple of
the Index.
If there is a significant intra-day
market event and/or the securities of the Index experience a significant increase, the Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, the Fund may close to purchases and sales of Shares prior to
the close of regular trading on the NYSE Arca, Inc. and incur significant losses.
Daily Inverse Index
Correlation/Tracking Risk
–
Investors will lose money
when the Index rises, which is a result that is the opposite from traditional index funds. There is no guarantee that the Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged
investment objective. The target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The
possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect
the Fund’s ability to adjust exposure to the required levels.
Due to the Index including
instruments that trade on a different market than the Fund, the Fund's return may vary from a multiple of the performance of the Index because different markets may close before the New York Stock Exchange opens or may not be open for business on
the same calendar days as the Fund. Additionally, due to differences in trading hours between different markets, and because the level of the Index may be determined using
prices obtained at times other than the Fund's net
asset value calculation time, correlation to the Index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the Index or by comparing the daily change in the Fund's net asset value per share to a multiple of
the daily performance of one or more U.S. ETFs that reflect the values of the securities underlying the Index as of the Fund's net asset value calculation time. It is important to note that the correlation to these ETFs may vary from the correlation
to the Index due to embedded costs and other factors.
The Fund may have difficulty
achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the
markets for the securities or derivatives held by the Fund. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In
addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the
Index. Activities surrounding periodic Index reconstitutions and other Index rebalancing events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective. The Fund may take or refrain from taking positions to
improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact the Fund’s inverse correlation to the Index.
Other Investment Companies (including
ETFs) Risk
— By investing in another investment company, including an ETF, the Fund becomes a shareholder of that investment company and as a result, Fund
shareholders indirectly bear the Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses of the Fund’s own operations. As a shareholder, the Fund must rely on the other
investment company to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment
objective, the value of the Fund’s investment will not perform as expected, thus affecting the Fund’s performance and its correlation with the Index. In addition, because shares of ETFs are listed and traded on national stock exchanges,
their shares may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, depending on the demand in the market, the Fund may not
be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect the Fund’s performance.
Underlying Fund Investment Risk
–
The Fund may invest a portion of its assets in the Underlying Fund, an ETF traded in the secondary market. The
performance of the Fund may be impacted by the performance of the market price of the shares of the Underlying Fund. The Fund’s net asset value is expected to change with a change in the value of the
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Underlying Fund’s shares, which are impacted
by the value of the Underlying Fund’s investments. An investment in the Fund may entail more fees and expenses. Please also see “Other Investment Companies (including ETFs) Risk” and “Market Price Variance Risk.”
Further, to the extent that the Adviser does not waive fees in an amount equal to the fees it earns from the Fund’s investment in the Underlying Fund, the Adviser is subject to a conflict of interest when investing the Fund’s assets in
the Underlying Fund as it will earn advisory fees from both the Fund and the Underlying Fund.
Debt Instrument Risk
—
The value of debt instruments may increase or decrease as a result of the following: market fluctuations; changes
in interest rates; actual or perceived inability of issuers, guarantors, or liquidity providers to make scheduled principal or interest payments; or illiquidity in debt securities markets. Debt instruments are also impacted by political, regulatory,
market and economic developments that impact the market in general and specific economic sectors, industries or segments of the fixed income market. In general, rising interest rates lead to a decline in the value of debt securities and debt
securities with longer durations tend to be more sensitive to interest rate changes usually making their prices more volatile than those of securities with shorter durations. To the extent that interest rates rise, certain underlying obligations may
be paid off substantially slower than originally anticipated and the value of those securities may fall. Declining interest rates may lead to prepayment of obligations and cause reduced rates of return due to reinvestment of interest and principal
payments at lower interest rates.
U.S. Government Securities Risk
—
A security backed by the U.S. Treasury or the full faith and credit of the United States is guaranteed only as to the
timely payment of interest and principal when held to maturity. The market prices for such securities are not guaranteed and will fluctuate. In addition, because many types of U.S. government securities trade actively outside the United States,
their prices may rise and fall as changes in global economic conditions affect the demand for these securities. In addition, U.S. Treasury obligations may differ from other securities in their interest rates, maturities, times of issuance and other
characteristics. Changes in the financial condition or credit rating of the U.S government may cause the value of U.S. Treasury obligations to decline.
Credit Risk
—
The Fund could lose money if the issuer or guarantor of a debt security goes bankrupt or is unable or unwilling to
make interest payments and/or repay principal. Changes in an issuer’s financial strength or in an issuer’s or debt security’s credit rating also may affect a security’s value and thus have an impact on Fund net asset value
and performance. Generally, the longer the maturity and the lower the credit quality of a security, the more sensitive it is to credit risk.
Interest Rate Risk
—
When interest rates
increase, fixed income securities or
instruments held
by the Fund will generally decline in value. The historically low interest rate environment,
together with recent
modest rate increases, heightens the risks associated with rising interest rates. A
rising interest rate environment may adversely
impact the liquidity of fixed-income securities and lead to increased volatility of fixed-income markets. Long-term fixed income securities or instruments will normally have more price volatility because of this risk than short-term fixed income
securities or instruments. The risks associated with changing interest rates may have unpredictable effects on the markets and the Fund’s investments. Fluctuations in interest rates may also affect the liquidity of fixed income securities and
instruments held by the Fund.
Cybersecurity Risk
-
Failures or breaches
of
the electronic systems of the Fund or its services providers may cause disruptions and negatively impact the Fund’s business operations, potentially resulting in financial losses to the Fund.
While the Fund has established business continuity plans and risk management
systems seeking to address system breaches or
failures,
these
plans and systems are inherently limited. Further,
cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to a significant loss of value.
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments, may incur significant tracking differences with its Index, and/or may incur substantial losses and may limit or stop purchases of the Fund.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. Money market instruments may be subject to credit risks associated with the instruments in which they invest. There is no guarantee that money market instruments will maintain a stable
value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
Its net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Securities Lending Risk
—
Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails
to return the securities in a
Direxion Shares
ETF Trust Prospectus
|
642
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timely manner or at all. The Fund could also lose
money in the event of a decline in the value of collateral provided for loaned securities, a decline in the value of any investments made with cash collateral, or a “gap” between the return on cash collateral reinvestments and any fees
the Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences for the Fund.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or instruments
that have lower trading volumes.
Market Price
Variance Risk.
Fund Shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at net asset value. The market prices of Shares will
fluctuate in response to changes in the value of the Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than net asset value (a premium) or
less than net asset value (a discount). The Adviser cannot predict if Shares will trade at a premium or discount to the Fund’s net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that
large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly. The Fund’s investment results are measured based upon the
daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience the same investment results as experienced by those creating and redeeming Shares directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade the Fund’s
Shares and/or create or redeem Creation Units, trading spreads and the resulting premium or discount on the Fund’s Shares may widen and the Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the exchange or market. There can be no assurance that Shares will continue to meet the listing requirements of the exchange
on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
The following performance
information provides some indication of the risks of investing in the Fund by
demonstrating how
its returns have varied from calendar year to calendar year. The bar chart shows changes in the Fund’s performance from calendar year to calendar year. The table shows how the Fund’s average annual returns for the one-year, five-year and
since inception periods compare with those of one or more broad-based market indexes for the same periods. The Fund’s past performance, before and after taxes, is not necessarily an indication of how the Fund will perform in the future.
Updated performance is available on the Fund’s website at www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
The performance shown prior to
September 13, 2010 reflects the Fund’s previous investment objective where it sought daily investment results, before fees and expenses, of -300 of the performance of the NYSE Current 30-Year U.S. Treasury Index. If the Fund had continued to
seek its previous investment objective, the calendar year performance of the Fund would have varied from that shown.
Additionally, the
performance shown from September 13, 2010 to May 2, 2016 reflects the Fund’s previous daily inverse leveraged investment objective, before fees and expenses, of -300% of the NYSE 20 Year Plus Treasury Bond Index. After May 2, 2016, the Fund
began to seek a daily inverse leveraged investment objective, before fees and expenses, of -300% of the ICE U.S. Treasury 20+ Year Bond Index. If the Fund had continued to seek its previous investment objective, the calendar year performance of the
Fund would have varied from that shown.
Total Return for the Calendar Years Ended
December 31
During the period
of time shown in the bar chart, the Fund’s highest calendar quarter return was 44.95% for the quarter ended December 31, 2016 and its lowest calendar quarter return was -59.80% for the quarter ended September 30, 2011. The year-to-date return
as of December 31, 2018 was 5.67%.
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Average Annual Total
Returns
(for the periods ended December 31, 2018)
|
1
Year
|
5
Years
|
Since
Inception
(4/16/2009)
|
Return
Before Taxes
|
5.67%
|
-24.22%
|
-24.00%
|
Return
After Taxes on Distributions
|
5.43%
|
-24.26%
|
-24.33%
|
Return
After Taxes on Distributions and Sale of Fund Shares
|
3.37%
|
-15.60%
|
-11.42%
|
ICE
U.S. Treasury 20+ Year Bond Index
(reflects no deduction for fees, expenses or taxes)
|
-1.98%
|
6.32%
|
4.82%
|
S&P
500
®
Index
(reflects no deduction for fees, expenses or taxes)
|
-4.38%
|
8.49%
|
14.12%
|
After-tax
returns are calculated using the historically highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those
shown, and after-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In addition, the "Return After Taxes on Distributions and Sale of Fund
Shares" is higher for the five-year and since inception periods because the calculation recognizes a capital loss upon the redemption of Fund shares.
Management
Investment Adviser.
Rafferty Asset Management, LLC
is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception in April 2009
|
Portfolio Manager
|
Tony
Ng
|
Since
September 2015
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each
of which is comprised of 50,000 Shares. Retail
investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net
asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be significantly higher than those of most other
ETFs.
Payments to Broker-Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Index Information
Interactive Data Pricing and
Reference Data, LLC
. Neither Rafferty nor the Fund is sponsored, endorsed, sold or promoted by Interactive Data Pricing and Reference Data, LLC or its affiliates (“Vendor”). Vendor makes no
representation or warranty regarding the advisability of investing in securities generally, in the Fund particularly, or the ability of the ICE U.S. Treasury 20+ Year Bond Index to track general financial market performance.
VENDOR MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE ICE INDEX OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL VENDOR HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE,
INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Direxion Shares
ETF Trust Prospectus
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The Direxion Shares ETF Trust
(the “Trust”) is a registered investment company offering a number of separate exchange-traded funds (“ETFs”). This Prospectus describes the ETFs noted in the table below (each a “Fund” and collectively the
“Funds”). Rafferty Asset Management, LLC serves as the investment advisor to the Fund ("Rafferty" or the "Adviser").
The Direxion Daily
7-10 Year Treasury Bull 3X Shares, Direxion Daily 7-10 Year Treasury Bear 3X Shares, Direxion Daily 20+ Year Treasury Bull 3X Shares, and the Direxion Daily 20+ Year Treasury Bear 3X Shares are collectively referred to as the “Fixed Income
Funds.”
The
Funds with the word “Bull” in their name (collectively, the “Bull Funds”), attempt to provide investment results that correlate positively to the return of an underlying index, meaning the Bull Funds attempt to move in the
same direction as the underlying index. The Funds with the word “Bear” in their name (collectively, the “Bear Funds”), attempt to provide investment results that correlate negatively to the return of an underlying index,
meaning that the Bear Funds attempt to move in the opposite or inverse direction of the underlying index. As used in this Prospectus, the terms “daily,” “day,” and “trading day,” refer to the period from the close
of the markets on one trading day to the close of the markets on the next trading day.
The Bull Funds
seek daily leveraged investment results, before fees and expenses, of 300% of the performance of an underlying index. The Bear Funds seek daily inverse leveraged investment results, before fees and expenses, of 300% of the inverse of the performance
of an underlying index. If, on a given day, the underlying index gains 1%, the Bull Funds are designed to gain approximately 3% (which is equal to 300% of 1%), while the Bear Funds are designed to lose approximately 3%. Conversely, if the the
underlying index loses 1% on a given day, the Bull Funds are designed to lose approximately 3%, while the Bear Funds are designed to gain approximately 3% (which is equal to -300% of the 1% index loss). The Funds seek leveraged investment results on
a daily basis
—
from the close of regular trading on one trading day to the close on the next trading day
—
which should not be equated with seeking a leveraged investment objective for any other period.
The Funds are designed as short-term trading vehicles. The Funds are intended to be used
by investors who intend to actively monitor and manage their portfolios.
Each Fund tracks an underlying index as
noted below:
Fund
|
Underlying
Index
|
Daily
Leveraged
Investment
Objective
|
Direxion
Daily Mid Cap Bull 3X Shares
|
S&P
Midcap
®
400 Index
|
300%
|
Direxion
Daily Mid Cap Bear 3X Shares
|
-300%
|
Direxion
Daily S&P 500
®
Bull 3X Shares
|
S&P
500
®
Index
|
300%
|
Direxion
Daily S&P 500
®
Bear 3X Shares
|
-300%
|
Direxion
Daily Small Cap Bull 3X Shares
|
Russell
2000
®
Index
|
300%
|
Direxion
Daily Small Cap Bear 3X Shares
|
-300%
|
Direxion
Daily Dow 30 Bull 3X Shares
|
Dow
Jones Industrial
Average Index
|
300%
|
Direxion
Daily Dow 30 Bear 3X Shares
|
-300%
|
Direxion
Daily MSCI Brazil Bull 3X Shares
|
MSCI
Brazil 25/50 Index
|
300%
|
Direxion
Daily MSCI Canada Bull 3X Shares
|
MSCI
Canada Index
|
300%
|
Direxion
Daily MSCI Canada Bear 3X Shares
|
-300%
|
Direxion
Daily FTSE China Bull 3X Shares
|
FTSE
China 50 Index
|
300%
|
Direxion
Daily FTSE China Bear 3X Shares
|
-300%
|
Direxion
Daily MSCI Developed Markets Bull 3X Shares
|
MSCI
EAFE
®
Index
|
300%
|
Direxion
Daily MSCI Developed Markets Bear 3X Shares
|
-300%
|
Direxion
Daily MSCI Emerging Markets Bull 3X Shares
|
MSCI
Emerging
Markets Index
SM
|
300%
|
Direxion
Daily MSCI Emerging Markets Bear 3X Shares
|
-300%
|
Direxion
Daily FTSE Europe Bull 3X Shares
|
FTSE
Developed Europe All Cap Index
|
300%
|
Direxion
Daily MSCI India Bull 3X Shares
|
MSCI
India Index
|
300%
|
Direxion
Daily MSCI Italy Bull 3X Shares
|
MSCI
Italy 25/50 Index
|
300%
|
Direxion
Daily MSCI Italy Bear 3X Shares
|
-300%
|
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|
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Trust Prospectus
|
Fund
|
Underlying
Index
|
Daily
Leveraged
Investment
Objective
|
Direxion
Daily MSCI Japan Bull 3X Shares
|
MSCI
Japan Index
|
300%
|
Direxion
Daily Latin America Bull 3X Shares
|
S&P
Latin America 40 Index
|
300%
|
Direxion
Daily MSCI Mexico Bull 3X Shares
|
MSCI
Mexico IMI 25/50 Index
|
300%
|
Direxion
Daily MSCI Mexico Bear 3X Shares
|
-300%
|
Direxion
Daily Russia Bull 3X Shares
|
MVIS
Russia Index
|
300%
|
Direxion
Daily Russia Bear 3X Shares
|
-300%
|
Direxion
Daily MSCI South Korea Bull 3X Shares
|
MSCI
Korea 25/50 Index
|
300%
|
Direxion
Daily EURO STOXX 50
®
Bull 3X Shares
|
EURO
STOXX 50
®
Index
|
300%
|
Direxion
Daily EURO STOXX 50
®
Bear 3X Shares
|
-300%
|
Direxion
Daily Aerospace & Defense Bull 3X Shares
|
Dow
Jones U.S. Select
Aerospace & Defense Index
|
300%
|
Direxion
Daily Aerospace & Defense Bear 3X Shares
|
-300%
|
Direxion
Daily S&P Biotech Bull 3X Shares
|
S&P
Biotechnology
Select Industry Index
|
300%
|
Direxion
Daily S&P Biotech Bear 3X Shares
|
-300%
|
Direxion
Daily Communication Services Index Bull 3X Shares
|
Communication
Services
Select Sector Index
|
300%
|
Direxion
Daily Communication Services Index Bear 3X Shares
|
-300%
|
Direxion
Daily Consumer Discretionary Bull 3X Shares
|
Consumer
Discretionary
Select Sector Index
|
300%
|
Direxion
Daily Consumer Discretionary Bear 3X Shares
|
-300%
|
Direxion
Daily Consumer Staples Bull 3X Shares
|
Consumer
Staples
Select Sector Index
|
300%
|
Direxion
Daily Consumer Staples Bear 3X Shares
|
-300%
|
Direxion
Daily Energy Bull 3X Shares
|
Energy
Select
Sector Index
|
300%
|
Direxion
Daily Energy Bear 3X Shares
|
-300%
|
Direxion
Daily Financial Bull 3X Shares
|
Russell
1000
®
Financial
Services Index
|
300%
|
Direxion
Daily Financial Bear 3X Shares
|
-300%
|
Direxion
Daily Gold Miners Index Bull 3X Shares
|
NYSE
Arca Gold
Miners Index
|
300%
|
Direxion
Daily Gold Miners Index Bear 3X Shares
|
-300%
|
Direxion
Daily Healthcare Bull 3X Shares
|
Health
Care Select
Sector Index
|
300%
|
Direxion
Daily Homebuilders & Supplies Bull 3X Shares
|
Dow
Jones U.S.
Select Home Construction
Index
|
300%
|
Direxion
Daily Industrials Bull 3X Shares
|
Industrials
Select Sector Index
|
300%
|
Direxion
Daily Industrials Bear 3X Shares
|
-300%
|
Direxion
Daily Junior Gold Miners Index Bull 3X Shares
|
MVIS
Global Junior Gold Miners Index
|
300%
|
Direxion
Daily Junior Gold Miners Index Bear 3X Shares
|
-300%
|
Direxion
Daily Metals & Mining Bull 3X Shares
|
S&P
Metals & Mining
Select Industry Index
|
300%
|
Direxion
Daily Metals & Mining Bear 3X Shares
|
-300%
|
Direxion
Daily Natural Gas Related Bull 3X Shares
|
ISE-Revere
Natural Gas Index
TM
|
300%
|
Direxion
Daily Natural Gas Related Bear 3X Shares
|
-300%
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
|
S&P
Oil & Gas
Exploration & Production
Select Industry Index
|
300%
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
|
-300%
|
Direxion
Daily Pharmaceutical & Medical Bull 3X Shares
|
Dynamic
Pharmaceutical
Intellidex Index
|
300%
|
Direxion
Daily Pharmaceutical & Medical Bear 3X Shares
|
-300%
|
Direxion
Daily Preferred Stock Bull 3X Shares
|
Indxx
US High Yield, Low Volatility
Preferred Stock Index
|
300%
|
Direxion Shares
ETF Trust Prospectus
|
646
|
Fund
|
Underlying
Index
|
Daily
Leveraged
Investment
Objective
|
Direxion
Daily MSCI Real Estate Bull 3X Shares
|
MSCI
US REIT Index
SM
|
300%
|
Direxion
Daily MSCI Real Estate Bear 3X Shares
|
-300%
|
Direxion
Daily Regional Banks Bull 3X Shares
|
S&P
Regional Banks
Select Industry Index
|
300%
|
Direxion
Daily Regional Banks Bear 3X Shares
|
-300%
|
Direxion
Daily Retail Bull 3X Shares
|
S&P
Retail Select Industry Index
|
300%
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
|
Indxx
Global Robotics and Artificial
Intelligence Thematic Index
|
300%
|
Direxion
Daily Semiconductor Bull 3X Shares
|
PHLX
Semiconductor
Sector Index
|
300%
|
Direxion
Daily Semiconductor Bear 3X Shares
|
-300%
|
Direxion
Daily Technology Bull 3X Shares
|
Technology
Select Sector Index
|
300%
|
Direxion
Daily Technology Bear 3X Shares
|
-300%
|
Direxion
Daily Transportation Bull 3X Shares
|
Dow
Jones Transportation Average
TM
|
300%
|
Direxion
Daily Transportation Bear 3X Shares
|
-300%
|
Direxion
Daily Utilities Bull 3X Shares
|
Utilities
Select Sector Index
|
300%
|
Direxion
Daily Utilities Bear 3X Shares
|
-300%
|
Direxion
Daily 7-10 Year Treasury Bull 3X Shares
|
ICE
U.S. Treasury 7-10 Year Bond Index
|
300%
|
Direxion
Daily 7-10 Year Treasury Bear 3X Shares
|
-300%
|
Direxion
Daily 20+ Year Treasury Bull 3X Shares
|
ICE
U.S. Treasury 20+ Year Bond Index
|
300%
|
Direxion
Daily 20+ Year Treasury Bear 3X Shares
|
-300%
|
Shares of the Funds
(“Shares”) are, or upon commencement of operations will be, listed and traded on the NYSE Arca, Inc. (the “Exchange”), where the market prices for the Shares may be different from the intra-day value of the Shares
disseminated by the Exchange and from their net asset value (“NAV”). Unlike conventional mutual funds, Shares are not individually redeemable directly with a Fund. Rather, each Fund issues and redeems Shares on a continuous basis at NAV
only in large blocks of Shares called “Creation Units.” A Creation Unit consists of 50,000 Shares. Creation Units of the Bull Funds are issued and redeemed in cash and/or in-kind for securities included in the relevant underlying index.
Creation Units of the Bear Funds are issued and redeemed for cash. As a result, retail investors generally will not be able to purchase or redeem Shares directly from, or with, each Fund. Most retail investors will purchase or sell Shares in the
secondary market through a broker.
In order to
provide additional information regarding the value of Shares of a Fund, the Exchange, a market data vendor or other information provider, disseminates an Intraday Optimized Portfolio Value (“IOPV”) for each Fund. Each Fund’s IOPV
is expected to be disseminated every 15 seconds during the regular trading hours of the Exchange. The IOPV is based on the current market value of the securities and cash required to be deposited in exchange for a Creation Unit. The IOPV does not
necessarily reflect the precise composition of the current portfolio holdings of a Fund as of a particular point in time, or an accurate valuation of the current portfolio. The quotations of certain Fund holdings may not be updated during U.S.
trading hours if such holdings do not trade in the U.S. The Funds are not involved in, nor responsible for, the calculation or dissemination of the IOPV and make no representations or warranty as to its accuracy.
There is no assurance that the Funds
will achieve their investment objective and an investment in a Fund could lose money. No single Fund is a complete investment program.
Changes in Investment Objective.
Each Fund’s investment objective is not a fundamental policy and may be changed by the Funds' Board of Trustees without shareholder approval.
Additional Information Regarding Investment
Techniques and Policies
Rafferty uses a number of investment
techniques in an effort to achieve the stated investment objective for each Fund. Each Fund seeks 300% or -300% of the return of its underlying index on a given day.
For the Bull Funds, Rafferty attempts
to provide three times the returns of its underlying index for a one-day period. Each Bear Fund is managed to provide three times the inverse (or opposite) of the return of its underlying index for a one-day period. To do this, Rafferty creates net
“long” positions for the Bull Funds and net “short” positions for the Bear Funds. (Rafferty may create short positions in the Bull Funds and long positions in the Bear Funds even though the net exposure
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in the Bull Funds
will be long and the net exposure in the Bear Funds will be short.) Long positions move in the same direction as its underlying index, advancing when the underlying index advances and declining when the underlying index declines. Short positions
move in the opposite direction of the underlying index, advancing when the underlying index declines and declining when the underlying index advances. Additionally, none of the Funds seek income that is exempt from federal, state or local income
taxes.
In seeking to achieve
each Fund’s investment objective, Rafferty uses statistical and quantitative analysis to determine the investments each Fund makes and the techniques it employs. Rafferty relies upon a pre-determined model to generate orders that result in
repositioning each Fund’s investments in accordance with its daily leveraged investment objective. Using this approach, Rafferty determines the type, quantity and mix of investment positions that it believes in combination should produce daily
returns consistent with a Fund’s investment objective. In general, if a Fund is performing as designed, the return of the underlying index will dictate the return for that Fund. Rafferty does not invest the assets of a Fund in securities,
derivatives or other investments based on Rafferty’s view of the investment merit of a particular security, instrument or company, nor does it conduct conventional investment research or analysis or forecast market movements or trends. Each
Fund generally pursues its investment objective regardless of the market conditions and does not take defensive positions.
Each Fund has a clearly articulated
daily leveraged investment objective which requires the Fund to seek economic exposure in excess of its net assets (
i.e.
, economic leverage). To meet its objectives, each Fund invests in some combination of
financial instruments so that it generates economic exposure consistent with the Fund’s investment objective.
Each Fund offered in this Prospectus
may invest significantly in: futures contracts; options on securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; ETFs; and other financial
instruments to obtain economic “leverage.” Leveraging allows Rafferty to generate a greater positive or negative return for the Funds than what would be generated on the invested capital without leverage, thus changing small market
movements into larger changes in the value of the investments of a Fund. Each Bear Fund may invest a portion of its assets in an ETF that provides inverse exposure to the same underlying index and is another series of the Trust managed by the
Adviser.
The Bull Funds
generally may hold a representative sample of the securities in the underlying index. The sampling of securities that is held by a Bull Fund is intended to maintain high correlation with, and similar aggregate characteristics (
e.g.
, market capitalization and industry weightings) to, the underlying index. A Bull Fund also may invest in securities that are not included in its underlying index or may overweight or underweight certain
components of the underlying index. Certain Funds’ assets may be concentrated in an industry or group of industries to the extent that a Fund's underlying index concentrates in a particular industry or group of industries. In addition, each
Fund offered in this Prospectus is non-diversified, which means that it may invest in the securities of a limited number of issuers.
At the close of the markets each
trading day, each Fund will position its portfolio to ensure that the Fund’s exposure to its underlying index is consistent with the Fund’s stated investment objective. The impact of market movements during the day determines whether a
portfolio needs to be repositioned. If the underlying index has risen on a given day, a Bull Fund’s net assets should rise, meaning its exposure will typically need to be increased. Conversely, if the underlying index has fallen on a given
day, a Bull Fund’s net assets should fall, meaning its exposure will typically need to be reduced. If the underlying index has risen on a given day, a Bear Fund’s net assets should fall, meaning its exposure will typically need to be
reduced. If the underlying index has fallen on a given day, a Bear Fund’s net assets should rise, meaning its exposure will typically need to be increased. Any of the Funds’ portfolios may also need to be changed to reflect changes in
the composition of its underlying index.
A Fund may have difficulty in achieving its daily
leveraged investment objective due to fees, expenses, transaction costs, income items, accounting standards, significant purchase and redemption activity by Fund shareholders and/or disruptions or a temporary lack of liquidity in the markets for the
securities held by the Fund. Additionally, if a Fund's underlying index includes foreign securities or tracks a foreign market index where the foreign market closes before or after the New York Stock Exchange (“NYSE”) closes (generally
at 4 p.m. Eastern Time), the performance of the underlying index may differ from the expected daily leveraged performance. As such, correlation to an underlying index for Funds that track an underlying index that includes foreign securities will
generally be measured by comparing the daily change in a Fund’s NAV per share to the performance of one or more U.S. ETFs that tracks the same underlying index.
An exchange or market may close or
issue trading halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in a Fund being unable to buy or sell certain securities or financial instruments. In such
circumstances, a Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
If a Fund is unable to obtain
sufficient leveraged or leveraged inverse exposure to its underlying index due to the limited availability of necessary investments or financial instruments, a Fund could, among other things, limit or suspend creation units until the Adviser
determines that the requisite exposure to its underlying index is obtainable. During the period that creation units are suspended, a Fund could trade at a significant premium or discount to its NAV and could experience substantial redemptions.
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A Cautionary Note to
Investors Regarding Dramatic Index Movement
. A Bull Fund seeks daily exposure to its underlying index equal to 300% of its net assets while a Bear Fund seeks daily exposure to its underlying index equal to -300% of
its net assets. As a consequence, a Fund could lose an amount greater than its net assets in the event of a movement of its underlying index in excess of 33% in a direction adverse to the Fund (meaning a decline in the value of the underlying index
of a Bull Fund and a gain in the value of the underlying index for a Bear Fund). Rafferty will attempt to position each Fund’s portfolio to ensure that a Fund does not gain or lose more than 90% of its NAV on a given day. If Rafferty
successfully positions a Fund’s portfolio to provide such limits, a Fund’s portfolio and NAV will not be responsive to movements in its underlying index beyond 30% in a given day, whether that movement is favorable or adverse to the
Fund. For example, if a Bull Fund’s underlying index were to gain 35%, the Bull Fund would be limited to a daily gain of 90%, which corresponds to 300% of an underlying index gain of 30%, rather than 105%, which is 300% of the underlying index
gain of 35%. It may not be possible to limit a Fund’s losses, and shareholders should not expect such protection. The risk of total loss exists.
If the underlying index of a Fund has
a dramatic adverse move that causes a material decline in a Fund’s net assets, the terms of a Fund’s swap agreements may permit the counterparty to immediately close out the swap transaction. In that event, a Fund may be unable to enter
into another swap agreement or invest in other derivatives to achieve exposure consistent with a Fund’s investment objective. This may prevent a Fund from achieving its leveraged or inverse leveraged investment objective, even if the
underlying index later reverses all or a portion the move.
Examples of the Impact of Daily
Compounding.
Seeking daily leveraged investment results provides potential for greater gains and losses for the Funds relative to its underlying index’s performance. For a period longer than one day, the
pursuit of a daily investment objective will result in daily leveraged compounding for the Funds. This means that the return of an underlying index over a period of time greater than one day multiplied by a Fund’s daily leveraged investment
objective (
e.g.
, 300% or -300%) generally will not equal a Fund’s performance over that same period. As a consequence, investors should not
plan to hold the Funds unmonitored for periods longer than a single trading day. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the
return of a Fund’s stated daily leveraged investment objective and the performance of the underlying index for the full trading day. The Funds are not suitable for all investors.
Consider the following examples:
Mary is considering
investments in two Funds, Funds A, and B. Fund A is a traditional index ETF which seeks (before fees and expenses) to match the performance of the XYZ index. Fund B is a leveraged ETF and seeks daily leveraged investment results (before fees and
expenses) that correspond to 300% of the daily performance of the XYZ index.
On Day 1, the XYZ index increases in
value from $100 to $105, a gain of 5%. On Day 2, the XYZ index declines from $105 back to $100, a loss of 4.76%. In the aggregate, the XYZ index has not moved.
An investment in Fund A would be
expected to gain 5% on Day 1 and lose 4.76% on Day 2 to return to its original value. The following example assumes a $100 investment in Fund A when the index is also valued at $100:
Day
|
Index
Value
|
Index
Performance
|
Value
of
Investment
|
|
$100.00
|
|
$100.00
|
1
|
$105.00
|
5.00%
|
$105.00
|
2
|
$100.00
|
-4.76%
|
$100.00
|
The same $100
investment in Fund B, however, would be expected to gain in value on Day 1 but decline in value on Day 2.
The $100 investment in Fund B would be
expected to gain 15% on Day 1 (300% of 5%) but decline 14.28% on Day 2.
Day
|
Index
Performance
|
300%
of
Index Performance
|
Value
of
Investment
|
|
|
|
$100.00
|
1
|
5.00%
|
15.0%
|
$115.00
|
2
|
-4.76%
|
-14.28%
|
$98.57
|
Although
the percentage decline in Fund B is smaller on Day 2 than the percentage gain on Day 1, the loss is applied to a higher principal amount, so the investment in Fund B experiences a loss even when the aggregate index value for the two-day period has
not declined. (These calculations do not include the charges for expense ratio and financing charges.)
As you can see, an investment in Fund B
has additional risks due to the effects of leverage and compounding.
The Funds are very
different from most mutual funds and ETFs. Each Fund pursues a daily leveraged or daily inverse leveraged investment objective, which means that the Funds are riskier than alternatives that do not use leverage because the Funds magnify the
performance or the inverse of the performance of the underlying index. Additionally, each Bear Fund seeks to provide returns that are a multiple of the inverse of the performance of its underlying index (-300%), a result opposite
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of most mutual
funds and ETFs. An investor who purchases shares of a Fund intra-day will generally receive more, or less, than 300% exposure to the underlying index from that point until the end of the trading day. The actual exposure will be largely a function of
the performance of the underlying index from the end of the prior trading day. If a Fund’s shares are held for a period longer than a single trading day, the Fund’s performance is likely to deviate from 300% or -300% of the return of the
underlying index’s performance for the longer period. This deviation will increase with higher underlying index volatility and longer holding periods.
For periods longer than a trading
day, volatility in the performance of the underlying index from day to day is the primary cause of any disparity between a Fund’s actual returns and the returns of the underlying index for such period. Volatility causes such disparity because
it exacerbates the effects of compounding on a Fund’s returns. In addition, the effects of volatility are magnified in the Funds due to leverage. For example, consider the following three examples that demonstrate the effect of volatility on a
hypothetical fund:
Example 1
–
Underlying Index
Experiences Low Volatility
Mary invests $10.00 in a hypothetical
Bull Fund at the close of trading on Day 1. During Day 2, the Fund’s underlying index rises from 100 to 102, a 2% gain. Mary’s investment rises 6% to $10.60. Mary holds her investment through the close of trading on Day 3, during which
the Fund’s underlying index rises from 102 to 104, a gain of 1.96%. Mary’s investment rises to $11.22, a gain during Day 3 of 5.88%. For the two day period since Mary invested in the Fund, the underlying index gained 4% although
Mary’s investment increased by 12.2%. Because the underlying index continued to trend upwards with low volatility, Mary’s return closely correlates to the 300% return of the return of the underlying index for the period.
John invests $10.00 in a hypothetical
Bear Fund at the close of trading on Day 1. During Day 2, the Fund’s underlying index gains 2%, and John’s investment falls by 6% to $9.40. On Day 3, the underlying index rises by 1.96%, and John’s Fund falls by 5.88% to $8.85. For
the two day period the underlying index returned 4% while the Fund lost 11.5%. John’s return still correlates to -300% return of the underlying index, but not as closely as Mary’s investment in a Bull Fund.
Example
2
–
Underlying Index Experiences High Volatility
Mary invests $10.00 in a hypothetical
Bull Fund after the close of trading on Day 1. During Day 2, the Fund’s underlying index rises from 100 to 102, a 2% gain, and Mary’s investment rises 6% to $10.60. Mary continues to hold her investment through the end of Day 3, during
which the Fund’s underlying index declines from 102 to 98, a loss of 3.92%. Mary’s investment declines by 11.76%, from $10.60 to $9.35. For the two day period since Mary invested in the Fund, the Fund’s underlying index lost 2%
while Mary’s investment decreased from $10 to $9.35, a 6.47% loss. The volatility of the underlying index affected the correlation between the underlying index’s return for the two day period and Mary’s return. In this situation,
Mary lost more than three times the return of the underlying index.
Conversely, John invests $10.00 in a
hypothetical Bear Fund after the close of trading on Day 1. During Day 2, the Fund’s underlying index rises from 100 to 102, a 2% gain, and John’s investment falls 6% to $9.40. John continues to hold his investment through the end of Day
3, during which the Fund’s underlying index declines from 102 to 98, a loss of 3.92%. John’s investment rises by 11.76%, from $9.40 to $10.51. For the two day period since John invested in the Fund, the Fund’s underlying index lost
2% while John’s investment increased from $10 to $10.51, a 5.06% gain. The volatility of the underlying index affected the correlation between the underlying index’s return for the two day period and John’s return. In this
situation, John gained less than three times the return of the underlying index.
Example
3
–
Intra-day Investment with Volatility
The examples above assumed that Mary
purchased the hypothetical Bull Fund at the close of trading on Day 1 and sold her investment at the close of trading on a subsequent day. However, if she made an investment intra-day, she would have received a beta determined by the performance of
the underlying index from the end of the prior trading day until her time of purchase on the next trading day. Consider the following example.
Mary invests $10.00 in a hypothetical
Bull Fund at 11 a.m. on Day 2. From the close of trading on Day 1 until 11 a.m. on Day 2, the underlying index moved from 100 to 102, a 2% gain. In light of that gain, the Fund beta at the point at which Mary invests is 289%. During the remainder of
Day 2, the Fund’s underlying index rises from 102 to 110, a gain of 7.84%, and Mary’s investment rises 22.7% (which is the underlying index gain of 7.84% multiplied by the 289% beta that she received) to $12.27. Mary continues to hold
her investment through the close of trading on Day 2, during which the Fund’s underlying index declines from 110 to 90, a loss of 18.18%. Mary’s investment declines by 54.5%, from $12.27 to $5.58. For the period of Mary’s
investment, the Fund’s underlying index declined from 102 to 90, a loss of 11.76%, while Mary’s investment decreased from $10.00 to $5.58, a 44% loss. The volatility of the underlying index affected the correlation between the underlying
index’s return for period and Mary’s return. In this situation, Mary lost more than three times the return of the underlying index. Mary was also hurt because she missed the first 2% move of the underlying index and had a beta of 289%
for the remainder of Day 2.
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ETF Trust Prospectus
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The Funds are designed to be utilized
only by sophisticated investors, such as traders and active investors employing dynamic strategies. Such investors are expected to monitor and manage their portfolios frequently. Investors in the Funds should: (a) understand the risks associated
with the use of leverage, (b) understand the consequences of seeking daily leveraged investment results, (c) For each Bear Fund, understand the risk of shorting, and (d) intend to actively monitor and manage their investments. Investors who do not
understand the Funds or do not intend to actively manage their funds and monitor their investments should not buy the Funds. There is no assurance that any of the Funds offered in this Prospectus will achieve their investment objectives and an
investment in any Fund could lose money. No single Fund is a complete investment program.
Market Volatility
. Each Fund seeks to provide a return which is a multiple of the daily performance of its underlying index. No Fund attempts to, and no Fund should be expected to, provide returns which are a multiple of the return of
the underlying index for periods other than a single day. Each Fund rebalances its portfolio on a daily basis, increasing exposure in response to that day’s gains or reducing exposure in response to that day’s losses.
Daily rebalancing will impair a
Fund’s performance if the underlying index experiences volatility. For instance, a Bull Fund would be expected to lose 11% (as shown in Table 1 below) if its underlying index provided no return over a one year period and experienced annualized
volatility of 20%. A Bear Fund would be expected to lose 21% (as shown in Table 1 below) if its underlying index provided no return over a one year period and experienced annualized volatility of 20%. If the underlying index’s annualized
volatility were to rise to 40%, the hypothetical loss for a one year period for a Bull Fund widens to approximately 38% while the loss for a Bear Fund rises to 62%.
At higher volatility
levels, there is a chance of a complete loss of Fund assets even if the underlying index is flat.
For instance, if annualized volatility of an underlying index were 90%, both Bull and Bear Funds based on that
underlying index would be expected to lose more than 90% of their value, even if the underlying index returned 0% for the year. An index’s volatility rate is a statistical measure of the magnitude of fluctuations in the returns of an
index.
Table 1
Volatility
Range
|
Bull
Fund
Loss
|
Bear
Fund
Loss
|
10%
|
-3%
|
-6%
|
20%
|
-11%
|
-21%
|
30%
|
-24%
|
-42%
|
40%
|
-38%
|
-62%
|
50%
|
-53%
|
-78%
|
60%
|
-67%
|
-89%
|
70%
|
-78%
|
-95%
|
80%
|
-87%
|
-98%
|
90%
|
-92%
|
-99%
|
100%
|
-96%
|
-99%
|
Table 2 shows the
average volatility rate for the Funds’ underlying indices over the five year period ended December 31, 2018. The underlying indices have annualized historical volatility rates over that period ranging from 5.07% to 39.91%. Since market
volatility has negative implications for Funds which rebalance daily, investors should be sure to monitor and manage their investments in the Funds particularly in volatile markets. The negative implications of volatility in Table 1 can be combined
with the recent volatility ranges of various indices in Table 2 to give investors some sense of the risks of holding the Funds for longer periods over the past five years. Given the historically low levels of volatility during the past five years,
historical index volatility and performance are not likely indicative of future volatility and performance.
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Table 2
–
Historic Volatility of each Fund’s Benchmark Index
Index
|
5-Year
Historical
Volatility
Rate
|
Communication
Services Select Sector Index
|
15.60%
|
Consumer
Discretionary Select Sector Index
|
14.70%
|
Consumer
Staples Select Sector Index
|
11.71%
|
Dow
Jones Industrial Average
|
13.26%
|
Dow
Jones Transportation Average Index
|
17.61%
|
Dow
Jones U.S. Select Aerospace & Defense Index
|
15.52%
|
Dynamic
Pharmaceutical Intellidex Index
|
19.96%
|
Energy
Select Sector Index
|
21.38%
|
EURO
STOXX 50
®
Index
|
17.72%
|
FTSE
China 50 Index
|
21.11%
|
FTSE
Developed Europe All Cap Index
|
14.98%
|
Health
Care Select Sector Index
|
15.11%
|
ICE
U.S. Treasury 20+ Year Bond Index
|
11.77%
|
ICE
U.S. Treasury 7-10 Year Bond Index
|
5.07%
|
Industrials
Select Sector Index
|
14.82%
|
Indxx
Global Robotics and Artificial Intelligence Thematic Index
|
15.12%
|
Indxx
US High Yield, Low Volatility Preferred Stock Index
(Has not Commenced Operations)
|
|
ISE-Revere
Natural Gas Index
|
39.91%
|
MSCI
Brazil 25/50 Index
|
31.62%
|
MSCI
Canada Index
|
14.78%
|
MSCI
EAFE
®
Index
|
12.33%
|
MSCI
Emerging Markets Index
|
14.01%
|
MSCI
India Index
|
15.81%
|
MSCI
Italy 25/50 Index
|
22.62%
|
MSCI
Japan Index
|
17.64%
|
MSCI
Korea 25/50 Index
|
17.45%
|
MSCI
Mexico IMI 25/50 Index
|
20.21%
|
MSCI
US REIT Index
|
14.46%
|
MVIS
Global Junior Gold Miners Index
|
38.25%
|
MVIS
Russia Index
|
25.71%
|
NYSE
Arca Gold Miners Index
|
34.36%
|
PHLX
Semiconductor Sector Index
|
22.34%
|
Russell
1000
®
Financial Services Index
|
14.71%
|
Russell
2000
®
Index
|
16.43%
|
S&P
500
®
Index
|
13.23%
|
S&P
Biotechnology Select Industry Index
|
33.59%
|
S&P
Homebuilders Select Industry Index
|
20.47%
|
S&P
Latin America 40 Index
|
24.77%
|
S&P
Metals & Mining Select Industry Index
|
30.14%
|
S&P
MidCap 400
®
Index
|
14.07%
|
S&P
Oil & Gas Exploration & Production Select Industry Index
|
34.92%
|
S&P
Regional Banks Select Industry Index
|
21.27%
|
S&P
Retail Select Industry Index
|
18.06%
|
Technology
Select Sector Index
|
16.47%
|
Utilities
Select Sector Index
|
14.53%
|
The
Projected Return of a Bull Fund for a Single Trading Day.
Each Bull Fund seeks to provide a daily return that is 300% of the daily return of an underlying index. Doing so requires the use of leveraged investment
techniques, which necessarily incur financing charges. In light of the financing charges and a Bull Fund’s operating expenses, the expected return of a Bull Fund over one trading day is equal to the gross expected return, which is the daily
underlying index return multiplied by a Bull Fund’s daily leveraged investment objective, minus (i) financing charges incurred by the portfolio and (ii) daily operating expenses. For instance, if the S&P 500
®
Index returns 2% on a given day, the gross expected return of the Direxion Daily S&P 500
®
Bull 3X Shares would be 6%, but the net expected return, which factors in the cost of financing the portfolio and the impact of operating expenses,
would be lower. Each Bull Fund will reposition its portfolio at the end of every
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trading day.
Therefore, if an investor purchases Fund shares at close of the markets on a given trading day, the investor’s exposure to the underlying index of a Bull Fund would reflect 300% of the performance of the underlying index during the following
trading day, subject to the charges and expenses noted above.
The Projected Return of a Bear Fund for
a Single Trading Day.
Each Bear Fund seeks to provide a daily return which is 300% of the inverse (or opposite) of the daily return of an underlying index. To create the necessary exposure, a Bear Fund may engage in
short selling
—
borrowing and selling securities it does not own. The money that a Bear
Fund receives from short sales
—
the short sale proceeds
—
is an asset of the Bear Fund that can generate income to help offset the Bear Fund’s
operating expenses. However, the costs of creating short exposure, which may require the Bear Fund’s counterparties to borrow and sell certain securities, may offset or outweigh such income. As the holder of a short position, a Bear Fund also
is responsible for paying the dividends and interest accruing on the short position, which is an expense to the Bear Fund that could cause the Fund to lose money on the short sale and may adversely affect its performance. Each Bear Fund will
reposition its portfolio at the end of every trading day. Therefore, if an investor purchases Bear Fund shares at close of the markets on a given trading day, the investor’s exposure to the underlying index of a Bear Fund would reflect 300% of
the inverse performance of the underlying index during the following trading day, subject to the charges and expenses noted above.
The Projected Returns of Funds for
Intra-Day Purchases.
Because the Funds rebalance their portfolios once daily, an investor who purchases shares during a day will likely have more, or less, than 300% leveraged investment exposure to the underlying
index. The exposure to the underlying index received by an investor who purchases a Fund intra-day will differ from the Fund’s stated daily leveraged investment objective (
e.g.
, 300% or -300%) by an amount determined by the movement of the underlying index from its value at the end of the prior day. If the underlying index moves in a direction favorable to the Fund between the close of the
market on one trading day through the time on the next trading day when the investor purchases Fund shares, the investor will receive less exposure to the underlying index than the stated fund daily leveraged investment objective (
e.g.
, 300% or -300%). Conversely, if the underlying index moves in a direction adverse to the Fund, the investor will receive more exposure to the underlying
index than the stated fund daily leveraged investment objective (
e.g.
, 300% or -300%).
Table 3 below indicates the exposure
to the underlying index that an intra-day purchase of a Bull Fund would be expected to provide based upon the movement in the value of a Bull Fund’s underlying index from the close of the market on the prior trading day. Such exposure holds
until a subsequent sale on that same trading day or until the close of the market on that trading day. For instance, if the underlying index of a Bull Fund has moved 2% in a direction favorable to a Bull Fund, the investor would receive exposure to
the performance of the underlying index from that point until the investor sells later that day or the end of the day equal to approximately 289% of the investor’s investment.
Conversely, if the underlying index
has moved 2% in a direction unfavorable to a Bull Fund, an investor at that point would receive exposure to the performance of the underlying index from that point until the investor sells later that day or the end of the day equal to approximately
313% of the investor’s investment.
The table includes a range of underlying
index moves from 5% to -5% for a Bull Fund. Movement of the underlying index beyond the range noted below will result in exposure further from the Fund’s daily leveraged investment objective.
Table 3
Index
Move
|
Resulting
Exposure
for Bull Fund
|
-5%
|
335%
|
-4%
|
327%
|
-3%
|
320%
|
-2%
|
313%
|
-1%
|
306%
|
0%
|
300%
|
1%
|
294%
|
2%
|
289%
|
3%
|
283%
|
4%
|
279%
|
5%
|
274%
|
Table 4
below indicates the exposure to the underlying index that an intra-day purchase of a Bear Fund would be expected to provide based upon the movement in the value of the Bear Fund’s underlying index from the close of the market on the prior
trading day. Such exposure holds until a subsequent sale on that same trading day or until the close of the market on that trading day. Table 4 indicates that, if the underlying index of a Bear Fund has moved 2% in a direction favorable to the Bear
Fund, the investor would receive exposure to the performance of the underlying index from that point until the investor sells later that day or the end of the day equal to approximately -277% of the investor’s investment. Conversely, if the
underlying index has moved 2% in a direction unfavorable to a Bear Fund, an investor would receive exposure to
653
|
Direxion Shares ETF
Trust Prospectus
|
the performance of the underlying index from that point
until the investor sells later that day or the end of the day equal to approximately 326% of the investor’s investment.
The table includes a range of underlying
index moves from 5% to -5% for the Bear Fund. Movement of the underlying index beyond the range noted below will result in exposure further from the Fund’s daily leveraged investment objective.
Table 4
Index
Move
|
Resulting
Exposure
for Bear Fund
|
-5%
|
-248%
|
-4%
|
-257%
|
-3%
|
-267%
|
-2%
|
-277%
|
-1%
|
-288%
|
0%
|
-300%
|
1%
|
-312%
|
2%
|
-326%
|
3%
|
-340%
|
4%
|
-355%
|
5%
|
-371%
|
The Projected
Returns of the Funds for Periods Other Than a Single Trading Day.
The Funds seek leveraged investment results on a daily
basis
—
from the close of regular trading on one trading day to the close on the next
trading day
— which should not be equated with seeking a leveraged investment objective for any other period. For instance, if the S&P 500
®
Index gains 10% for a week, the Direxion Daily S&P
500
®
Bull 3X Shares should not be expected to provide a return of 30% for the week even if it meets its daily leveraged investment objective
throughout the week. This is true because of the financing charges noted above but also because the pursuit of daily goals may result in daily leveraged compounding, which means that the return of an underlying index over a period of time greater
than one day multiplied by a Fund’s daily leveraged investment objective or inverse daily leveraged investment objective (e.g., 300% or -300%) will not generally equal a Fund’s performance over that same period. In addition, the effects
of compounding become greater the longer Shares are held beyond a single trading day.
The following charts set out a range
of hypothetical daily performances during a given 10 trading days of the hypothetical underlying index and demonstrate how changes in the hypothetical underlying index impact the hypothetical Funds’ performance for one trading day and
cumulatively up to, and including, the entire 10 trading day period. The charts are based on a hypothetical $100 investment in the hypothetical Funds over a 10 trading day period and do not reflect expenses of any kind.
Table 5
–
The Index Lacks a Clear Trend
Index
|
Bull
Fund
|
Bear
Fund
|
|
Value
|
Daily
Performance
|
Cumulative
Performance
|
NAV
|
Daily
Performance
|
Cumulative
Performance
|
NAV
|
Daily
Performance
|
Cumulative
Performance
|
|
100
|
|
|
$100.00
|
|
|
$100.00
|
|
|
Day
1
|
105
|
5.00%
|
5.00%
|
$115.00
|
15.00%
|
15.00%
|
$
85.00
|
-15.00%
|
-15.00%
|
Day
2
|
110
|
4.76%
|
10.00%
|
$131.43
|
14.29%
|
31.43%
|
$
72.86
|
-14.29%
|
-27.14%
|
Day
3
|
100
|
-9.09%
|
0.00%
|
$
95.58
|
-27.27%
|
-4.42%
|
$
92.73
|
27.27%
|
-7.27%
|
Day
4
|
90
|
-10.00%
|
-10.00%
|
$
66.91
|
-30.00%
|
-33.09%
|
$120.55
|
30.00%
|
20.55%
|
Day
5
|
85
|
-5.56%
|
-15.00%
|
$
55.76
|
-16.67%
|
-44.24%
|
$140.64
|
16.67%
|
40.64%
|
Day
6
|
100
|
17.65%
|
0.00%
|
$
85.28
|
52.94%
|
-14.72%
|
$
66.18
|
-52.94%
|
-33.82%
|
Day
7
|
95
|
-5.00%
|
-5.00%
|
$
72.48
|
-15.00%
|
-27.52%
|
$
76.11
|
15.00%
|
-23.89%
|
Day
8
|
100
|
5.26%
|
0.00%
|
$
83.93
|
15.79%
|
-16.07%
|
$
64.09
|
-15.79%
|
-35.91%
|
Day
9
|
105
|
5.00%
|
5.00%
|
$
96.52
|
15.00%
|
-3.48%
|
$
54.48
|
-15.00%
|
-45.52%
|
Day
10
|
100
|
-4.76%
|
0.00%
|
$
82.73
|
-14.29%
|
-17.27%
|
$
62.26
|
14.29%
|
-37.74%
|
The
cumulative performance of the hypothetical underlying index in Table 5 is 0% for 10 trading days. The return of the hypothetical Bull Fund for the 10 trading day period is 17.27%, while the return of the hypothetical Bear Fund is -37.74%. The
volatility of the hypothetical underlying index’s performance and lack of a clear trend results in performance for each hypothetical Fund for the period which bears little relationship to the performance of the hypothetical underlying index
for the 10 trading day period.
Direxion Shares
ETF Trust Prospectus
|
654
|
Table 6
–
The Index Rises in a Clear Trend
Index
|
Bull
Fund
|
Bear
Fund
|
|
Value
|
Daily
Performance
|
Cumulative
Performance
|
NAV
|
Daily
Performance
|
Cumulative
Performance
|
NAV
|
Daily
Performance
|
Cumulative
Performance
|
|
100
|
|
|
$100.00
|
|
|
$100.00
|
|
|
Day
1
|
102
|
2.00%
|
2.00%
|
$106.00
|
6.00%
|
6.00%
|
$
94.00
|
-6.00%
|
-6.00%
|
Day
2
|
104
|
1.96%
|
4.00%
|
$112.24
|
5.88%
|
12.24%
|
$
88.47
|
-5.88%
|
-11.53%
|
Day
3
|
106
|
1.92%
|
6.00%
|
$118.71
|
5.77%
|
18.71%
|
$
83.37
|
-5.77%
|
-16.63%
|
Day
4
|
108
|
1.89%
|
8.00%
|
$125.43
|
5.66%
|
25.43%
|
$
78.65
|
-5.66%
|
-21.35%
|
Day
5
|
110
|
1.85%
|
10.00%
|
$132.40
|
5.56%
|
32.40%
|
$
74.28
|
-5.56%
|
-25.72%
|
Day
6
|
112
|
1.82%
|
12.00%
|
$139.62
|
5.45%
|
39.62%
|
$
70.23
|
-5.45%
|
-29.77%
|
Day
7
|
114
|
1.79%
|
14.00%
|
$147.10
|
5.36%
|
47.10%
|
$
66.46
|
-5.36%
|
-33.54%
|
Day
8
|
116
|
1.75%
|
16.00%
|
$154.84
|
5.26%
|
54.84%
|
$
62.97
|
-5.26%
|
-37.03%
|
Day
9
|
118
|
1.72%
|
18.00%
|
$162.85
|
5.17%
|
62.85%
|
$
59.71
|
-5.17%
|
-40.29%
|
Day
10
|
120
|
1.69%
|
20.00%
|
$171.13
|
5.08%
|
71.13%
|
$
56.67
|
-5.08%
|
-43.33%
|
The
cumulative performance of the hypothetical underlying index in Table 6 is 20% for 10 trading days. The return of the hypothetical Bull Fund for the 10 trading day period is 71.13%, while the return of the hypothetical Bear Fund is -43.33%. In this
case, because of the positive hypothetical underlying index trend, the hypothetical Bull Fund gain is greater than 300% of the hypothetical underlying index gain and the hypothetical Bear Fund’s decline is less than -300% of the hypothetical
underlying index gain for the 10 trading day period.
Table 7
–
The Index Declines in a Clear Trend
Index
|
Bull
Fund
|
Bear
Fund
|
|
Value
|
Daily
Performance
|
Cumulative
Performance
|
NAV
|
Daily
Performance
|
Cumulative
Performance
|
NAV
|
Daily
Performance
|
Cumulative
Performance
|
|
100
|
|
|
$100.00
|
|
|
$100.00
|
|
|
Day
1
|
98
|
-2.00%
|
-2.00%
|
$
94.00
|
-6.00%
|
-6.00%
|
$106.00
|
6.00%
|
6.00%
|
Day
2
|
96
|
-2.04%
|
-4.00%
|
$
88.24
|
-6.12%
|
-11.76%
|
$112.49
|
6.12%
|
12.49%
|
Day
3
|
94
|
-2.08%
|
-6.00%
|
$
82.73
|
-6.25%
|
-11.76%
|
$119.52
|
6.25%
|
19.52%
|
Day
4
|
92
|
-2.13%
|
-8.00%
|
$
77.45
|
-6.38%
|
-22.55%
|
$127.15
|
6.38%
|
27.15%
|
Day
5
|
90
|
-2.17%
|
-10.00%
|
$
72.40
|
-6.52%
|
-27.60%
|
$135.44
|
6.52%
|
35.44%
|
Day
6
|
88
|
-2.22%
|
-12.00%
|
$
67.57
|
-6.67%
|
-32.43%
|
$144.47
|
6.67%
|
44.47%
|
Day
7
|
86
|
-2.27%
|
-14.00%
|
$
62.96
|
-6.82%
|
-37.04%
|
$154.32
|
6.82%
|
54.32%
|
Day
8
|
84
|
-2.33%
|
-16.00%
|
$
58.57
|
-6.98%
|
-41.43%
|
$165.09
|
6.98%
|
65.09%
|
Day
9
|
82
|
-2.38%
|
-18.00%
|
$
54.39
|
-7.14%
|
-45.61%
|
$176.88
|
7.14%
|
76.88%
|
Day
10
|
80
|
-2.44%
|
-20.00%
|
$
50.41
|
-7.32%
|
-49.59%
|
$189.82
|
7.32%
|
89.82%
|
The
cumulative performance of the hypothetical underlying index in Table 7 is -20% for 10 trading days. The return of the hypothetical Bull Fund for the 10 trading day period is 49.59%, while the return of the hypothetical Bear Fund is 89.82%. In this
case, because of the negative hypothetical underlying index trend, the hypothetical Bull Fund’s decline is less than 300% of the hypothetical underlying index decline and the hypothetical Bear Fund’s gain is greater than 300% of the
hypothetical underlying index decline for the 10 trading day period.
655
|
Direxion Shares ETF
Trust Prospectus
|
Additional Information Regarding Principal
Risks
An investment in a
Fund entails risks. A Fund may not achieve its investment objective and may decline in value. The Funds present risks not traditionally associated with other mutual funds and ETFs. For example, due to the Funds' daily leveraged or inverse leveraged
investment objectives, a small adverse move in a Fund's underlying index will result in larger and potentially substantial declines in that Fund. It is important that investors closely review and understand all of a Fund’s risks before making
an investment. A Fund is not a complete investment program. The table below provides the risks of investing in the Funds. Following the table, each risk is explained.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion
Daily Mid Cap Bull 3X Shares
|
Direxion
Daily Mid Cap Bear 3X Shares
|
Direxion
Daily S&P 500
®
Bull 3X Shares
|
Direxion
Daily S&P 500
®
Bear 3X Shares
|
Direxion
Daily Small Cap Bull 3X Shares
|
Direxion
Daily Small Cap Bear 3X Shares
|
Direxion
Daily Dow 30 Bull 3X Shares
|
Direxion
Daily Dow 30 Bear 3X Shares
|
Direxion
Daily MSCI Brazil Bull 3X Shares
|
Direxion
Daily MSCI Canada Bull 3X Shares
|
Direxion
Daily MSCI Canada Bear 3X Shares
|
Direxion
Daily FTSE China Bull 3X Shares
|
Direxion
Daily FTSE China Bear 3X Shares
|
Direxion
Daily MSCI Developed Markets Bull 3X Shares
|
Direxion
Daily MSCI Developed Markets Bear 3X Shares
|
Effects
of Compounding and Market Volatility Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Leverage
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Market
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Aggressive
Investment Techniques Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Liquidity
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Derivatives
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Counterparty
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Shorting
Risk
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
X
|
|
X
|
|
X
|
Cash
Transaction Risk
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
X
|
|
X
|
|
X
|
Intra-Day
Investment Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Daily
Index Correlation/Tracking Risk
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
X
|
|
X
|
|
X
|
|
Daily
Inverse Index Correlation/Tracking Risk
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
X
|
|
X
|
|
X
|
Other
Investment Companies (including ETFs) Risk
|
X
|
|
X
|
X
|
X
|
X
|
X
|
|
X
|
X
|
|
X
|
|
X
|
|
Underlying
Fund Investment Risk
|
|
|
|
X
|
|
X
|
|
|
|
|
|
|
|
|
|
Aerospace
and Defense Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biotechnology
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazilian
Securities Risk
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
Canadian
Securities Risk
|
|
|
|
|
|
|
|
|
|
X
|
X
|
|
|
|
|
Chinese
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
|
|
Communication
Services Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Discretionary Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Goods Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Services Industry Risk
|
|
|
|
|
|
|
X
|
X
|
|
|
|
|
|
|
|
Consumer
Staples Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
Instrument Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
Country Investing Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
Emerging
Markets Risk
|
|
|
|
|
|
|
|
|
X
|
|
|
X
|
X
|
|
|
Energy
Sector Risk
|
|
|
|
|
|
|
|
|
|
X
|
X
|
|
|
|
|
European
Economic Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
Financials
Sector Risk
|
X
|
X
|
|
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Gold
and Silver Mining Company Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
Sector Risk
|
|
|
X
|
X
|
X
|
X
|
X
|
X
|
|
|
|
|
|
|
|
Homebuilding
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion Shares
ETF Trust Prospectus
|
656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion
Daily Mid Cap Bull 3X Shares
|
Direxion
Daily Mid Cap Bear 3X Shares
|
Direxion
Daily S&P 500
®
Bull 3X Shares
|
Direxion
Daily S&P 500
®
Bear 3X Shares
|
Direxion
Daily Small Cap Bull 3X Shares
|
Direxion
Daily Small Cap Bear 3X Shares
|
Direxion
Daily Dow 30 Bull 3X Shares
|
Direxion
Daily Dow 30 Bear 3X Shares
|
Direxion
Daily MSCI Brazil Bull 3X Shares
|
Direxion
Daily MSCI Canada Bull 3X Shares
|
Direxion
Daily MSCI Canada Bear 3X Shares
|
Direxion
Daily FTSE China Bull 3X Shares
|
Direxion
Daily FTSE China Bear 3X Shares
|
Direxion
Daily MSCI Developed Markets Bull 3X Shares
|
Direxion
Daily MSCI Developed Markets Bear 3X Shares
|
Hong
Kong Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
|
|
Indian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrials
Sector Risk
|
X
|
X
|
|
|
|
|
X
|
X
|
|
|
|
|
|
|
|
Information
Technology Sector Risk
|
X
|
X
|
X
|
X
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Italian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japanese
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
Latin
American Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials
Sector Risk
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
Mexican
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MLP
Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mining
and Metal Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and Gas Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmaceutical
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robotics
& Artificial Intelligence Company Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
Korean Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
|
|
Transportation
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities
Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large-Capitalization
Company Risk
|
|
|
X
|
X
|
|
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Micro-Capitalization
Company Risk
|
|
|
|
|
X
|
X
|
|
|
|
|
|
|
|
|
|
Mid-Capitalization
Company Risk
|
|
|
X
|
X
|
|
|
|
|
|
|
|
|
|
|
|
Small-
and/or Mid-Capitalization Company Risk
|
X
|
X
|
|
|
X
|
X
|
|
|
X
|
X
|
X
|
|
|
X
|
X
|
Currency
Exchange Rate Risk
|
|
|
|
|
|
|
|
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Depositary
Receipt Risk
|
|
|
|
|
|
|
|
|
X
|
X
|
|
X
|
|
X
|
|
Foreign
Securities Risk
|
|
|
|
|
|
|
|
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Geographic
Concentration Risk
|
|
|
|
|
|
|
|
|
X
|
X
|
X
|
X
|
X
|
|
|
International
Closed-Market Trading Risk
|
|
|
|
|
|
|
|
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Cybersecurity
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Early
Close/Trading Halt Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Equity
Securities Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
High
Portfolio Turnover Risk
|
|
|
X
|
|
|
|
X
|
X
|
X
|
X
|
X
|
X
|
|
X
|
|
Investment
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Money
Market Instrument Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Non-Diversification
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
657
|
Direxion Shares ETF
Trust Prospectus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion
Daily Mid Cap Bull 3X Shares
|
Direxion
Daily Mid Cap Bear 3X Shares
|
Direxion
Daily S&P 500
®
Bull 3X Shares
|
Direxion
Daily S&P 500
®
Bear 3X Shares
|
Direxion
Daily Small Cap Bull 3X Shares
|
Direxion
Daily Small Cap Bear 3X Shares
|
Direxion
Daily Dow 30 Bull 3X Shares
|
Direxion
Daily Dow 30 Bear 3X Shares
|
Direxion
Daily MSCI Brazil Bull 3X Shares
|
Direxion
Daily MSCI Canada Bull 3X Shares
|
Direxion
Daily MSCI Canada Bear 3X Shares
|
Direxion
Daily FTSE China Bull 3X Shares
|
Direxion
Daily FTSE China Bear 3X Shares
|
Direxion
Daily MSCI Developed Markets Bull 3X Shares
|
Direxion
Daily MSCI Developed Markets Bear 3X Shares
|
Securities
Lending Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Special
Risks of Exchange-Traded Funds
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion
Daily MSCI Emerging Markets Bull 3X Shares
|
Direxion
Daily MSCI Emerging Markets Bear 3X Shares
|
Direxion
Daily FTSE Europe Bull 3X Shares
|
Direxion
Daily MSCI India Bull 3X Shares
|
Direxion
Daily MSCI Italy Bull 3X Shares
|
Direxion
Daily MSCI Italy Bear 3X Shares
|
Direxion
Daily MSCI Japan Bull 3X Shares
|
Direxion
Daily Latin America Bull 3X Shares
|
Direxion
Daily MSCI Mexico Bull 3X Shares
|
Direxion
Daily MSCI Mexico Bear 3X Shares
|
Direxion
Daily Russia Bull 3X Shares
|
Direxion
Daily Russia Bear 3X Shares
|
Direxion
Daily MSCI South Korea Bull 3X Shares
|
Direxion
Daily EURO STOXX 50
®
Bull 3X Shares
|
Direxion
Daily EURO STOXX 50
®
Bear 3X Shares
|
Effects
of Compounding and Market Volatility Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Leverage
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Market
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Aggressive
Investment Techniques Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Liquidity
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Derivatives
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Counterparty
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Shorting
Risk
|
|
X
|
|
|
|
X
|
|
|
|
X
|
|
X
|
|
|
X
|
Cash
Transaction Risk
|
|
X
|
|
|
|
X
|
|
|
|
X
|
|
X
|
|
|
X
|
Intra-Day
Investment Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Daily
Index Correlation/Tracking Risk
|
X
|
|
X
|
X
|
X
|
|
X
|
X
|
X
|
|
X
|
|
X
|
X
|
|
Daily
Inverse Index Correlation/Tracking Risk
|
|
X
|
|
|
|
X
|
|
|
|
X
|
|
X
|
|
|
X
|
Other
Investment Companies (including ETFs) Risk
|
X
|
|
X
|
X
|
X
|
|
X
|
X
|
X
|
|
X
|
|
X
|
X
|
|
Underlying
Fund Investment Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace
and Defense Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
Biotechnology
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazilian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chinese
Securities Risk
|
X
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communication
Services Sector Risk
|
|
|
|
|
|
|
|
|
X
|
X
|
|
|
|
|
|
Direxion Shares
ETF Trust Prospectus
|
658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion
Daily MSCI Emerging Markets Bull 3X Shares
|
Direxion
Daily MSCI Emerging Markets Bear 3X Shares
|
Direxion
Daily FTSE Europe Bull 3X Shares
|
Direxion
Daily MSCI India Bull 3X Shares
|
Direxion
Daily MSCI Italy Bull 3X Shares
|
Direxion
Daily MSCI Italy Bear 3X Shares
|
Direxion
Daily MSCI Japan Bull 3X Shares
|
Direxion
Daily Latin America Bull 3X Shares
|
Direxion
Daily MSCI Mexico Bull 3X Shares
|
Direxion
Daily MSCI Mexico Bear 3X Shares
|
Direxion
Daily Russia Bull 3X Shares
|
Direxion
Daily Russia Bear 3X Shares
|
Direxion
Daily MSCI South Korea Bull 3X Shares
|
Direxion
Daily EURO STOXX 50
®
Bull 3X Shares
|
Direxion
Daily EURO STOXX 50
®
Bear 3X Shares
|
Consumer
Discretionary Sector Risk
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
Consumer
Goods Sector Risk
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Services Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Staples Sector Risk
|
|
|
|
|
|
|
|
|
X
|
X
|
|
|
|
|
|
Credit
Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
Instrument Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
Country Investing Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emerging
Markets Risk
|
X
|
X
|
|
X
|
|
|
|
X
|
X
|
X
|
X
|
X
|
X
|
|
|
Energy
Sector Risk
|
|
|
|
|
X
|
X
|
|
X
|
|
|
X
|
X
|
|
|
|
European
Economic Risk
|
|
|
X
|
|
X
|
X
|
|
|
|
|
|
|
|
X
|
X
|
Financials
Sector Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
|
X
|
X
|
X
|
|
|
|
|
|
Gold
and Silver Mining Company Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hong
Kong Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indian
Securities Risk
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
Industrials
Sector Risk
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
Information
Technology Sector Risk
|
|
|
|
X
|
|
|
|
|
|
|
|
|
X
|
|
|
Interest
Rate Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Italian
Securities Risk
|
|
|
|
|
X
|
X
|
|
|
|
|
|
|
|
|
|
Japanese
Securities Risk
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
Latin
American Securities Risk
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
Materials
Sector Risk
|
|
|
|
|
|
|
|
X
|
|
|
X
|
X
|
|
|
|
Mexican
Securities Risk
|
|
|
|
|
|
|
|
|
X
|
X
|
|
|
|
|
|
MLP
Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mining
and Metal Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and Gas Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmaceutical
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robotics
& Artificial Intelligence Company Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
|
|
|
Semiconductor
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
Korean Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
Technology
Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities
Sector Risk
|
|
|
|
|
X
|
X
|
|
|
|
|
|
|
|
|
|
Large-Capitalization
Company Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Micro-Capitalization
Company Risk
|
X
|
X
|
X
|
|
|
|
|
|
X
|
X
|
|
|
X
|
|
|
659
|
Direxion Shares ETF
Trust Prospectus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion
Daily MSCI Emerging Markets Bull 3X Shares
|
Direxion
Daily MSCI Emerging Markets Bear 3X Shares
|
Direxion
Daily FTSE Europe Bull 3X Shares
|
Direxion
Daily MSCI India Bull 3X Shares
|
Direxion
Daily MSCI Italy Bull 3X Shares
|
Direxion
Daily MSCI Italy Bear 3X Shares
|
Direxion
Daily MSCI Japan Bull 3X Shares
|
Direxion
Daily Latin America Bull 3X Shares
|
Direxion
Daily MSCI Mexico Bull 3X Shares
|
Direxion
Daily MSCI Mexico Bear 3X Shares
|
Direxion
Daily Russia Bull 3X Shares
|
Direxion
Daily Russia Bear 3X Shares
|
Direxion
Daily MSCI South Korea Bull 3X Shares
|
Direxion
Daily EURO STOXX 50
®
Bull 3X Shares
|
Direxion
Daily EURO STOXX 50
®
Bear 3X Shares
|
Mid-Capitalization
Company Risk
|
|
|
|
|
X
|
X
|
|
X
|
|
|
|
|
|
|
|
Small-
and/or Mid-Capitalization Company Risk
|
X
|
X
|
X
|
X
|
|
|
X
|
|
X
|
X
|
X
|
X
|
X
|
|
|
Currency
Exchange Rate Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Depositary
Receipt Risk
|
X
|
|
X
|
X
|
X
|
|
X
|
X
|
X
|
|
X
|
|
X
|
X
|
|
Foreign
Securities Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Geographic
Concentration Risk
|
|
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
International
Closed-Market Trading Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Cybersecurity
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Early
Close/Trading Halt Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Equity
Securities Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
High
Portfolio Turnover Risk
|
X
|
|
|
|
X
|
X
|
|
X
|
X
|
X
|
X
|
|
X
|
X
|
X
|
Investment
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Money
Market Instrument Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Non-Diversification
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Securities
Lending Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Special
Risks of Exchange-Traded Funds
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion
Daily Aerospace & Defense Bull 3X Shares
|
Direxion
Daily Aerospace & Defense Bear 3X Shares
|
Direxion
Daily S&P Biotech Bull 3X Shares
|
Direxion
Daily S&P Biotech Bear 3X Shares
|
Direxion
Daily Communication Services Index Bull 3X Shares
|
Direxion
Daily Communication Services Index Bear 3X Shares
|
Direxion
Daily Consumer Discretionary Bull 3X Shares
|
Direxion
Daily Consumer Discretionary Bear 3X Shares
|
Direxion
Daily Consumer Staples Bull 3X Shares
|
Direxion
Daily Consumer Staples Bear 3X Shares
|
Direxion
Daily Energy Bull 3X Shares
|
Direxion
Daily Energy Bear 3X Shares
|
Direxion
Daily Financial Bull 3X Shares
|
Direxion
Daily Financial Bear 3X Shares
|
Direxion
Daily Gold Miners Index Bull 3X Shares
|
Direxion
Daily Gold Miners Index Bear 3X Shares
|
Effects
of Compounding and Market Volatility Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Leverage
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Market
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Aggressive
Investment Techniques Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Liquidity
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Derivatives
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Counterparty
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Direxion Shares
ETF Trust Prospectus
|
660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion
Daily Aerospace & Defense Bull 3X Shares
|
Direxion
Daily Aerospace & Defense Bear 3X Shares
|
Direxion
Daily S&P Biotech Bull 3X Shares
|
Direxion
Daily S&P Biotech Bear 3X Shares
|
Direxion
Daily Communication Services Index Bull 3X Shares
|
Direxion
Daily Communication Services Index Bear 3X Shares
|
Direxion
Daily Consumer Discretionary Bull 3X Shares
|
Direxion
Daily Consumer Discretionary Bear 3X Shares
|
Direxion
Daily Consumer Staples Bull 3X Shares
|
Direxion
Daily Consumer Staples Bear 3X Shares
|
Direxion
Daily Energy Bull 3X Shares
|
Direxion
Daily Energy Bear 3X Shares
|
Direxion
Daily Financial Bull 3X Shares
|
Direxion
Daily Financial Bear 3X Shares
|
Direxion
Daily Gold Miners Index Bull 3X Shares
|
Direxion
Daily Gold Miners Index Bear 3X Shares
|
Shorting
Risk
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
Cash
Transaction Risk
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
Intra-Day
Investment Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Daily
Index Correlation/Tracking Risk
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
Daily
Inverse Index Correlation/Tracking Risk
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
Other
Investment Companies (including ETFs) Risk
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
Underlying
Fund Investment Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace
and Defense Industry Risk
|
X
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biotechnology
Industry Risk
|
|
|
X
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazilian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
Chinese
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communication
Services Sector Risk
|
|
|
|
|
X
|
X
|
|
|
|
|
|
|
|
|
|
|
Consumer
Discretionary Sector Risk
|
|
|
|
|
|
|
X
|
X
|
|
|
|
|
|
|
|
|
Consumer
Goods Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Services Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Staples Sector Risk
|
|
|
|
|
|
|
|
|
X
|
X
|
|
|
|
|
|
|
Credit
Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
Instrument Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
Country Investing Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emerging
Markets Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
Energy
Sector Risk
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
|
|
|
|
European
Economic Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financials
Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
|
|
Gold
and Silver Mining Company Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
Healthcare
Sector Risk
|
|
|
X
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hong
Kong Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrials
Sector Risk
|
X
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information
Technology Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Italian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japanese
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latin
American Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials
Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MLP
Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
661
|
Direxion Shares ETF
Trust Prospectus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion
Daily Aerospace & Defense Bull 3X Shares
|
Direxion
Daily Aerospace & Defense Bear 3X Shares
|
Direxion
Daily S&P Biotech Bull 3X Shares
|
Direxion
Daily S&P Biotech Bear 3X Shares
|
Direxion
Daily Communication Services Index Bull 3X Shares
|
Direxion
Daily Communication Services Index Bear 3X Shares
|
Direxion
Daily Consumer Discretionary Bull 3X Shares
|
Direxion
Daily Consumer Discretionary Bear 3X Shares
|
Direxion
Daily Consumer Staples Bull 3X Shares
|
Direxion
Daily Consumer Staples Bear 3X Shares
|
Direxion
Daily Energy Bull 3X Shares
|
Direxion
Daily Energy Bear 3X Shares
|
Direxion
Daily Financial Bull 3X Shares
|
Direxion
Daily Financial Bear 3X Shares
|
Direxion
Daily Gold Miners Index Bull 3X Shares
|
Direxion
Daily Gold Miners Index Bear 3X Shares
|
Mining
and Metal Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
Natural
Gas Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and Gas Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmaceutical
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robotics
& Artificial Intelligence Company Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
Korean Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities
Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large-Capitalization
Company Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Micro-Capitalization
Company Risk
|
|
|
X
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-Capitalization
Company Risk
|
|
|
|
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
|
|
|
|
Small-
and/or Mid-Capitalization Company Risk
|
X
|
X
|
X
|
X
|
|
|
|
|
|
|
|
|
X
|
X
|
X
|
X
|
Currency
Exchange Rate Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
Depositary
Receipt Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
Foreign
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
Geographic
Concentration Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
International
Closed-Market Trading Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
Cybersecurity
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Early
Close/Trading Halt Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Equity
Securities Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
High
Portfolio Turnover Risk
|
|
X
|
X
|
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
|
X
|
|
X
|
|
Investment
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Money
Market Instrument Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Non-Diversification
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Securities
Lending Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Special
Risks of Exchange-Traded Funds
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Direxion Shares
ETF Trust Prospectus
|
662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion
Daily Healthcare Bull 3X Shares
|
Direxion
Daily Homebuilders & Supplies Bull 3X Shares
|
Direxion
Daily Industrials Bull 3X Shares
|
Direxion
Daily Industrials Bear 3X Shares
|
Direxion
Daily Junior Gold Miners Index Bull 3X Shares
|
Direxion
Daily Junior Gold Miners Index Bear 3X Shares
|
Direxion
Daily Metals & Mining Bull 3X Shares
|
Direxion
Daily Metals & Mining Bear 3X Shares
|
Direxion
Daily Natural Gas Related Bull 3X Shares
|
Direxion
Daily Natural Gas Related Bear 3X Shares
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
|
Direxion
Daily Pharmaceutical & Medical Bull 3X Shares
|
Direxion
Daily Pharmaceutical & Medical Bear 3X Shares
|
Direxion
Daily Preferred Stock Bull 3X Shares
|
Effects
of Compounding and Market Volatility Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Leverage
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Market
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Aggressive
Investment Techniques Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Liquidity
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Derivatives
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Counterparty
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Shorting
Risk
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
Cash
Transaction Risk
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
Intra-Day
Investment Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Daily
Index Correlation/Tracking Risk
|
X
|
X
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
Daily
Inverse Index Correlation/Tracking Risk
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
Other
Investment Companies (including ETFs) Risk
|
X
|
X
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
Underlying
Fund Investment Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace
and Defense Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australian
Securities Risk
|
|
|
|
|
X
|
X
|
|
|
|
|
|
|
|
|
|
Banking
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biotechnology
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
|
Brazilian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian
Securities Risk
|
|
|
|
|
X
|
X
|
|
|
|
|
|
|
|
|
|
Chinese
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communication
Services Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Discretionary Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Goods Sector Risk
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Services Industry Risk
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Staples Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
Instrument Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
Country Investing Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emerging
Markets Risk
|
|
|
|
|
X
|
X
|
|
|
X
|
X
|
|
|
|
|
|
Energy
Sector Risk
|
|
|
|
|
|
|
|
|
X
|
X
|
X
|
X
|
|
|
|
European
Economic Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financials
Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold
and Silver Mining Company Risk
|
|
|
|
|
X
|
X
|
|
|
|
|
|
|
|
|
|
Healthcare
Sector Risk
|
X
|
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
|
Homebuilding
Industry Risk
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hong
Kong Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrials
Sector Risk
|
|
X
|
X
|
X
|
|
|
|
|
|
|
|
|
|
|
|
Information
Technology Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Italian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
663
|
Direxion Shares ETF
Trust Prospectus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion
Daily Healthcare Bull 3X Shares
|
Direxion
Daily Homebuilders & Supplies Bull 3X Shares
|
Direxion
Daily Industrials Bull 3X Shares
|
Direxion
Daily Industrials Bear 3X Shares
|
Direxion
Daily Junior Gold Miners Index Bull 3X Shares
|
Direxion
Daily Junior Gold Miners Index Bear 3X Shares
|
Direxion
Daily Metals & Mining Bull 3X Shares
|
Direxion
Daily Metals & Mining Bear 3X Shares
|
Direxion
Daily Natural Gas Related Bull 3X Shares
|
Direxion
Daily Natural Gas Related Bear 3X Shares
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
|
Direxion
Daily Pharmaceutical & Medical Bull 3X Shares
|
Direxion
Daily Pharmaceutical & Medical Bear 3X Shares
|
Direxion
Daily Preferred Stock Bull 3X Shares
|
Japanese
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latin
American Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials
Sector Risk
|
|
|
|
|
|
|
X
|
X
|
|
|
|
|
|
|
|
Mexican
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MLP
Risk
|
|
|
|
|
|
|
|
|
X
|
X
|
|
|
|
|
|
Mining
and Metal Industry Risk
|
|
|
|
|
X
|
X
|
X
|
X
|
|
|
|
|
|
|
|
Natural
Gas Industry Risk
|
|
|
|
|
|
|
|
|
X
|
X
|
|
|
|
|
|
Oil
and Gas Industry Risk
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
|
|
|
Preferred
Stock Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
Pharmaceutical
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
|
Real
Estate Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Industry Risk
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robotics
& Artificial Intelligence Company Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
Korean Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities
Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large-Capitalization
Company Risk
|
X
|
X
|
X
|
X
|
|
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
|
Micro-Capitalization
Company Risk
|
|
X
|
|
|
X
|
X
|
|
|
|
|
X
|
X
|
|
|
|
Mid-Capitalization
Company Risk
|
X
|
|
X
|
X
|
|
|
|
|
|
|
|
|
|
|
|
Small-
and/or Mid-Capitalization Company Risk
|
|
X
|
|
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Currency
Exchange Rate Risk
|
|
|
|
|
X
|
X
|
|
|
X
|
X
|
|
|
|
|
|
Depositary
Receipt Risk
|
|
|
|
|
X
|
|
|
|
X
|
|
|
|
|
|
|
Foreign
Securities Risk
|
|
|
|
|
X
|
X
|
|
|
X
|
X
|
|
|
|
|
|
Geographic
Concentration Risk
|
|
|
|
|
X
|
X
|
|
|
|
|
|
|
|
|
|
International
Closed-Market Trading Risk
|
|
|
|
|
X
|
X
|
|
|
X
|
X
|
|
|
|
|
|
Cybersecurity
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Early
Close/Trading Halt Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Equity
Securities Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
High
Portfolio Turnover Risk
|
|
|
|
X
|
X
|
|
X
|
X
|
|
|
X
|
|
X
|
X
|
X
|
Investment
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Money
Market Instrument Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Non-Diversification
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Securities
Lending Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Special
Risks of Exchange-Traded Funds
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Direxion Shares
ETF Trust Prospectus
|
664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion
Daily MSCI Real Estate Bull 3X Shares
|
Direxion
Daily MSCI Real Estate Bear 3X Shares
|
Direxion
Daily Regional Banks Bull 3X Shares
|
Direxion
Daily Regional Banks Bear 3X Shares
|
Direxion
Daily Retail Bull 3X Shares
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
|
Direxion
Daily Semiconductor Bull 3X Shares
|
Direxion
Daily Semiconductor Bear 3X Shares
|
Direxion
Daily Technology Bull 3X Shares
|
Direxion
Daily Technology Bear 3X Shares
|
Direxion
Daily Transportation Bull 3X Shares
|
Direxion
Daily Transportation Bear 3X Shares
|
Effects
of Compounding and Market Volatility Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Leverage
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Market
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Aggressive
Investment Techniques Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Liquidity
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Derivatives
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Counterparty
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Shorting
Risk
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
Cash
Transaction Risk
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
Intra-Day
Investment Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Daily
Index Correlation/Tracking Risk
|
X
|
|
X
|
|
X
|
X
|
X
|
|
X
|
|
X
|
|
Daily
Inverse Index Correlation/Tracking Risk
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
Other
Investment Companies (including ETFs) Risk
|
X
|
|
X
|
|
X
|
X
|
X
|
|
X
|
|
X
|
|
Underlying
Fund Investment Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace
and Defense Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Australian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking
Industry Risk
|
|
|
X
|
X
|
|
|
|
|
|
|
|
|
Biotechnology
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazilian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Chinese
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Communication
Services Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Discretionary Sector Risk
|
|
|
|
|
X
|
|
|
|
|
|
|
|
Consumer
Goods Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Services Industry Risk
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
Consumer
Staples Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
Instrument Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
Country Investing Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Emerging
Markets Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
European
Economic Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Financials
Sector Risk
|
|
|
X
|
X
|
|
|
|
|
|
|
|
|
Gold
and Silver Mining Company Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
665
|
Direxion Shares ETF
Trust Prospectus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion
Daily MSCI Real Estate Bull 3X Shares
|
Direxion
Daily MSCI Real Estate Bear 3X Shares
|
Direxion
Daily Regional Banks Bull 3X Shares
|
Direxion
Daily Regional Banks Bear 3X Shares
|
Direxion
Daily Retail Bull 3X Shares
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
|
Direxion
Daily Semiconductor Bull 3X Shares
|
Direxion
Daily Semiconductor Bear 3X Shares
|
Direxion
Daily Technology Bull 3X Shares
|
Direxion
Daily Technology Bear 3X Shares
|
Direxion
Daily Transportation Bull 3X Shares
|
Direxion
Daily Transportation Bear 3X Shares
|
Healthcare
Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Hong
Kong Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Indian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrials
Sector Risk
|
|
|
|
|
|
X
|
|
|
|
|
X
|
X
|
Information
Technology Sector Risk
|
|
|
|
|
|
X
|
|
|
X
|
X
|
|
|
Interest
Rate Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Italian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Japanese
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Latin
American Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials
Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
MLP
Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Mining
and Metal Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and Gas Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmaceutical
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate Sector Risk
|
X
|
X
|
|
|
|
|
|
|
|
|
|
|
Retail
Industry Risk
|
|
|
|
|
X
|
|
|
|
|
|
|
|
Robotics
& Artificial Intelligence Company Risk
|
|
|
|
|
|
X
|
|
|
|
|
|
|
Russian
Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor
Industry Risk
|
|
|
|
|
|
|
X
|
X
|
|
|
|
|
South
Korean Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation
Industry Risk
|
|
|
|
|
|
|
|
|
|
|
X
|
X
|
U.S.
Government Securities Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities
Sector Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Large-Capitalization
Company Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Micro-Capitalization
Company Risk
|
X
|
X
|
|
|
|
X
|
|
|
|
|
|
|
Mid-Capitalization
Company Risk
|
|
|
|
|
|
|
X
|
X
|
X
|
X
|
|
|
Small-
and/or Mid-Capitalization Company Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
|
|
|
|
X
|
X
|
Currency
Exchange Rate Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Depositary
Receipt Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion Shares
ETF Trust Prospectus
|
666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion
Daily MSCI Real Estate Bull 3X Shares
|
Direxion
Daily MSCI Real Estate Bear 3X Shares
|
Direxion
Daily Regional Banks Bull 3X Shares
|
Direxion
Daily Regional Banks Bear 3X Shares
|
Direxion
Daily Retail Bull 3X Shares
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
|
Direxion
Daily Semiconductor Bull 3X Shares
|
Direxion
Daily Semiconductor Bear 3X Shares
|
Direxion
Daily Technology Bull 3X Shares
|
Direxion
Daily Technology Bear 3X Shares
|
Direxion
Daily Transportation Bull 3X Shares
|
Direxion
Daily Transportation Bear 3X Shares
|
Foreign
Securities Risk
|
|
|
|
|
|
X
|
|
|
|
|
|
|
Geographic
Concentration Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
International
Closed-Market Trading Risk
|
|
|
|
|
|
X
|
|
|
|
|
|
|
Cybersecurity
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Early
Close/Trading Halt Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Equity
Securities Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
High
Portfolio Turnover Risk
|
X
|
|
X
|
|
X
|
X
|
X
|
|
|
|
|
X
|
Investment
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Money
Market Instrument Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Non-Diversification
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Securities
Lending Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Special
Risks of Exchange-Traded Funds
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
|
|
|
|
|
|
|
|
Direxion
Daily Utilities Bull 3X Shares
|
Direxion
Daily Utilities Bear 3X Shares
|
Direxion
Daily 20+ Year Treasury Bull 3X Shares
|
Direxion
Daily 20+ Year Treasury Bear 3X Shares
|
Direxion
Daily 7-10 Year Treasury Bull 3X Shares
|
Direxion
Daily 7-10 Year Treasury Bear 3X Shares
|
Effects
of Compounding and Market Volatility Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
Leverage
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
Market
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
Aggressive
Investment Techniques Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
Liquidity
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
Derivatives
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
667
|
Direxion Shares ETF
Trust Prospectus
|
|
|
|
|
|
|
|
|
Direxion
Daily Utilities Bull 3X Shares
|
Direxion
Daily Utilities Bear 3X Shares
|
Direxion
Daily 20+ Year Treasury Bull 3X Shares
|
Direxion
Daily 20+ Year Treasury Bear 3X Shares
|
Direxion
Daily 7-10 Year Treasury Bull 3X Shares
|
Direxion
Daily 7-10 Year Treasury Bear 3X Shares
|
Counterparty
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
Shorting
Risk
|
|
X
|
|
X
|
|
X
|
Cash
Transaction Risk
|
|
X
|
|
X
|
|
X
|
Intra-Day
Investment Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
Daily
Index Correlation/Tracking Risk
|
X
|
|
X
|
|
X
|
|
Daily
Inverse Index Correlation/Tracking Risk
|
|
X
|
|
X
|
|
X
|
Other
Investment Companies (including ETFs) Risk
|
X
|
|
X
|
X
|
X
|
X
|
Underlying
Fund Investment Risk
|
|
|
|
X
|
|
X
|
Aerospace
and Defense Industry Risk
|
|
|
|
|
|
|
Australian
Securities Risk
|
|
|
|
|
|
|
Banking
Industry Risk
|
|
|
|
|
|
|
Biotechnology
Industry Risk
|
|
|
|
|
|
|
Brazilian
Securities Risk
|
|
|
|
|
|
|
Canadian
Securities Risk
|
|
|
|
|
|
|
Chinese
Securities Risk
|
|
|
|
|
|
|
Communication
Services Sector Risk
|
|
|
|
|
|
|
Consumer
Discretionary Sector Risk
|
|
|
|
|
|
|
Consumer
Goods Sector Risk
|
|
|
|
|
|
|
Consumer
Services Industry Risk
|
|
|
|
|
|
|
Consumer
Staples Sector Risk
|
|
|
|
|
|
|
Credit
Risk
|
|
|
X
|
X
|
X
|
X
|
Debt
Instrument Risk
|
|
|
X
|
X
|
X
|
X
|
Developed
Country Investing Risk
|
|
|
|
|
|
|
Emerging
Markets Risk
|
|
|
|
|
|
|
Energy
Sector Risk
|
|
|
|
|
|
|
European
Economic Risk
|
|
|
|
|
|
|
Financials
Sector Risk
|
|
|
|
|
|
|
Gold
and Silver Mining Company Risk
|
|
|
|
|
|
|
Healthcare
Sector Risk
|
|
|
|
|
|
|
Homebuilding
Industry Risk
|
|
|
|
|
|
|
Hong
Kong Securities Risk
|
|
|
|
|
|
|
Indian
Securities Risk
|
|
|
|
|
|
|
Industrials
Sector Risk
|
|
|
|
|
|
|
Information
Technology Sector Risk
|
|
|
|
|
|
|
Interest
Rate Risk
|
|
|
X
|
X
|
X
|
X
|
Italian
Securities Risk
|
|
|
|
|
|
|
Japanese
Securities Risk
|
|
|
|
|
|
|
Latin
American Securities Risk
|
|
|
|
|
|
|
Materials
Sector Risk
|
|
|
|
|
|
|
Mexican
Securities Risk
|
|
|
|
|
|
|
MLP
Risk
|
|
|
|
|
|
|
Mining
and Metal Industry Risk
|
|
|
|
|
|
|
Natural
Gas Industry Risk
|
|
|
|
|
|
|
Oil
and Gas Industry Risk
|
|
|
|
|
|
|
Direxion Shares
ETF Trust Prospectus
|
668
|
|
|
|
|
|
|
|
|
Direxion
Daily Utilities Bull 3X Shares
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Direxion
Daily Utilities Bear 3X Shares
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Direxion
Daily 20+ Year Treasury Bull 3X Shares
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Direxion
Daily 20+ Year Treasury Bear 3X Shares
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Direxion
Daily 7-10 Year Treasury Bull 3X Shares
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Direxion
Daily 7-10 Year Treasury Bear 3X Shares
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Preferred
Stock Risk
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Pharmaceutical
Industry Risk
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Real
Estate Sector Risk
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Retail
Industry Risk
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Robotics
& Artificial Intelligence Company Risk
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Russian
Securities Risk
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Semiconductor
Industry Risk
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South
Korean Securities Risk
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Technology
Sector Risk
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Transportation
Industry Risk
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U.S.
Government Securities Risk
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X
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X
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X
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X
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Utilities
Sector Risk
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X
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X
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Large-Capitalization
Company Risk
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X
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X
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Micro-Capitalization
Company Risk
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Mid-Capitalization
Company Risk
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X
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X
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Small-
and/or Mid-Capitalization Company Risk
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Currency
Exchange Rate Risk
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Depositary
Receipt Risk
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Foreign
Securities Risk
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Geographic
Concentration Risk
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International
Closed-Market Trading Risk
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Cybersecurity
Risk
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X
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X
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X
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X
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X
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X
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Early
Close/Trading Halt Risk
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X
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X
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X
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X
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X
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X
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Equity
Securities Risk
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X
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X
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High
Portfolio Turnover Risk
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X
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X
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Investment
Risk
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X
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X
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X
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X
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X
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X
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Money
Market Instrument Risk
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X
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X
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X
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X
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X
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X
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Non-Diversification
Risk
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X
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X
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X
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X
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X
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X
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Securities
Lending Risk
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X
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X
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X
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X
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X
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X
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Special
Risks of Exchange-Traded Funds
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X
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X
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X
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X
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X
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X
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Effects of Compounding and Market Volatility Risk
Each Fund
has a daily leveraged investment objective and a Fund’s performance for periods greater than a trading day will be the result of each day's returns compounded over the period, which is very likely to differ from underlying index’s
performance times the stated multiple in a Fund’s investment objective, before fees and expenses. Compounding affects all investments, but has a more significant impact on leveraged funds, particularly during periods of higher index
volatility. A Fund does not attempt to, and should not be expected to, provide returns, before fees and expenses, which are 300% or -300% of the performance of its underlying
index for periods other than one trading day. The
impact of compounding will affect each shareholder differently depending on the period of time an investment in a Fund is held and the volatility of its underlying index during the period an investment in a Fund is held. The effect of compounding
becomes more pronounced as volatility and a shareholder’s holding period increase.
Over time, the cumulative percentage
increase or decrease in the value of a Fund’s portfolio may diverge significantly from the cumulative percentage increase or decrease in 300% or -300% of the return of a Fund's underlying index due
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to the compounding
effect of losses and gains on the returns of a Fund. It also is expected that a Fund's use of leverage will cause the Fund to underperform the return of 300% or -300% of its underlying index in a trendless or flat market.
The chart below provides examples of
how index volatility could affect a Fund’s performance. An index’s volatility rate is a statistical measure of the magnitude of fluctuations in the returns of the index. Fund performance for periods greater than one single day can be
estimated given any set of assumptions for the following factors: a) index volatility; b) index performance; c) period of time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with
respect to securities in its underlying index. The chart below illustrates the impact of two principal factors
–
index volatility and index performance
–
on Fund performance. The chart shows estimated Fund returns for a number of combinations of index volatility and index performance over a one-year period. Performance
shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in its underlying index; (ii) there were no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure for the Bull Funds and
inverse leveraged exposure for the Bear Funds) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be worse than those shown.
As shown below, a Bull Fund would be
expected to lose 17.1% and a Bear Fund would be expected to lose 31.3% if the underlying index provided no return over a one year period during which the underlying index experienced annualized volatility of 25%. If the underlying index’s
annualized volatility were to rise to 75%, the hypothetical loss for a one year period widens to approximately 81.5% for a Bull Fund and 96.6% for a Bear Fund. At higher ranges of volatility, there is a chance of a near complete loss of value even
if the underlying index is flat. For instance, if the underlying index’s annualized volatility is 100%, it is likely that a Bull Fund would lose 95% of its value, and a Bear Fund would lose approximately 100% of its value, even if the
underlying index’s cumulative return for the year was only 0%. The volatility of ETFs or instruments that reflect the value of the underlying index such as swaps, may differ from the volatility of a Fund's underlying index.
Bull Fund
One
Year
Index
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300%
One
Year
Index
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Volatility
Rate
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Return
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Return
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10%
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25%
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50%
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75%
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100%
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-60%
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-180%
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-93.8%
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-94.7%
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-97.0%
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-98.8%
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-99.7%
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-50%
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-150%
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-87.9%
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-89.6%
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-94.1%
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-97.7%
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-99.4%
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-40%
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-120%
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-79.0%
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-82.1%
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-89.8%
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-96.0%
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-98.9%
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-30%
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-90%
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-66.7%
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-71.6%
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-83.8%
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-93.7%
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-98.3%
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-20%
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-60%
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-50.3%
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-57.6%
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-75.8%
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-90.5%
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-97.5%
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-10%
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-30%
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-29.3%
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-39.6%
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-65.6%
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-86.5%
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-96.4%
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0%
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0%
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-3.0%
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-17.1%
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-52.8%
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-81.5%
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-95.0%
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10%
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30%
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29.2%
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10.3%
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-37.1%
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-75.4%
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-93.4%
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20%
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60%
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67.7%
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43.3%
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-18.4%
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-68.0%
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-91.4%
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30%
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90%
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113.2%
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82.1%
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3.8%
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-59.4%
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-89.1%
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40%
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120%
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166.3%
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127.5%
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29.6%
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-49.2%
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-86.3%
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50%
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150%
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227.5%
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179.8%
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59.4%
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-37.6%
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-83.2%
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60%
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180%
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297.5%
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239.6%
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93.5%
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-24.2%
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-79.6%
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Bear Fund
One
Year
Index
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-300%
One
Year
Index
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Volatility
Rate
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Return
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Return
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10%
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25%
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50%
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75%
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100%
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-60%
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180%
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1371.5%
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973.9%
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248.6%
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-46.5%
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-96.1%
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-50%
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150%
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653.4%
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449.8%
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78.5%
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-72.6%
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-98.0%
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-40%
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120%
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336.0%
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218.2%
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3.3%
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-84.2%
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-98.9%
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-30%
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90%
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174.6%
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100.4%
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-34.9%
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-90.0%
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-99.3%
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-20%
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60%
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83.9%
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34.2%
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-56.4%
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-93.3%
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-99.5%
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-10%
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30%
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29.2%
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-5.7%
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-69.4%
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-95.3%
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-99.7%
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0%
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0%
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-5.8%
|
-31.3%
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-77.7%
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-96.6%
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-99.8%
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10%
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-30%
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-29.2%
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-48.4%
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-83.2%
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-97.4%
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-99.8%
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20%
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-60%
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-45.5%
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-60.2%
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-87.1%
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-98.0%
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-99.9%
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30%
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-90%
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-57.1%
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-68.7%
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-89.8%
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-98.4%
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-99.9%
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40%
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-120%
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-65.7%
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-75.0%
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-91.9%
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-98.8%
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-99.9%
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50%
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-150%
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-72.1%
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-79.6%
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-93.4%
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-99.0%
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-99.9%
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60%
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-180%
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-77.0%
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-83.2%
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-94.6%
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-99.2%
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-99.9%
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Holding an
unmanaged position opens the investor to the risk of market volatility adversely affecting the performance of the investment. A Fund is not appropriate for investors who do not intend to actively monitor and manage their portfolios. Each table is
intended to underscore the fact that a Fund is designed as a short-term trading vehicle for
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investors who intend to actively monitor and manage
their portfolios.
For additional
information and examples demonstrating the effects of volatility and index performance on the long-term performance of the Funds, see the “Additional Information Regarding Investment Techniques and Policies” section, and “Special
Note Regarding the Correlation Risks of the Funds” in the Funds' Statement of Additional Information.
Leverage Risk
To achieve its daily investment objective, each Fund
employs leverage and is exposed to the risk that adverse daily performance of a Fund's underlying index will be magnified. This means that, if a Fund's underlying index experiences an adverse daily performance, an investment in the Fund will be
reduced by an amount equal to 3% for every 1% of adverse performance, not including the costs of financing leverage and other operating expenses, which would further reduce its value.
A Fund could theoretically lose an
amount greater than its net assets if its underlying index moves more than 33% in a direction adverse to the Fund (meaning a decline in the value of the underlying index of a Bull Fund and a gain in the value of the underlying index for a Bear
Fund). Leverage will also have the effect of magnifying any differences in a Fund’s correlation with the underlying index.
To fully understand the risks of
using leverage in a Fund, see “Effects of Compounding and Market Volatility Risk” above.
Market Risk
Market risks include political, regulatory, market
and economic developments, including developments that impact specific economic sectors, industries or segments of the market. A Bull Fund typically would lose value on a day when its underlying index declines. A Bear Fund typically would lose value
on a day when its underlying index increases.
Turbulence in the financial markets
and reduced liquidity may negatively affect issuers, which could have an adverse effect on each Fund. A Fund’s NAV could decline over short periods due to short-term market movements and over longer periods during market downturns.
Aggressive Investment Techniques
Risk
Using investment techniques that may be
considered aggressive, such as futures contracts, forward contracts, options and swap agreements, includes the risk of potentially dramatic changes (losses) in the value of the instruments, imperfect correlations between the price of the instrument
and the underlying security or index, and volatility of a Fund.
Liquidity Risk
Some securities held by a Fund, including
derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including, but not limited to, an economic crisis, natural
disasters, new legislation or regulatory changes inside or outside the United States. Illiquid securities may be difficult to value, especially in changing or volatile markets. If a Fund is forced to sell
an illiquid security at an unfavorable time or
price, a Fund may incur a loss. Certain market conditions may prevent a Fund from limiting losses, realizing gains or achieving a high correlation with its underlying index. There is no assurance that a security that is deemed liquid when purchased
will continue to be liquid.
Market illiquidity may cause losses
for certain Funds. For these Funds, to the extent that a Fund's underlying index moves adversely, a Fund may be one of many market participants that are attempting to transact in the securities of an underlying index or correlated instruments. Under
such circumstances, the market for investments of the underlying index may lack sufficient liquidity for all market participants' trades. Therefore, a Fund may have more difficulty transacting in securities of the underlying index or correlated
investments such as financial instruments and a Fund's transactions could exacerbate the price change of the securities of the underlying index. Additionally, because a Fund is leveraged, a minor adverse change in the value of underlying index
should be expected to have a substantial adverse impact on a Fund.
Derivatives Risk
A Fund uses investment techniques, including
investments in derivatives, such as swaps, futures and forward contracts, and options that may be considered aggressive. The use of derivatives may result in larger losses or smaller gains than investing in the underlying securities directly, or in
the case of the Bear Funds, directly shorting the underlying securities. Investments in these derivatives may generally be subject to market risks that cause their prices to fluctuate more than an investment directly in a security and may increase
the volatility of a Fund. The use of derivatives may expose a Fund to additional risks such as counterparty risk, liquidity risk and increased daily correlation risk. When a Fund uses derivatives, there may be imperfect correlation between the value
of the underlying reference assets and the derivative, which may prevent a Fund from achieving its investment objective.
A Fund may use
swaps on the underlying index. If the underlying index has a dramatic intraday move in value that causes a material decline in a Fund’s NAV, the terms of the swap agreement between a Fund and its counterparty may allow the counterparty to
immediately close out of the transaction with a Fund. In such circumstances, a Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with a Fund’s daily leveraged
investment objective. This may prevent a Fund from achieving its daily leveraged investment objective particularly if the underlying index reverses all or a portion of its intraday move by the end of the day. The value of an investment in the Fund
may change quickly and without warning. Any financing, borrowing or other costs associated with using derivatives may also have the effect of lowering a Fund’s return.
In addition, a Fund’s investments
in derivatives are subject to the following risks:
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Swap Agreements
. Swap agreements are entered into primarily with major global financial institutions for a
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specified period which may range from one day to
more than one year. In a standard swap transaction, two parties agree to exchange the return (or differentials in rates of return) earned or realized on particular predetermined reference or underlying securities or instruments. The gross return to
be exchanged or swapped between the parties is calculated based on a notional amount or the return on or change in value of a particular dollar amount invested in a reference asset.
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Futures Contracts
. A futures contact is a contract to purchase or sell a particular security, or the cash value of an index, at a specified future date at a price agreed upon when the contract is made. Under such contracts, no delivery of
the actual securities is required. Rather, upon the expiration of the contract, settlement is made by exchanging cash in an amount equal to the difference between the contract price and the closing price of a security or index at expiration, net of
the variation margin that was previously paid.
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•
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Forward Contracts
. Forward contracts are two-party contracts pursuant to which one party agrees to pay the counterparty a fixed price for an agreed upon amount of commodities, securities, or the cash value of the commodities, securities
or the securities index, at an agreed upon date. A forward currency contract is an obligation to buy or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract.
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•
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Options
. An option is a contract that gives the purchaser (holder) of the option, in return for a premium, the right to buy from (call) or sell to (put) the seller (writer) of the option the security or currency underlying the
option at a specified exercise price at any time during the term of the option (normally not exceeding nine months). The writer of an option has the obligation upon exercise of the option to deliver the underlying security or currency upon payment
of the exercise price or to pay the exercise price upon delivery of the underlying security or currency.
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•
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Options
on Futures Contracts
. An option on a futures contract provides the holder with the right to enter into a “long” position in the underlying futures contract, in the case of a call option, or a
“short” position in the underlying futures contract in the case of a put option, at a fixed exercise price to a stated expiration date. Upon exercise of the option by the holder, the contract market clearing house establishes a
corresponding short position for the writer of the option, in the case of a call option, or a corresponding long position, in the case of a put option.
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Counterparty Risk
Counterparty risk
is the risk that a counterparty is unwilling or unable to make timely payments to meet its contractual obligations with respect to the amount a Fund expects to receive from a counterparty to a financial instrument entered into by a Fund. Each Fund
generally enters into derivatives transactions, such as the swap agreements, with counterparties such that either party can terminate the contract without penalty prior to the termination date. A
Fund may be negatively impacted if a counterparty
becomes bankrupt or otherwise fails to perform its obligations under such a contract, or if any collateral posted by the counterparty for the benefit of a Fund is insufficient or there are delays in a Fund’s ability to access such collateral.
If the counterparty becomes bankrupt or defaults on its payment obligations to a Fund, it may experience significant delays in obtaining any recovery, may obtain only a limited recovery or obtain no recovery and the value of an investment held by a
Fund may decline. The Fund may also not be able to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral, if such remedies are stayed or eliminated under special resolutions adopted in the
United States, the European Union and various other jurisdictions. European Union rules and regulations intervene when a financial institution is experiencing financial difficulties and could reduce, eliminate, or convert to equity a
counterparty’s obligations to a Fund (sometimes referred to as a “bail in”).
A Fund typically enters into
transactions with counterparties that present minimal risks based on the Adviser’s assessment of the counterparty’s creditworthiness, or its capacity to meet its financial obligations during the term of the derivative agreement or
contract. The Adviser considers factors such as counterparty credit rating among other factors when determining whether a counterparty is creditworthy. The Adviser regularly monitors the creditworthiness of each counterparty with which a Fund
transacts. Each Fund generally enters into swap agreements or other financial instruments with major, global financial institutions and seeks to mitigate risks by generally requiring that the counterparties for each Fund to post collateral, marked
to market daily, in an amount approximately equal to what the counterparty owes a Fund, subject to certain minimum thresholds. To the extent any such collateral is insufficient or there are delays in accessing the collateral, the Funds will be
exposed to the risks described above. If a counterparty’s credit ratings decline, a Fund may be subject to a bail-in, as described above.
In addition, a Fund may enter into
swap agreements with a limited number of counterparties, which may increase a Fund’s exposure to counterparty credit risk. A Fund does not specifically limit its counterparty risk with respect to any single counterparty. There is a risk that
no suitable counterparties are willing to enter into, or continue to enter into, transactions with a Fund and, as a result, a Fund may not be able to achieve its investment objective. Additionally, although a counterparty to a centrally cleared swap
agreement and/or an exchange-traded futures contract is often backed by a futures commission merchant (“FCM”) or a clearing organization that is further backed by a group of financial institutions, there may be instances in which a FCM
or a clearing organization would fail to perform its obligations, causing significant losses to a Fund.
Shorting Risk
Shareholders should lose money when the Index rises,
which is a result that is the opposite from traditional index tracking funds. A Bear Fund may engage in short sales designed to earn the Bear Fund a profit from the decline in the price of particular securities, baskets of securities or indices.
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sales are transactions in which a Bear Fund borrows
securities from a broker and sells the borrowed securities. A Bear Fund is obligated to replace the security borrowed by purchasing the security at the market price at the time of replacement. If the market price of the underlying security goes down
between the time a Bear Fund sells the security and buys it back, a Bear Fund will realize a gain on the transaction. Conversely, if the underlying security goes up in price during the period, a Bear Fund will realize a loss on the transaction. Any
such loss is increased by the amount of premium or interest a Bear Fund must pay to the lender of the security. Likewise, any gain will be decreased by the amount of premium or interest a Bear Fund must pay to the lender of the security. A Bear
Fund’s investment performance may also suffer if the Bear Fund is required to close out a short position earlier than it had intended. This would occur if the securities lender required a Bear Fund to deliver the securities the Bear Fund
borrowed at the commencement of the short sale and the Bear Fund was unable to borrow the securities from another securities lender or otherwise obtain the security by other means. In addition, a Bear Fund may be subject to expenses related to short
sales that are not typically associated with investing in securities directly, such as costs of borrowing and margin account maintenance costs associated with the Bear Fund’s open short positions. As the holder of a short position, a Bear Fund
also is responsible for paying the dividends and interest accruing on the short position, which is an expense to the Bear Fund that could cause the Bear Fund to lose money on the short sale and may adversely affect its performance.
A Bear Fund may
also seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may expose a Bear Fund to certain risks such as an increase in volatility or decrease in the liquidity of the
securities of the underlying short position. If a Bear Fund were to experience this volatility or decreased liquidity, a Bear Fund’s return may be lower, the Fund’s ability to obtain inverse exposure through the use of derivatives may be
limited or a Bear Fund may be required to obtain inverse exposure through alternative investment strategies that may be less desirable or more costly to implement. If the securities underlying the short positions are thinly traded or have a limited
market due to various factors, including regulatory action, a Bear Fund may be unable to meet its investment objective due to a lack of available securities or counterparties. A Bear Fund may not be able to issue additional Creation Units during
period when it cannot meet its investment objective due to these factors. Any income, dividends or payments by the assets underlying a Bear Fund’s short positions will negatively impact the Fund.
Cash Transaction Risk
Unlike most ETFs, each Bear Fund currently intends
to effect creation and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial instruments held by each Bear Fund. As such, investment in each Bear Fund may be less tax efficient than
investment in a conventional ETF. ETFs generally are able to make in-kind redemptions and avoid being taxed on gains on the distributed portfolio securities at the fund level. Because each Bear Fund currently intends to effect
redemptions principally for cash, each Bear Fund may
be required to sell portfolio securities in order to obtain the cash needed to distribute redemption proceeds. Each Bear Fund may recognize a capital gain on these sales that might not have been incurred if such Bear Fund had made a redemption
in-kind and this may decrease the tax efficiency of the Bear Fund compared to ETFs that utilize an in-kind redemption process.
Intra-Day Investment Risk
Each Fund seeks
daily leveraged investment results, which should not be equated with seeking an investment objective for shorter than a day. Thus, an investor who purchases Fund shares after the close of the markets on one trading day and before the close of the
markets on the next trading day will likely have more, or less, than 300% or -300% leveraged investment exposure to the underlying index, depending upon the movement of the underlying index from the end of one trading day until the time of purchase.
If the underlying index moves in a direction favorable to a Fund, the investor will receive less than 300% or -300% exposure to the underlying index. Conversely, if the underlying index moves in a direction adverse to a Fund, the investor will
receive exposure to the underlying index greater than 300% or -300%. Thus, an investor that purchases shares intra-day may experience performance that is greater than, or less than, a Fund’s stated multiple of its underlying index.
If there is a significant intra-day
market event and/or the securities of the underlying index experience a significant change in value, a Fund may not meet its investment objective or rebalance its portfolio appropriately. Additionally, a Fund may close to purchases and sales of
Shares prior to the close of regular trading on the Exchange and incur significant losses.
Daily Index Correlation/Tracking
Risk
For each Bull
Fund, there is no guarantee that each Bull Fund will achieve a high degree of correlation to its underlying index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with its underlying index, each
Bull Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. In addition, the target amount of portfolio exposure to the underlying index is impacted dynamically by the underlying
index’s movement. Because of this, it is unlikely that each Bull Fund will be perfectly exposed to the underlying index at the end of each day. The possibility of each Bull Fund being materially over- or under-exposed to the underlying index
increases on days when the underlying index is volatile near the close of the trading day. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect each Bull Fund’s ability to adjust exposure to the required
levels.
Because an underlying
index may include instruments that trade on a different market than a Bull, the Fund's return may vary from a multiple of the performance of the underlying index because different markets may close before the Exchange opens or may not be open for
business on the same calendar days as a Bull Fund. Additionally, due to differences in trading hours between different markets, and because the level of the underlying index may be
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determined using
prices obtained at times other than a Bull Fund's NAV calculation time, correlation to the underlying index may be measured by comparing the Fund's daily return to a multiple of the daily performance of the underlying index or by comparing the daily
change in the Fund's NAV per share to a multiple of the daily performance of one or more U.S. ETFs that reflect the values of the securities underlying the underlying index as of a Bull Fund's NAV calculation time. It is important to note that the
correlation to these ETFs may vary from the correlation to the underlying index due to embedded costs and other factors.
Each Bull Fund may have difficulty
achieving its daily leveraged investment objective due to fees, expenses, transactions costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets
for the securities or derivatives held by each Bull Fund. Each Bull Fund may not have investment exposure to all securities in the underlying index, or its weighting of investment exposure to such stocks or industries may be different from that of
the underlying index. In addition, each Bull Fund may invest in securities or financial instruments not included in the underlying index. Each Bull Fund may be subject to large movements of assets into and out of each Bull Fund, potentially
resulting in a Fund being over- or under-exposed to the underlying index. Activities surrounding periodic index reconstitutions and other index rebalancing events may hinder each Bull Fund’s ability to meet its daily leveraged investment
objective. Each Bull Fund may take or refrain from taking positions to improve the tax efficiency or to comply with various regulatory restrictions, either of which may negatively impact each Bull Fund’s correlation to the underlying
index.
Daily Inverse Index
Correlation/Tracking Risk
Investors will
lose money when the underlying index of a Bear rises, which is a result that is the opposite from traditional index funds. There is no guarantee that a Bear Fund will achieve a high degree of inverse correlation to its underlying index and therefore
achieve its daily inverse leveraged investment objective. To achieve a high degree of inverse correlation with the underlying index, a Bear Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily inverse leveraged
investment objective. A Bear Fund may have difficulty achieving its daily inverse leveraged investment objective due to fees, expenses, transaction costs, financing costs related to the use of derivatives, income items, valuation methodology,
accounting standards and disruptions or illiquidity in the markets for the securities or derivatives held by a Bear Fund. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect a Bear Fund’s ability to
adjust exposure to the required levels.
Because an underlying index may
include instruments that trade on a different market than a Bear Fund, a Bear Fund's return may vary from a multiple of the performance of an underlying index because different markets may close before the Exchange opens or may not be open for
business on the same calendar days as a Bear Fund. Additionally, due to differences in trading hours between different markets,
and because the level of the underlying index may be
determined using prices obtained at times other than a Fund's NAV calculation time, correlation to the underlying index may be measured by comparing a Fund's daily return to a multiple of the daily performance of the underlying index or by comparing
the daily change in a Fund's NAV per share to a multiple of the daily performance of one or more U.S. ETFs that reflect the values of the securities underlying the underlying index as of a Fund's NAV calculation time. It is important to note that
the correlation to these ETFs may vary from the correlation to a Fund’s underlying index due to embedded costs and other factors.
A Bear Fund may not have investment
exposure to all securities in its underlying index, or its weighting of investment exposure to such stocks or industries may be different from that of the underlying index. In addition, a Bear Fund may invest in securities or financial instruments
not included in the underlying index. A Bear Fund may be subject to large movements of assets into and out of the Bear Fund, potentially resulting in the Bear Fund being over- or under-exposed to its underlying index. In addition, the target amount
of portfolio exposure to the underlying index is impacted dynamically by the underlying index’s movement. Because of this, it is unlikely that a Bear Fund will be perfectly exposed to its underlying index at the end of each day. The
possibility of a Bear Fund being materially over- or under-exposed to its underlying index increases on days when the underlying index is volatile near the close of the trading day. Activities surrounding periodic underlying index reconstitutions
and other underlying index rebalancing or reconstitution events may hinder a Bear Fund’s ability to meet its daily inverse leveraged investment objective.
Other Investment Companies (including
ETFs) Risk
By investing in
another investment company, including an ETF, a Fund becomes a shareholder of that investment company and as a result, Fund shareholders indirectly bear a Fund’s proportionate share of the fees and expenses of the other investment company, in
addition to the fees and expenses Fund shareholders of a Fund’s own operations. As a shareholder, a fund must rely on the other investment company to achieve its investment objective. A Fund’s performance may be magnified positively or
negatively by virtue of its investment in other investment companies. If the other investment company fails to achieve its investment objective, the value of a Fund’s investment will not perform as expected, thus affecting a Fund’s
performance and its correlation with its underlying index. In addition, because shares of ETFs are listed and traded on national stock exchanges, their shares potentially may trade at a discount or a premium, which may impact the price at which a
Fund purchases, sells or values the other investment company shares which may impact a Fund’s ability to achieve its investment objective. Investments in such shares may be subject to brokerage and other trading costs, which could result in
greater expenses to a Fund. Finally, depending on the demand in the market, a Fund may not be able to liquidate its holdings in ETFs at an optimal price or time, which may adversely affect a Fund’s performance.
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Underlying Fund Investment Risk
Certain Bear Funds may invest a portion of their
assets in an Underlying Fund, an ETF traded in the secondary market. As a result, the performance of a Fund may be impacted by the performance of the market price of the shares of an Underlying Fund. A Fund’s net asset value is expected to
change with a change in the value of an Underlying Fund which is impacted by the value of the Underlying Fund’s investments. An investment in a Fund will entail more fees and expenses. Please also see “Other Investment Companies
(including ETFs) Risk” and “Market Price Variance Risk.” Further, to the extent that the Adviser does not waive fees in an amount equal to the fees it earns from a Fund’s investment in the Underlying Fund, the Adviser is
subject to a conflict of interest when investing a Fund’s assets in the Underlying Fund as it will earn advisory fees from both the Fund and the Underlying Fund.
Aerospace and Defense Industry Risk
Companies in the aerospace and defense industries
can be significantly affected by changes in government regulations and spending policies, economic conditions and industry consolidation. The aerospace industry in particular has recently been affected by adverse economic conditions and
consolidation within the industry.
Australian Securities
Risk
Investments in Australian issuers may subject a fund
to regulatory, political, currency, security, and economic risk specific to Australia. The Australian economy is heavily dependent on exports from the agricultural and mining sectors. As a result, the Australian economy is susceptible to
fluctuations in the commodity markets. The Australian economy is also becoming increasingly dependent on its growing services industry. The Australian economy is dependent on trading with key trading partners, including the United States, China,
Japan, Singapore and certain European countries. Reduction in spending on Australian products and services, or changes in any of the economies, may cause an adverse impact on the Australian economy. Additionally, Australia is located in a part of
the world that has historically been prone to natural disasters, such as hurricanes and droughts, and is economically sensitive to environmental events. Any such event may adversely impact the Australian economy, causing an adverse impact on the
value of a fund.
Banking Industry
Risk
Investments in securities issued by,
and/or having exposure to, companies engaged in the banking industry can be significantly affected by extensive governmental regulation, which may limit both the amounts and types of loans and other financial commitments they can make, and the
interest rates and fees they can charge and amount of capital they must maintain. Profitability is largely dependent on the availability and cost of capital funds, and can fluctuate significantly when interest rates change. Credit losses resulting
from financial difficulties of borrowers can negatively impact the sector. Banks may also be subject to severe price competition. The regional banking industry is highly
competitive and thus, failure to maintain or
increase market share may result in regional bank failures or mergers with larger, or multi-national banks.
Biotechnology Industry Risk
Companies in the biotechnology industry invest
heavily in research and development which may not lead to commercially successful products. The biotech industry is also subject to significant governmental regulation which may delay or inhibit the release of new products. Many biotech companies
are dependent upon their ability to use and enforce intellectual property rights and patents. Any impairment or expiration of such rights may have adverse financial consequences for these companies. Biotech stocks, especially those of smaller,
less-seasoned companies, tend to be more volatile than the overall market. Biotech companies can be significantly affected by technological change and obsolescence, product liability lawsuits and consequential high insurance costs.
Brazilian Securities Risk
Investments in, and/or exposure to, securities of
Brazilian issuers involves risks that may be greater than if a Fund’s investments were more geographically diverse. Brazil’s economy is heavily dependent on trading with key partners. Any increase or decrease in the volume of this
trading, changes in taxes or tariffs, or variance in political relationships between nations may impact the Brazilian economy in a way that would be adverse to a Fund’s investments. The Brazilian economy has historically been exposed to high
rates of inflation and a high level of debt, each of which may reduce and/or prevent economic growth. Additionally, investments in Brazil may be subject to any positive or adverse effects of the varying nature of its economic landscape with respect
to expropriation and/or nationalization of assets; strengthened or lessened restrictions on, and government intervention in, international trade; confiscatory taxation; political instability, including authoritarian and/or military involvement in
governmental decision making; and armed conflict and its impact on the economy as a result of civil war and social instability as a result of religious, ethnic and/or socioeconomic unrest.
Canadian Securities Risk
The United States is Canada’s largest trading
and investment partner and the Canadian economy is significantly affected by developments in the U.S. economy. Since the implementation of North American Free Trade Agreement (“NAFTA”) in 1994 among Canada, the United States and Mexico,
total two-way merchandise trade between the United States and Canada has increased significantly. Any downturn in the U.S or Mexican economic activity, which could result from the U.S. threatening to exit NAFTA, is likely to have an adverse impact
on the Canadian economy. The Canadian economy is also dependent upon external trade with other key trading partners, including China and the European Union. In addition, Canada is a large supplier of natural resources (
e.g.
, oil, natural gas and agricultural products). As a result, the Canadian economy is sensitive to fluctuations in certain commodity prices.
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Chinese Securities Risks
Investment in, and/or exposure to, the securities of
Chinese issuers involves risks that may be greater than if a Fund’s investments were more geographically diverse. The Chinese economy is generally considered an emerging market and can be significantly affected by economic and political
conditions and policy in China and surrounding Asian countries. In addition, the Chinese economy is export-driven and highly reliant on trade. A downturn in the economies of China’s primary trading partners could slow or eliminate the growth
of the Chinese economy. Additionally, the economy of China differs greatly from the U.S. economy in such respects as, structure, general development, government involvement, wealth distribution, rate of inflation, interest rates, allocation of
resources and capital reinvestment. Specifically, issuers in China are subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than issuers in more developed markets, and therefore, all material
information may not be available or reliable.
Chinese Government Risk
The Chinese government has historically exercised
substantial control over virtually every sector of the Chinese economy through administrative regulation and/or state ownership. In the past, the Chinese government has from time to time taken actions that influence the prices at which certain goods
may be sold, encouraged companies to invest or concentrate in particular industries, induced mergers between companies in certain industries and induced inflation or otherwise regulated economic expansion. If such past actions were to continue, they
may have significant adverse effects on the economic conditions in China. The Chinese government also strictly regulates the payment of foreign currency-denominated obligations and sets monetary policy, and may introduce new laws and regulations
that may impact a Fund. Although China has begun the process of privatizing certain sectors of its economy, privatized entities may lose money and/or be re-nationalized. Accordingly, an investment in Chinese securities could result in a total loss
if these companies are re-nationalized or other regulatory actions are taken by the Chinese government. The Chinese securities markets have a limited operating history and are not as developed as those in the U.S. A small number of issuers may
represent a large portion of the China market as a whole, and prices for securities of these issuers may be very sensitive to adverse political, economic and regulatory developments in China and other Asian countries and may experience significant
losses in such conditions. The Chinese securities markets are characterized by relatively frequent trading halts and low trading volume, resulting in substantially less liquidity and greater price volatility than more developed securities
markets.
Chinese Markets
Risk
The Chinese securities markets have a
limited operating history and are not as developed as those in the United States. A small number of issuers may represent a large portion of the China market as a whole, and prices for securities of these issuers may be very sensitive to adverse
political, economic and regulatory developments in China and other Asian countries and may experience significant losses in such
conditions. The Chinese securities markets are
characterized by relatively frequent trading halts and low trading volume, resulting in substantially less liquidity and greater price volatility than more developed securities markets.
Investments in China may also be
subject to any positive or adverse effects of the varying nature of its economic landscape with respect to expropriation and/or nationalization of assets, strengthened or lessened restrictions on and government intervention in international trade,
confiscatory taxation, political instability, including authoritarian and/or military involvement in governmental decision making, armed conflict, the impact on the economy as a result of civil war and social instability as a result of religious,
ethnic and/or socioeconomic unrest.
Chinese Currency Risk
The value of the renminbi (“RMB”) may be
subject to a high degree of fluctuation due to, among other things, changes in interest rates, the effects of monetary policies issued by the Chinese government, the United States, foreign governments, central banks or supranational entities, the
imposition of current controls of other national or global political or economic developments. The RMB is currently not a freely convertible currency. The Chinese government places strict regulations on RMB and sets the value of RMB to levels
dependent on the value of the U.S. Dollar, but the Chinese government has been under pressure to manage the currency in a less restrictive fashion so that it is less correlated to the U.S. Dollar. The Chinese government’s imposition of
restrictions on the repatriation of RMB out of mainland China may limit the depth of the offshore RMB market and may reduce the liquidity of Chinese investments. A Fund’s exposure to Chinese securities and therefore, the RMB, may result in
volatility.
Communication Services
Sector Risk
The communication services sector
may be dominated by a small number of companies which may lead to additional volatility in the sector. Communication services companies are particularly vulnerable to the potential obsolescence of products and services due to technological advances
and the innovation of competitors. Communication services companies may also be affected by other competitive pressures, such as pricing competition, as well as research and development costs, substantial capital requirements and government
regulation. Fluctuating domestic and international demand, shifting demographics and often unpredictable changes in consumer demand can drastically affect a communication services company’s profitability. Telecommunication service providers
are often required to obtain licenses or franchises in order to provide services in a given location. Licensing or franchise rights are limited, which may result in an advantage to certain participants. Compliance with governmental regulations,
delays or failure to receive regulatory approvals, or the enactment of new regulatory requirements may negatively affect the business of telecommunication services companies. Companies in media and entertainment industries can be significantly
affected by competition, particularly in formulating new products and services using new technologies, and the cyclicality of revenues and earnings. Certain companies in
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the communication services sector may be particular
targets of network security breaches, hacking and potential theft of proprietary or consumer information or disruptions in services, which would have a material adverse effect on their businesses.
Consumer Discretionary Sector Risk
Because companies in the consumer discretionary
sector manufacture products and provide discretionary services directly to the consumer, the success of these companies is tied closely to the performance of the overall domestic and international economy, interest rates, competition and consumer
confidence. Success depends heavily on disposable household income and consumer spending. Also, companies in the consumer discretionary sector may be subject to severe competition, which may have an adverse impact on a company’s profitability.
Changes in demographics and consumer tastes also can affect the demand for, and success of, consumer discretionary products in the marketplace.
Consumer Goods Sector Risk
Investment in, and/or exposure to, the securities of
companies in the consumer goods sector includes the risk that since these companies manufacture products, their success is tied closely to the performance of the overall domestic and international economy, interest rates, competition and consumer
confidence. Additionally, government regulation, including new laws, affecting the permissibility of using various production methods or other types of inputs such as materials, may adversely impact companies in the consumer goods sector. Changes or
trends in commodity prices, which may be influenced or characterized by unpredictable factors may adversely impact companies in the consumer goods sector.
Consumer Services Industry Risk
The
success of consumer product manufacturers and retailers (including food and drug retailers, general retailers, media, and travel and leisure) is tied closely to the performance of the domestic and international economy, interest rates, exchange
rates, competition and consumer confidence. The consumer services industry depends heavily on disposable household income and consumer spending. Companies in the consumer services industry may be subject to severe competition, which may also have an
adverse impact on their profitability. Changes in demographics and consumer preferences may affect the success of consumer service providers.
Consumer Staples Sector Risk
Consumer staples companies are subject to government
regulations affecting their products which may negatively impact such companies’ performance. For instance, government regulations may affect the permissibility of using various food additives and production methods of companies that make food
products, which could affect company profitability. Also, the success of food, beverages, household and personal product companies may be strongly affected by changing consumer tastes and/or interest, marketing campaigns and other factors affecting
supply and demand, including performance of the overall domestic and global
economy, interest rates, competition and consumer
confidence and spending. In particular, tobacco companies may be adversely affected by new laws, regulations and litigation. The consumer staples sector may also be adversely affected by changes or trends in commodity prices, which may be influenced
or characterized by unpredictable factors.
Credit Risk
A Fund could lose
money if the issuer or guarantor of a debt security goes bankrupt or is unable or unwilling to make interest payments and/or repay principal. Changes in an issuer’s financial strength or in an issuer’s or debt security’s credit
rating also may affect a security’s value and thus have an impact on Fund performance. The degree of credit risk for a particular security may be reflected in its credit rating. Lower rated debt securities involve greater credit risk,
including the possibility of default or bankruptcy. Generally, the longer the maturity and the lower the credit quality of a security, the more sensitive it is to credit risk.
Debt Instrument Risk
The value of debt
instruments may increase or decrease as a result of the following: market fluctuations; changes in interest rates; actual or perceived inability of issuers, guarantors, or liquidity providers to make scheduled principal or interest payments; or
illiquidity in debt securities markets. Debt instruments are also impacted by political, regulatory, market and economic developments that impact the market in general and specific economic sectors, industries or segments of the fixed income market.
In general, rising interest rates lead to a decline in the value of debt securities and debt securities with longer durations tend to be more sensitive to interest rate changes usually making their prices more volatile than those of securities with
shorter durations. To the extent that interest rates rise, certain underlying obligations may be paid off substantially slower than originally anticipated and the value of those securities may fall. Declining interest rates may lead to prepayment of
obligations and cause reduced rates of return due to reinvestment of interest and principal payments at lower interest rates.
Developed Country Investing Risk
Issuers from developed countries may be subject to
regulatory, political, currency, security, economic and other risks associated with developed countries. Developed countries generally tend to rely on service sectors (
e.g.
, the financial services sector,
consumer services, etc.) as the primary means of economic growth. A prolonged slowdown in one or more service sectors is likely to have a negative impact on the economies of certain developed countries. In the past, certain developed countries have
been targets of terrorism. Acts of terrorism in developed countries or against their interests may cause uncertainty in the financial markets and may adversely affect certain issuers. Heavy regulation of certain markets, including labor and product
markets, may have an adverse effect on certain issuers. Such regulations may negatively affect economic growth or cause prolonged periods of recession. Many developed countries are heavily indebted and face rising healthcare and retirement expenses.
In addition price fluctuations or certain commodities and
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regulations impacting the import of commodities may
negatively impact developed countries economies.
Emerging Markets Risk
Investments in, and/or exposure to, emerging markets
instruments involves greater risks than investing in issuers located or operating in more developed markets. This is due to various factors, including, the potential for greater market volatility, lower trading volume, higher levels of inflation,
political and economic instability, greater risk of market shutdown and more government limitations on foreign investments in emerging market countries than typically found in more developed markets. Emerging market countries may include economies
that concentrate in only a few industries, security issues that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issuances or securities offerings may be manipulated by foreign
nationals who have inside information. Additionally, emerging markets often have less uniformity in accounting and reporting requirements, less reliable securities valuations and greater risks associated with custody of securities than developed
markets. Emerging markets often have greater risk of capital controls through such measures as taxes or interest rate control than developed markets. Certain emerging markets countries may also lack the infrastructure necessary to attract large
amounts of foreign trade and investment. Local securities markets in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of
holdings difficult or impossible at times. Settlement procedures in emerging market countries are frequently less developed and reliable than those in other developed countries. In addition, significant delays may occur in certain markets in
registering the transfer of securities.
Economic, business, political, or
social instability may adversely affect the value of emerging market securities more than securities of developed markets. Additionally, any of these developments may result in a decline in the value of a country’s currency. Emerging markets
may develop unevenly and may never fully develop.
Energy Sector Risk
Energy securities include the securities of
companies that engage in energy-related businesses, such as oil companies involved in the exploration, production, servicing, drilling and refining processes, and companies primarily involved in the production and mining of coal and other fuels used
in the generation of consumable energy. Also included are gas distribution, gas pipeline and related companies. As a result, a Fund is subject to risks of legislative or regulatory changes, adverse market conditions and/or increased competition
affecting the energy sector. The prices of the securities of energy and energy services companies may fluctuate widely due to the supply and demand for both their specific products or services and energy products in general. The prices of energy
product securities may be affected by changes in value and dividend yield, which depend largely on the price and supply of energy fuels, international political events relating to oil producing countries, energy conservation, the success of
exploration projects, and tax
and other governmental regulatory policies. In
addition, these companies are at risk of civil liability from accidents resulting in injury, loss of life or property, pollution or other environmental damage claims and risk of loss from terrorism and natural disasters.
European Economic Risk
The Economic and Monetary Union of the European
Union (the “EU”) requires member countries to comply with restrictions on inflation rates, deficits, interest rates, debt levels and fiscal and monetary controls, each of which may significantly affect every country in Europe. Changes in
imports or exports, changes in governmental or EU regulations on trade, changes in the exchange rate of the euro (the common currency of certain EU countries), the default or threat of default by an EU member country on its sovereign debt and/or an
economic recession in an EU member country may have a significant adverse impact on the economies of EU member countries and their trading partners. The European financial markets experienced volatility and were adversely affected by concerns about
economic downturns, credit rating downgrades, rising government debt levels and possible default on, or restructuring of, government debt in several European countries, including: Cyprus, Greece, Ireland, Italy, Portugal, Spain and Ukraine. A
default or debt restructuring by any European country would adversely impact holders of that country’s debt and economy. These concerns have adversely affected the value and exchange rate of the euro and may continue to significantly affect
the economies of every country in Europe, including EU member countries that do not use the euro and non-EU member countries.
Responses to financial problems by
European governments, central banks and others, including austerity measures and reforms, may not produce the desired results, may result in social unrest, may limit future growth and economic recovery or may have other unintended consequences.
Further defaults or restricting by governments and other entities of their debt could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, one or more countries may abandon the euro
and/or withdraw from the EU. In a referendum held on June 23, 2016, the United Kingdom resolved to leave the EU. The referendum may introduce significant uncertainties and instability in the financial markets as the United Kingdom negotiates its
exit from the EU. Secessionist movements, such as the Catalan movement in Spain, as well as government or other responses to such movements, may also create instability and uncertainty in the region.
The occurrence of terrorist incidents
throughout Europe also could impact financial markets. The impact of these events is not clear but could be significant and far-reaching and materially impact a Fund.
Financials Sector Risk
Performance of companies in the financials sector
may be materially impacted by many factors, including but not limited to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of these companies is
largely dependent on the availability and cost of capital
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and can fluctuate significantly when interest rates
change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. These companies are also subject to substantial government regulation and intervention, which may adversely impact the scope of their
activities, the prices they can charge, the amount of capital they must maintain, and potentially, their size. Government regulation may change frequently and may have significant adverse consequences for financial companies, including effects that
are not intended by such regulation. The impact of more stringent capital requirements, or recent or future regulation in various countries on any individual financial company or of the financials sector as a whole cannot be predicted. The
financials sector is also a target for cyber attacks and may experience technology malfunctions and disruptions.
Gold and Silver Mining Company Risk
A Fund may be concentrated in the gold mining
industry and may have significant exposure to assets in the silver mining industry, and would therefore be sensitive to changes in the overall condition of gold- and silver-related companies. Competitive pressures may have a significant effect on
the financial condition of gold- and silver-related companies. Also gold- and silver-related companies are highly dependent on the price of gold and silver bullion, respectively, and may be adversely affected by a variety of worldwide economic,
financial and political factors.
A drop in the price of gold and/or
silver bullion would particularly adversely impact the profitability of small- and mid-capitalization gold- and silver-related companies and their ability to secure financing. Furthermore, mining companies that are only in the exploration stage are
typically unable to adopt specific strategies for controlling the impact of the price of gold or silver on their profits. In times of significant inflation or great economic uncertainty, gold, silver and other precious metals may outperform
traditional investments such as bonds and stocks. However, in times of stable economic growth, traditional equity and debt investments could offer greater appreciation potential and the value of gold, silver and other precious metals may be
adversely affected, which could in turn affect a Fund.
A significant portion of the
world’s gold reserves are held by governments, central banks and related institutions. The production, purchase and sale of precious metals by governments or central banks or other larger holders can be negatively affected by various economic,
financial, social and political factors, which may be unpredictable and may have a significant adverse impact on the supply and prices of precious metals. Economic, social and political conditions in those countries that are the largest producers of
gold may have a direct negative impact on the production and marketing of gold and on sales of central bank holdings.
Some gold, silver and precious metals
mining operation companies may hedge their exposure to declines in gold, silver and precious metals by selling forward future production, which may result in lower returns during periods when the prices of gold, silver and precious metals increase.
The gold, silver and precious metals industries can be significantly adversely affected by events relating to
international political developments, the success of
exploration projects, commodity prices, tax and government regulations, changes in inflation or expectations regarding inflation in various countries and investment speculation. If a natural disaster or other event with a significant economic impact
occurs in a region which the companies included in the underlying indices operate, such disaster or event could negatively impact the profitability of such companies and, in turn, impact a Fund’s returns. Gold- and silver-related companies may
also be significantly adversely impacted by import controls, worldwide competition, liability for environmental damage, depletion of resources, and mandated expenditures for safety and pollution control devices.
Healthcare Sector Risk
The profitability of companies in the healthcare
sector may be affected by extensive, costly and uncertain government regulation, restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, an increased emphasis on outpatient
services, limited number of products, industry innovation, changes in technologies and other market developments. Many healthcare companies are heavily dependent on patent protection. The expiration of patents may adversely affect the profitability
of these companies. Many healthcare companies are subject to extensive litigation based on product liability and similar claims. Healthcare companies are subject to competitive forces that may make it difficult to raise prices and, in fact, may
result in price discounting. Many new products in the healthcare sector may be subject to regulatory approvals. The process of obtaining such approvals may be long and costly.
Homebuilding Industry Risk
The homebuilding industry includes home builders
(including manufacturers of mobile and prefabricated homes), as well as producers, sellers and suppliers of building materials, furnishings and fixtures. Companies within the industry may be significantly affected by the national, regional and local
real estate markets, changes in government spending, zoning laws, interest rates and commodity prices. This industry is also sensitive to interest rate fluctuations which can cause changes in the availability of mortgage capital and directly impact
the purchasing power of potential homebuyers. Certain segments of the homebuilding industry may be significantly affected by environmental cleanup costs and catastrophic events such as earthquakes, hurricanes and terrorist acts. The building
industry can be significantly affected by changes in consumer confidence, demographic patterns, housing starts and the level of new and existing home sales.
Hong Kong Securities Risk
As part of Hong Kong’s transition from British
to Chinese sovereignty in 1997, China agreed to allow Hong Kong to maintain a high degree of autonomy with regard to its political, legal and economic systems for a period of at least 50 years. China controls matters that relate to defense and
foreign affairs. Under the agreement, China does not tax Hong Kong, does not limit the exchange of the Hong Kong dollar for foreign currencies and does not place restrictions
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on free trade in Hong Kong. However, there is no
guarantee that China will continue to honor the agreement and China may change its policies regarding Hong Kong in the future. Any such change may adversely affect market conditions and the performance of the Chinese economy and, thus, the value of
securities in a Fund’s portfolio. The economy of Hong Kong has few natural resources and any fluctuation or shortage in the commodity markets could have a significant adverse effect on the Hong Kong economy. Hong Kong is also heavily dependent
on international trade and finance. Additionally, the continuation of current political, economic, legal and social policies of Hong Kong is dependent on and subject to the control of the Chinese government.
Indian Securities Risk
Investments in,
and/or exposure to, Indian issuers involve risks that are specific to India, including legal, regulatory, political and economic risks. Political and legal uncertainty, ongoing religious and border disputes within its territory and between India and
its neighboring countries, greater government control over the economy, currency fluctuations or blockage, and the risk of nationalization or expropriation of assets may result in higher potential for losses. The securities markets in India are
relatively underdeveloped and may subject the Fund to higher transaction costs or greater uncertainty than investments in more developed securities markets. Indian securities markets are characterized by a small number of listed companies that have
significantly smaller market capitalizations, greater price volatility, greater delays and possibility of disruptions in settlement transactions, and less liquidity. The Fund’s investments in securities of issuers located or operating in India
also may be limited or prevented, at times, due to the limits on foreign ownership imposed by the Reserve Bank of India.
Industrials Sector Risk
Stock prices of issuers in the industrials sector
are affected by supply and demand both for their specific product or service and for industrials sector products in general. Government regulation, world events and economic conditions will also affect the performance of investment in such issuers.
Aerospace and defense companies, a component of the industrials sector, can be significantly affected by government spending policies because companies involved in this industry rely to a significant extent on U.S. and other government demand for
their products and services. Thus, the financial condition of, and investor interest in, aerospace and defense companies are heavily influenced by government defense spending policies which are typically under pressure from efforts to control
government spending budgets. Transportation companies, another component of the industrials sector, are subject to cyclical performance and therefore investment in such companies may experience occasional sharp price movements which may result from
changes in the economy, fuel prices, labor agreements and insurance costs.
Information Technology Sector Risk
The value
of stocks of information technology companies and companies that rely heavily on technology is particularly vulnerable to rapid changes in technology product cycles,
rapid product obsolescence, government regulation
and competition, both domestically and internationally, including competition from competitors with lower production costs. Information technology companies and companies that rely heavily on technology, especially those of smaller, less-seasoned
companies, tend to be more volatile than the overall market. Information technology companies are heavily dependent on patent and intellectual property rights, the loss or impairment of which may adversely affect profitability. Additionally,
companies in the information technology sector may face dramatic and often unpredictable changes in growth rates and competition for the services of qualified personnel.
Interest Rate Risk
Debt securities,
and securities that provide exposure to debt securities, have varying levels of sensitivity to changes in interest rates. In addition, a Fund is subject to the risk that interest rates may change and exhibit increased volatility, thus affecting the
performance of a Fund. Interest rates across the U.S. economy have recently increased and may continue to increase, which may expose a Fund to heightened interest rate risk and volatility. Securities with longer maturities can be more sensitive to
interest rate changes. To the extent a Fund’s Index includes a substantial portion of its assets in fixed-income securities with longer-term durations, rising interest rates may cause the value of the Index to decline significantly. An
increase in interest rates may lead to heightened volatility in the fixed-income markets and adversely affect the liquidity of certain fixed-income investments. A decrease in fixed-income market maker capacity may act to decrease liquidity in the
fixed-income markets and act to further increase volatility, affecting a Fund’s return.
In addition, short-term and long-term
interest rates do not necessarily move in the same amount or the same direction. Short-term securities tend to react to changes in short-term interest rates, and long-term securities tend to react to changes in long-term interest rates. The impact
of an interest rate change may be significant for other asset classes as well, whether because of the impact of interest rates on economic activity or because of changes in the relative attractiveness of asset classes due to changes in interest
rates. For instance, higher interest rates may make investments in debt securities more attractive, thus reducing investments in equities. The link between interest rates and debt security prices tends to be weaker with lower-rated debt securities
than with investment-grade debt securities.
The historically low interest rate
environment was created in part by the U.S. Board of Governors of the Federal Reserve System (the “Fed”) and certain foreign banks keeping the federal funds and equivalent foreign rates at or near zero percent. The Fed recently raised
its benchmark interest rate several times as the U.S. labor market strengthened and economic activity accelerated. The Fed indicated that it expects its accommodative monetary policy stance to support strong labor market conditions and a sustained
return to target inflation, which increases the likelihood of rising interest rates in the future. Fed policy going forward is less clear given recent changes in Fed leadership.
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Italian Securities Risk
A Fund’s investment in, and/or exposure to,
Italian issuers may subject the Fund to legal, regulatory, political, currency and economic risk specific to Italy. Italy’s economy is dependent upon external trade with other economies, specifically Germany, France, other Western European
developed countries and the United States. As a result, Italy is dependent on the economies of these other countries and any change in the price or demand for Italy’s exports may have an adverse impact on its economy. Recently, the Italian
economy, along with certain other European economies, has experienced significant volatility and adverse trends due to concerns about economic downturn and rising government debt levels. Interest rates on Italy’s debt may rise to levels that
may make it difficult for it to service high debt levels without significant financial help from the European Union and could potentially lead to default. These events have adversely impacted the Italian economy, causing credit agencies to lower
Italy’s sovereign debt rating and could decrease outside investment in Italian companies.
Japanese Securities Risk
Investment in,
and/or exposure to, securities of Japanese issuers involves risks that may be greater than if a Fund’s investments were more geographically diverse. The growth of Japan’s economy has lagged that of its Asian neighbors and other major
developed countries. Since 2000, Japan’s economic growth rate has remained relatively low, and it may remain low in the future. The Japanese economy is characterized by government intervention and protectionism, an unstable financial services
sector, changes in its labor market, and is heavily dependent on international trade and has been adversely affected by trade tariffs and competition from emerging economies. As such, economic growth is heavily dependent on continued growth in
international trade, government support of the financial services sector, among other troubled sectors, and consistent government policy. Any changes or trends in these economic factors could have a significant impact on Japan’s economy
overall and may negatively affect the Fund’s investment. Japan’s economy is also closely tied to its two largest trading partners, the U.S. and China. Economic volatility in either nation may create volatility in Japan’s economy as
well. Additionally, Japan’s relations with its neighbors, particularly China, North Korea, South Korea and Russia, have at times been strained due to territorial disputes, historical animosities and defense concerns.
Latin American Securities Risk
The economies of certain Latin American countries
have experienced high interest rates, economic volatility, inflation, currency devaluations, government debt defaults and high unemployment rates. Certain Latin American countries have experienced periods of political and economic instability and
social unrest in the past. International economic
conditions, as well as world prices for oil and
other commodities may also influence the development of Latin American economies. These risks, among others, may materially affect the value of a Fund’s investments.
Materials Sector Risk
Companies in the materials sector could be adversely
affected by commodity price volatility, exchange rates, import controls and increased competition. The production of industrial materials often exceeds demand as a result of over-building or economic downturns, leading to poor investment returns.
Companies in the materials sector also are at risk for environmental damage and product liability claims, and may be adversely affected by depletion of resources, technical progress, labor relations, and governmental regulations. This sector may
also be affected by economic cycles, technical progress, labor relations, and government regulations.
Mexican Securities Risk
Investment in securities of Mexican issuers involves
risks that may be greater than if the Fund’s investments were more geographically diverse. Mexico’s economy is heavily dependent on trading with key partners, including the United States and certain Latin American countries. As a result,
Mexico is dependent on, among other things, the U.S. economy and any change in the price or demand for Mexican exports may have an adverse impact on the Mexican economy. Any increases or decreases in the volume of this trading, changes in taxes or
tariffs, or variance in political relationships between those nations may impact the Mexican economy overall. Recent political developments in the U.S. have raised potential implications for the current trade arrangements between the U.S. and
Mexico, which could negatively impact the Mexican economy.
Mexico has been
destabilized by local insurrections, social upheavals, and drug related violence. Recently, Mexico experienced an outbreak of violence due to drug trafficking. Incidents involving Mexico’s security may have an adverse effect on the Mexican
economy and cause uncertainty in its financial markets. Recently, Mexican elections have been contentious and have been very closely decided. Changes in political parties or other Mexican political events may affect the economy and cause
instability. Historically, Mexico has experienced substantial economic instability from, among other things, economic volatility, high unemployment rates, periods of very high inflation and significant devaluation of the Mexican currency, the
peso.
Additionally,
investment in Mexico may be subject to any positive or adverse effects of the varying nature of its economic landscape with respect to expropriation and/or nationalization of assets, strengthened or lessened restrictions on, and government
intervention in, international trade, confiscatory taxation, political instability, including authoritarian and/or military involvement in governmental decision making, armed
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conflict, the impact on the economy as a result of
civil war and social instability as a result of religious, ethnic and/or socioeconomic unrest.
MLP Risk
Investments in common units of MLPs involve risks
that differ from investments in common stock. Holders of MLP common units are subject to certain risks inherent in the structure of MLPs, including (i) tax risks, (ii) risk related to limited control of management or the general partner or managing
member, (iii) limited rights to vote on matters affecting the MLP, except with respect to extraordinary transactions, (iv) conflicts of interest between the general partner or managing member and its affiliates, on the one hand, and the limited
partners or members, on the other hand, including those arising from incentive distribution payments or corporate opportunities, and (v) cash flow risks. MLP common units can be affected by macro-economic and other factors affecting the stock market
in general, expectations of interest rates, investor sentiment towards MLPs or the energy sector, changes in a particular issuer’s financial condition, or unfavorable or unanticipated poor performance of a particular issuer (in the case of
MLPs, generally measured in terms of distributable cash flow). Prices of common units of individual MLPs also can be affected by unique fundamentals, including cash flow growth, cash generating power and distribution coverage.
In addition, the value of a
Fund’s investment in an MLP will depend largely on the MLP’s treatment as a partnership for U.S. federal income tax purposes. If an MLP does not meet current legal requirements to maintain partnership status, or if it is unable to do so
because of tax law changes, it would be treated as a corporation for U.S. federal income tax purposes. In that case, the MLP would be obligated to pay income tax at the entity level and distributions received by a Fund would generally be taxed as
dividend income. As a result, there could be a material reduction in a Fund’s cash flow and there could be a material decrease in its NAV. Furthermore, MLP interests may not be as liquid as other more commonly traded equity securities. The
value of MLPs that are regulated by the Federal Energy Regulatory Commission (“FERC”) may also be negatively impacted by regulatory action taken by and regulatory requirements of FERC.
Finally, each Fund
currently qualifies as, and intends to continue to qualify as, a registered investment company under Subchapter M of Chapter 1 of Subtitle A of the Internal Revenue Code of 1985, as amended (the “IRC”) and as such may not invest more
than 25% of its net assets in the securities of MLPs. If the Fund exceeds this limitation, it may no longer qualify under the IRC as a registered investment company and may be subject to taxation as a corporation instead of a registered investment
company.
Mining and Metal
Industry Risk
Prices of gold, silver or other
precious metals, and of gold, silver and other precious metal-related securities, historically have been very volatile. The high volatility of gold, silver and other precious metal prices may adversely affect the financial condition of companies
involved with gold, silver and other precious metals. The production and sale of precious
metals by governments or central banks or other
larger holders can be affected by various economic, financial, social and political factors, which may be unpredictable and may have a significant impact on the supply and prices of precious metals. Additionally, producers of gold, silver or other
precious metals are often concentrated in a small number of countries or regions. Economic and political conditions in those countries may have a direct effect on the production and marketing of gold, silver and other precious metals and on sales of
central bank gold, silver and other precious metals holdings.
Some gold, silver and precious metals
mining operation companies may hedge, to varying degrees, their exposure to falls in gold, silver and precious metals prices by selling forward future production. This may limit the company’s ability to benefit from future increases in the
price of gold, silver or precious metals, thereby lowering returns to a Fund. Hedging techniques also have their own risk, including the possibility that a mining company or other party will be unable to meet its contractual obligations and
potential margin requirements.
Other factors that may affect the
prices of precious metals and securities related to them include changes in inflation, the outlook for inflation and changes in industrial and commercial demand for precious metals. Additionally, increased environmental or labor costs may depress
the value of mining and metal investments.
In addition, in many countries, the
activities of companies engaged in mining are subject to the policies adopted by government officials and agencies and are subject to national and international political and economic developments. Moreover, political, social and economic conditions
in many mining and metals producing countries are somewhat unsettled, which may pose certain risks to a Fund in addition to the risks described in “Emerging Markets Risk” and “Foreign Securities Risk” because the Fund may
hold a portion of its assets in securities of issuers in such countries.
Natural Gas Industry Risk
Investment in securities issued by, and/or having
exposure to, companies primarily involved in the natural gas industry involves the risk that economic forces affecting natural gas, as well as government policies and regulations affecting the natural gas and related industries, could materially
affect a Fund’s portfolio companies and, thus, a Fund’s financial situations and profitability. The profitability of companies engaged in the exploration and production of natural gas may be adversely affected by changes in worldwide
energy prices, exploration and production spending, government policies and regulation, economic conditions and world events. Governmental policies affecting companies engaged in the exploration and production of natural gas, such as taxes, tariffs,
duties, subsidies and import and export restrictions, can influence industry profitability and the volume and types of imports and exports. Natural gas companies could be adversely affected by commodity price volatility, changes in exchange rates,
interest rates, imposition of import controls, increased competition, depletion of resources, development of alternative energy sources, technological developments and labor relations and may have significant capital investments in, or engage in
transactions involving emerging
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market countries, which may heighten these risks. In
addition, a Fund’s portfolio companies must comply with a broad range of environmental laws and regulations. Additional or more stringent environmental laws and regulations may be enacted in the future and such changes could have a material
adverse effect on the business of a Fund’s portfolio companies. Another risk of investing in the natural gas sector is the competitive risk associated with the prices of alternate fuels, such as coal and oil. For example, major natural gas
customers often have the ability to switch between the use of coal, oil or natural gas.
Oil and Gas Industry Risk
Investment in,
and/or exposure to, the securities of companies in the oil and gas exploration and production industries develop and produce crude oil and natural gas and provide drilling and other energy resources production and distribution related services.
Stock prices for these types of companies are affected by supply and demand both for their specific product or services and for energy products in general. The oil and gas sector is a highly competitive and cyclical industry, with intense price
competition. The price of oil and gas, exploration and production spending, government regulation, world events and economic conditions will affect the performance of these companies. Correspondingly, securities of companies in the energy field are
subject to swift price and supply fluctuations caused by events relating to international politics, energy conservation, the success of exploration products and tax and other governmental regulatory policies. Weak demand for the companies’
products or services or for energy products and services in general, as well as negative developments in these other areas, may adversely impact a company’s performance. Oil and gas exploration and production can be significantly affected by
natural disasters and adverse weather conditions as well as changes in exchange rates, interest rates, government regulation, world events and economic conditions.
These companies may be at risk for
environmental damages claims. Additionally, these companies’ operations are subject to hazards inherent in the oil and gas industry, such as fire, explosion, blowouts, loss of well control, oil spills, pipeline and equipment leaks and ruptures
and discharges of toxic and hazardous gases. The revenues of these companies may be negatively affected by contract termination and renegotiation. In this sector, it is customary for contracts to provide for either automatic termination or
termination at the option of the customer if the drilling unit is destroyed or lost or if drilling operations are suspended for a specified period of time as a result of events beyond the control of either party or because of equipment breakdowns.
Additionally, in periods of depressed market conditions, the customers of oil services companies may not honor the terms of existing contracts and may terminate contracts or seek to renegotiate contract rates and terms to reduce their
obligations.
Pharmaceutical Industry
Risk
The profitability of securities of
companies in the pharmaceutical industry is highly dependent on the development, procurement and marketing of drugs and
the development, protection and exploitation of
intellectual property rights and other proprietary information. These companies may be significantly affected by the expiration of patents or the loss of, or the inability to enforce, intellectual property rights. Research and other costs associated
with developing or procuring new drugs and the related intellectual property rights can be significant and may not be successful. Many pharmaceutical companies face intense competition from new products and less costly generic products. In addition,
the process for obtaining regulatory approval from the U.S. Food and Drug Administration or other governmental regulatory authorities is long and costly and there is no assurance that the necessary approvals will be obtained or maintained by these
companies.
Additionally,
companies in the pharmaceutical industry may be subject to expenses and losses from extensive litigation based on intellectual property, product liability and similar claims. These companies may be adversely affected by government regulation and
changes in reimbursement rates from third-party payors, such as Medicare, Medicaid and other government-sponsored programs, private health insurance plans and health maintenance organizations. The ability of pharmaceutical companies to commercialize
current and any future products also depends in part on the extent reimbursement for the cost of such products and related treatments are available from these third party payors. A pharmaceutical company’s valuation may also be affected if one
of its products proves to be unsafe, ineffective or unprofitable. The stock prices of companies in this sector have been, and will likely continue to be, volatile.
The profitability of these companies
may be dependent on a relatively limited number of products. Additionally, their products can become obsolete due to industry innovation, changes in technologies or other market developments.
Preferred Stock
Risk
A preferred stock has characteristics of
a bond and a common stock. It may offer the higher yield of a bond and has priority over common stock in the receipt of dividends or in any residual assets after payment to creditors should the issuer be dissolved. However, it does not have the same
seniority as a bond and, unlike common stock, its participation in the issuer’s growth may be limited. Although the dividend on a preferred stock may be set at a fixed annual rate, in some circumstances it may be changed or passed by the
issuer. Unlike interest payments on debt securities, dividend payments on preferred stock must be declared by the issuer’s board of directors. An issuer’s board of directors is generally not under any obligation to pay a dividend (even
if such dividend has been accrued) and may suspend payment of dividends on preferred stock at any time. In the event an issuer of preferred stock experiences economic difficulties, the issuer’s preferred stock may lose substantial value due to
the reduced likelihood that the issuer’s board of directors will declare a dividend and the fact that preferred stock may be subordinated to other securities of the same issuer.
Additionally, because many preferred
stocks pay dividends at a fixed rate, their market price can be sensitive to changes in interest rates in a manner similar to bonds
–
that is, as
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interest rates
rise, the value of the preferred stocks is likely to decline. Also because many preferred stocks allow holders to convert the preferred stock into common stock of the issuer, their market price can be sensitive to changes in the value of the
issuer’s common stock. Preferred stocks are subject to market volatility and the prices of preferred stocks will fluctuate based on market demand.
Real Estate Sector Risk
Investment in securities issued by, and/or having
exposure to, commercial and residential real estate companies are subject to risks similar to those associated with direct ownership of real estate, including changes in local and general economic conditions, vacancy rates, interest rates, zoning
laws, rental income, property taxes, operating expenses and losses from casualty or condemnation. An investment in a real estate investment trust (“REIT”) is subject to additional risks, including poor performance by the manager of the
REIT, adverse tax consequences, and limited diversification resulting from being invested in a limited number or type of properties or a narrow geographic area.
Retail Industry Risk
Investment in, and/or exposure to, the securities of
companies in the retail industry can be significantly affected by the performance of the domestic and international economy, consumer confidence and spending, intense competition, changes in demographics, and changing consumer tastes and
preferences. In addition, the retailing industry is highly competitive and a company’s success can be tied to its ability to anticipate changing consumer tastes.
Robotics &
Artificial Intelligence Company Risk
Robotics
and artificial intelligence companies may have limited product lines, markets, financial resources or personnel. These companies typically face intense competition and potentially rapid product obsolescence. These companies are also heavily
dependent on intellectual property rights and may be adversely affected by loss or impairment of those rights. There can be no assurance these companies will be able to successfully protect their intellectual property to prevent the misappropriation
of their technology, or that competitors will not develop technology that is substantially similar or superior to such companies’ technology. Robotics and artificial intelligence companies typically engage in significant amounts of spending on
research and development, and there is no guarantee that the products or services produced by these companies will be successful. Robotics and artificial intelligence companies, especially smaller companies, tend to be more volatile than companies
that do not rely heavily on technology.
Russian Securities Risk
Investment in, and/or exposure to, Russian
securities involves risks in addition to those associated with investments in securities of issuers in more developed countries, which may adversely a Fund. Such heightened risks include, among others, expropriation and/or nationalization of assets,
restrictions on and government intervention in international trade, confiscatory or punitive taxation, regional conflict, political instability, including authoritarian and/or military involvement in governmental decision making, armed conflict, the
imposition of economic sanctions by other nations, the
impact on the economy as a result of civil war and
social instability as a result of religious, ethnic and/or socioeconomic unrest.
The securities markets of Russia are
underdeveloped and are often considered to be less correlated to global economic cycles than those markets located in more developed countries. As a result, securities markets in Russia are subject to greater risks associated with market volatility,
lower market capitalization, lower trading volume, inflation, greater price fluctuations, uncertainty regarding the existence of trading markets, governmental control and heavy regulation of labor and industry. Additionally, certain investments in
Russia may become less liquid in response to market developments or adverse investor perceptions, or become illiquid after purchase by a Fund, particularly during periods of market turmoil. Moreover, trading on securities markets in Russia may be
suspended altogether.
The
government in Russia may restrict or control to varying degrees the ability of foreign investors to invest in securities of issuers located or operating in Russia. These restrictions and/or controls may at times limit or prevent foreign investment
in securities of issuers located or operating in Russia. Moreover, governmental approval or special licenses may be required prior to investments by foreign investors and may limit the amount of investments by foreign investors in a particular
industry and/or issuer and may limit such foreign investment to a certain class of securities of an issuer that may have less advantageous rights than the classes available for purchase by domiciliaries of Russia and/or impose additional taxes on
foreign investors. These factors, among others, make investing in issuers located or operating in Russia significantly riskier than investing in issuers located or operating in more developed countries.
The value of the Russian Ruble may be
subject to a high degree of fluctuation. A Fund’s assets will be invested primarily in equity securities of Russian issuers and the income received by a Fund will be principally in Russian Rubles. A Fund’s exposure to the Russian Ruble
and changes in value of the Russian Ruble versus the U.S. Dollar may result in reduced returns to a Fund. Moreover, a Fund may incur costs in connection with conversions between U.S. Dollars and the Russian Ruble. In addition, the current economic
turmoil in Russia and the effects on the current global economic crisis on the Russian economy may have significant adverse effects on the Russian Ruble.
As a result of recent events
involving Ukraine and Russia, the United States and the European Union have imposed sanctions on certain Russian entities and individuals and certain sectors of Russia’s economy, which may result in, among other things, the devaluation of
Russian currency, a downgrade in the country’s credit rating, and/or a decline in the value and liquidity of Russian securities, property or interests. The United States and other nations or international organizations may impose additional
economic sanctions or take other actions that may adversely affect Russia-exposed issuers and companies in various sectors of the Russian economy, including, but not limited to, the financial services, energy, metals and mining, engineering, and
defense and defense-related materials sectors. These sanctions, any future
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sanctions or other actions, or even the threat of
further sanctions or other actions, may negatively affect the value and liquidity of a Fund’s portfolio and may impair a Fund’s ability to achieve its investment objective. For example, a Fund may be prohibited from investing in
securities issued by companies subject to such sanctions. In addition, the sanctions may require a Fund to freeze its existing investments in Russian companies, prohibiting a Fund from buying, selling or otherwise transacting in these investments.
Russia has undertaken and may undertake additional countermeasures or retaliatory actions which may further impair the value and liquidity of Russian securities and potentially disrupt a Fund’s operations.
Despite recent reform and
privatization, the Russian government continues to control a large share of economic activity in the region. The Russian government owns shares in corporations in a range of sectors including banking, energy production and distribution, automotive,
transportation and telecommunications. Additionally, because Russia produces and exports large volumes of oil and gas, the Russian economy is particularly sensitive to the price of oil and gas on the world market, and a decline in the price of oil
and gas could have a significant negative impact on the Russian economy.
For these or other reasons, in the
event that an emergency exists in which it is not reasonably practicable for a Fund to dispose of its securities or to determine its net asset value, a Fund could seek to suspend redemptions of creation units. A Fund could also, among other things,
limit or suspend creations of creation units. During the period that creations or redemptions are affected, a Fund’s shares could trade at a significant premium or discount to their net asset value. In the case of a period during which
creations are suspended, a Fund could experience substantial redemptions, which may cause a Fund to experience increased transaction costs and make greater taxable distributions to shareholders of a Fund. A Fund may also change its investment
objective by, for example, seeking to track an alternative index. Alternatively, a Fund could liquidate, through a liquidating trust or otherwise, all or a portion of its assets, which may be at unfavorable prices.
Semiconductor Industry Risk
Investment in, and/or exposure to, securities in the
semiconductor industry may be similarly affected by particular economic or market events, which may, in certain circumstances, cause the value of securities of all companies in the semiconductor sector of the market to decrease. Specific risks faced
by companies in the semiconductor industry include, but are not limited to: intense competition, both domestically and internationally, including competition from subsidized foreign competitors with lower production costs; securities prices may
fluctuate widely due to risks of rapid obsolescence of products; economic performance of the customers of semiconductor companies; research costs and the risks that their products may not prove commercially successful; capital equipment expenditures
could be substantial and suffer from rapid obsolescence; and thin
capitalization and limited product lines, markets,
financial resources or personnel.
South Korean Securities Risk
South Korea’s economy is heavily dependent on
trading with key partners. Any increases or decreases in the volume of this trading, changes in taxes or tariffs, or variance in political relationships between nations may impact the South Korean economy overall in a way that would be adverse to a
Fund’s investments. Specifically, economic or political developments with respect to South Korea’s neighboring nations may influence the performance of any investments made within South Korea. Potential hostilities with North Korea may
have an adverse effect on the South Korean economy.
Technology Sector Risk
The market prices of technology-related securities
tend to exhibit a greater degree of market risk and sharp price fluctuations than other types of securities. These securities may fall in and out of favor with investors rapidly, which may cause sudden selling and dramatically lower market prices.
Technology securities also may be affected adversely by changes in technology, consumer and business purchasing patterns, government regulation and/or obsolete products or services. In addition, a rising interest rate environment tends to negatively
affect technology companies. Technology companies having high market valuations may appear less attractive to investors, which may cause sharp decreases in their market prices. Further, those technology companies seeking to finance expansion would
have increased borrowing costs, which may negatively impact earnings.
Transportation Industry Risk
The transportation industry may be adversely
affected by economic changes, increases in fuel and operating costs, labor relations and insurance costs. Transportation companies may also be subject to significant government regulation and oversight, which may adversely affect their
businesses.
U.S. Government
Securities Risk
A security backed
by the U.S. Treasury or the full faith and credit of the United States is guaranteed only as to the timely payment of interest and principal when held to maturity. The market prices for such securities are not guaranteed and will fluctuate. In
addition, because many types of U.S. government securities trade actively outside the United States, their prices may rise and fall as changes in global economic conditions affect the demand for these securities. In addition, U.S. Treasury
obligations may differ from other securities in their interest rates, maturities, times of issuance and other characteristics. Changes in the financial condition or credit rating of the U.S government may cause the value of U.S. Treasury obligations
to decline. On August 5, 2011, S&P Global Ratings downgraded U.S. Treasury securities from a AAA rating to a AA+ rating. A further downgrade of the ratings of U.S. government debt obligations could result in higher interest rates for individual
and corporate borrowers, cause disruptions in bond markets and have a substantial negative effect on the U.S. economy.
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Utilities Sector Risk
Utility companies are affected by supply and demand,
operating costs, government regulation, environmental factors, liabilities for environmental damage and general liabilities, and rate caps or rate changes. Although rate changes of a regulated utility usually fluctuate in approximate correlation
with financing costs, due to political and regulatory factors, rate changes ordinarily occur only following a delay after the changes in financing costs. This factor will tend to favorably affect a regulated utility company’s earnings and
dividends in times of decreasing costs, but conversely, will tend to adversely affect earnings and dividends when costs are rising. The value of regulated utility equity securities may tend to have an inverse relationship to the movement of interest
rates. Certain utility companies have experienced full or partial deregulation in recent years. These utilities are frequently more similar to industrial companies in that they are subject to greater competition and have been permitted by regulators
to diversify outside of their original geographic regions and their traditional lines of business. These opportunities may permit certain utility companies to earn more than their traditional regulated rates of return. Some companies, however, may
be forced to defend their core business and may be less profitable. In addition, natural disasters, terrorist attacks, government intervention or other factors may render a utility company’s equipment unusable or obsolete which may negatively
impact profitability.
Utility
companies may be adversely affected by increases in fuel and other operating costs, high costs of borrowing to finance capital construction during inflationary periods, restrictions on operations and increased costs and delays associated with
compliance with environmental and nuclear safety regulations, and difficulties involved in obtaining natural gas for resale or fuel for generating electricity at reasonable prices. Additionally, these companies may be subject to risks related to the
construction and operation of nuclear power plants, the effects of energy conservation and the effects of regulatory changes.
Large-Capitalization Company Risk
Large-capitalization companies may be less able to
adapt to changing market conditions or to respond quickly to competitive challenges or to changes in business, product, financial, or market conditions. Larger companies may not be able to maintain growth at rates that may be achieved by
well-managed smaller and mid-size companies, which may affect the companies’ returns. Over certain periods, the performance of large-capitalization companies has trailed the performance of the overall markets.
Micro-Capitalization Company Risk
Stock prices of micro-capitalization companies are
significantly more volatile, and more vulnerable to adverse business and economic developments than those of larger companies. In addition, micro-capitalization companies often have limited product lines, narrower markets for their goods and/or
services and more limited managerial and financial resources than larger, more established companies, including companies which are considered small- or mid-capitalization. In addition, because these stocks are not well known to the investing
public, do not have significant institutional ownership and
are followed by relatively few security analysts,
there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can
decrease the value and liquidity of securities held by a Fund. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of a Fund’s portfolio.
Mid-Capitalization Company Risk
Mid-capitalization companies often have narrower
markets for their goods and/or services and more limited managerial and financial resources than larger, more-established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are
dependent on a small management group. In addition, because these stocks are not well known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less
publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and
liquidity of securities held by a Fund. As a result, the performance of mid-capitalization companies can be more volatile and they face greater risk of business failure, which could increase the volatility of a Fund’s portfolio.
Small- and/or Mid-Capitalization Company
Risk
Small- and/or mid-capitalization companies often
have narrower markets for their goods and/or services and more limited managerial and financial resources. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management
group. Because these stocks are not well-known to the investing public, there will normally be less publicly available information concerning these securities. Adverse publicity and investor perceptions, whether or not based on fundamental analysis,
can decrease the value and liquidity of securities held by a Fund, resulting in more volatile performance. They also face greater risk of business failure, which could increase the volatility of a Fund’s portfolio.
Currency Exchange Rate Risk
Changes in foreign currency exchange rates will
affect the value of what a Fund owns and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities
markets.
Depositary Receipt
Risk
To the extent a Fund invests in, or has
exposure to, foreign companies, investment may be in the form of depositary receipts or other securities convertible into securities of foreign issuers. American Depositary Receipts (“ADRs”) are receipts typically issued by an American
bank or trust company that
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evidence ownership of underlying securities issued
by a foreign corporation. European Depositary Receipts (“EDRs”) are receipts issued in Europe that evidence a similar ownership arrangement. Global Depositary Receipts (“GDRs”) are receipts issued throughout the world that
evidence a similar arrangement. Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are designed for use in European securities markets. GDRs are tradable both in the United States and
in Europe and are designed for use throughout the world. Depositary receipts will not necessarily be denominated in the same currency as their underlying securities.
Depositary receipts may be purchased
through “sponsored” or “unsponsored” facilities. A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a depositary may establish an unsponsored facility without
participation by the issuer of the depositary security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of an unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts of the deposited securities.
Fund investments in depositary
receipts, which include ADRs, GDRs and EDRs, are deemed to be investments in foreign securities for purposes of a Fund’s investment strategy.
Foreign Securities Risk
Foreign instruments may involve greater risks than
domestic instruments. As a result, a Fund’s returns and NAV may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in other
countries. The laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the United States, and there may be less public information available about foreign companies.
Foreign securities may involve
additional risk, including, greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability. Certain
foreign markets may rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or countries, organizations, entities and/or
individuals, changes in international trade patterns, trade barriers, and other protectionists or retaliatory measures.
Geographic Concentration Risk
Investments in a particular country or geographic
region may be particularly susceptible to political, diplomatic or economic conditions and regulatory requirements. As a result, a Fund may be more volatile than a more geographically diversified fund.
International Closed-Market Trading
Risk
Because a Fund’s investments may be
traded in markets that are closed when the Exchange is open, there are likely to be deviations between the current value of an underlying
investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to NAV that may be greater than those experienced by other ETFs.
Adverse Market Conditions Risk
The
investment objective of each Fund is to provide performance that correlates to the leveraged performance or the leveraged inverse performance of an underlying index. A Fund’s performance will suffer when market conditions are adverse to the
Fund’s investment objective. For example, if a Bear Fund’s underlying index rises on a given day, then a Bear Fund’s performance should decline. Conversely, if a Bear Fund’s underlying index falls on a given day, then a Bear
Fund’s performance should rise. If a Bull Fund's underlying index rises on a given day, then a Bull Fund's performance should rise. Conversely, if a Bull Fund's underlying index falls on a given day, then a Bull Fund's performance should also
fall.
In addition, because each
Fund is leveraged to provide returns equal to 300% or -300%, respectively, of its underlying index, a minor adverse index move should be expected to have a substantial adverse effect on the Fund.
Adviser’s Investment Strategy
Risk
The Adviser utilizes a quantitative
methodology to select investments for each Fund. Although this methodology is designed to correlate each Bull Fund's daily performance with 300% of the daily performance of its underlying index and each Bear Fund's daily performance with -300% of
the daily performance of its underlying index, there is no assurance that such methodology will be successful and will enable a Fund to achieve its investment objective.
Commodity Pool Registration Risk
Under
amended regulations promulgated by the U.S. Commodities Futures Trading Commission (“CFTC”), the Funds are considered commodity pools, and therefore each is subject to regulation under the Commodity Exchange Act and CFTC rules. The
Adviser is registered as a commodity pool operator and will manage the Funds in accordance with CFTC rules as well as the rules that apply to registered investment companies, which includes registering the Funds as commodity pools. Registration as a
commodity pool subjects the registrant to additional laws, regulations and enforcement policies, all of which may potentially increase compliance costs and may affect the operations and financial performance of the Funds.
Cybersecurity Risk
The increased use of technologies, such as the
internet, to conduct business increases the operational, information security and related “cyber” risks both directly to a Fund and through its service providers. Similar types of cyber security risks are also present for issuers of
securities in which a Fund may invest, which could result in material adverse consequences for such issuers. Unlike many other types of risks faced by a Fund, these risks typically are not covered by insurance. Cyber incidents can result from
deliberate attacks or unintentional events. Cyber incidents may include, but are not limited to, gaining unauthorized access to digital systems (
e.g.
, through “hacking” or malicious software
coding)
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for purposes of misappropriating assets or sensitive
information, corrupting data, causing physical damage to computer or network systems, or causing operational disruption. Cyber attacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing
denial-of-service attacks on websites (
i.e
., efforts to make network services unavailable to intended users).
Failures or breaches of the
electronic systems of a Fund, a Fund’s advisor, distributor, other service providers, counterparties, securities trading venues, or the issuers of securities in which a Fund invests have the ability to cause disruptions and negatively impact a
Fund’s business operations, potentially resulting in financial losses to a Fund and its shareholders. Cyber attacks may also interfere with the Fund’s calculation of its NAV, result in the submission of erroneous trades or erroneous
creation or redemption orders, and could lead to violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs and/or additional compliance costs. While a Fund has
established business continuity plans, there are inherent limitations in such plans, including the possibility that certain risks have not been identified and that prevention and remediation efforts will not be successful. Furthermore, a Fund cannot
control the cyber security plans and systems of a Fund’s service providers or issuers of securities in which a Fund invests.
Early Close/Trading Halt Risk
An exchange or market may close or issue trading
halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in a Fund being unable to buy or sell certain securities or financial instruments. For example, there is a
risk that sharp price declines in securities owned by the Fund may trigger trading halts, which may result in the Fund’s shares trading at an increasingly large discount to NAV during part of, or all of, the trading day. In such circumstances,
a Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
Equity Securities Risk
Publicly-issued equity securities, including common
stocks, are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which a Fund invests will cause the NAV of the Fund to fluctuate.
Gain Limitation Risk
Rafferty will
attempt to position each Fund’s portfolio to ensure that a Fund does not gain or lose more than 90% of its NAV on a given day. As a consequence, a Fund’s portfolio should not be responsive to underlying index movements of more than 30%
in a given day. For example, for a Bull Fund, if its underlying index were to gain 35%, its gains should be limited to a daily gain of 30% (
i.e
. 300% of 30) rather than 105%
(
i.e.
is 300% of 35%).
High Portfolio Turnover Risk
Daily rebalancing of a Fund’s holdings
pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs.
Additionally, active market trading of a
Fund’s shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities which could increase the number of portfolio transactions. Frequent and active trading may lead to higher transaction costs
because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income when distributed to them).
A Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of a Fund’s trading. As such, if a Fund’s extensive use of derivative instruments were
reflected, the calculated portfolio turnover rate would be significantly higher.
Investment Risk
An investment in a Fund is not a deposit in a bank
and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Money Market Instrument Risk
Money market instruments, including money market
funds, depositary accounts and repurchase agreements may be used for cash management purposes. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject
to credit risk with respect to the financial institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase
agreements may be subject to market and credit risk related to the collateral securing the repurchase agreement. Money market instruments may also be subject to credit risks associated with the instruments in which they invest. There is no guarantee
that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
A Fund invests a high percentage of its assets in a
limited number of securities. A Fund’s NAV and total return may fluctuate more, or fall greater, in times of weaker markets than a diversified mutual fund because the Fund may invest its assets in a smaller number of issuers or may invest a
larger proportion of its assets in a single issuer. As a result, the gains or losses on a single investment may have a greater impact on a Fund’s NAV and may make a Fund more volatile than more diversified funds.
Regulatory Risk
Each Fund is subject to the risk that a change in
U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Fund’s operations and/or change the competitive landscape. In particular, there is no guarantee that the Bear Funds will be permitted
to continue to engage in short sales, which are designed to earn the Bear Funds a profit from the decline of the price of a particular security, basket of securities or index.
Additional legislative or regulatory
changes could occur that may materially and adversely affect each Fund. For example,
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the regulatory environment for derivative
instruments in which a Fund may invest is evolving, and changes in the regulation or taxation of derivative instruments may materially and adversely affect the ability of a Fund to pursue its trading strategies. Similarly, the regulatory environment
for leveraged funds generally also may evolve, and changes in the direct or indirect regulation of leveraged funds could have a material adverse effect on the ability of a Fund to pursue its investment objective or strategy. Such legislative or
regulatory changes could pose additional risks and result in material adverse consequences to a Fund.
Securities Lending
Risk
Securities lending involves the risk that
a Fund may lose money because the borrower of the loaned securities fails to return the securities in a timely manner or at all. A Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities, a
decline in the value of any investments made with cash collateral, or a “gap” between the return on cash collateral reinvestments and any fees a Fund has agreed to pay a borrower. These events could also trigger adverse tax consequences
for a Fund. In the event of a large redemption while a Fund has loaned portfolio securities, a Fund may suffer losses (
e.g
. overdraft fees) if it is unable to recall the securities on loan in time to fulfill
the redemption.
Special
Risks of Exchange-Traded Funds
Authorized
Participants Concentration Risk
. A Fund may have a limited number of financial institutions that may act as Authorized Participants. Only Authorized Participants who have entered into agreements
with a Fund’s distributor may engage in creation or redemption transactions directly with the Fund. To the extent that those Authorized Participants exit the business or are unable to process creation and/or redemption orders, Shares may trade
at a discount to NAV and possibly face trading halts and/or delisting. Authorized Participant concentration risk may be heightened for a fund that invests in non-U.S. securities or other securities or investments that have lower trading
volumes.
Market Price
Variance Risk
. Shares of a Fund that are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices rather than at NAV. The market prices of Shares will
fluctuate in response to changes in the value of a Fund’s holdings and supply and demand for Shares. Shareholders that purchase or sell Shares on the secondary market may trade Shares at a price greater than NAV (a premium) or less than NAV (a
discount). The Adviser cannot predict if Shares will trade at a
premium or discount to the Fund’s NAV. Given the fact that Shares can be created and redeemed in creation units, the
Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and a shareholder may trade shares at a premium or a discount to a
Fund’s NAV. A Fund’s investment results are measured based upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent with those
experienced by those creating and redeeming
directly with a Fund. There is no guarantee that an
active secondary market will develop for Shares of a Fund. To the extent that exchange specialists, market makers, Authorized Participants, or other participants are unavailable or unable to trade a Fund’s Shares and/or create or redeem
Creation Units, trading spreads and the resulting premium or discount on a Fund’s Shares may widen and a Fund’s Shares may possibly be subject to trading halts and/or delisting.
Trading Issues
. Trading in Shares on the Exchange may be halted due to market conditions or for reasons that, in the view of the Exchange, make trading in Shares inadvisable, such as extraordinary market volatility
or other reasons. Extraordinary market volatility can lead to trading halts pursuant to “circuit breaker” rules of the Exchange or markets. There can be no assurance that Shares will continue to meet the listing requirements of the
Exchange, and the listing requirements may be amended from time to time.
A Precautionary Note to Retail
Investors
. The Depository Trust Company (“DTC”), a limited trust company and securities depositary that serves as a national clearinghouse for the settlement of trades for its participating banks and
broker-dealers, or its nominee, will be the registered owner of all outstanding Shares of each Fund of the Trust. Your ownership of Shares will be shown on the records of DTC and the DTC Participant broker through whom you hold the Shares. THE TRUST
WILL NOT HAVE ANY RECORD OF YOUR OWNERSHIP. Your account information will be maintained by your broker, who will provide you with account statements, confirmations of your purchases and sales of Shares, and tax information. Your broker also will be
responsible for ensuring that you receive shareholder reports and other communications from a Fund whose Shares you own. Typically, you will receive other services (
e.g.
, average basis information) only if your broker offers these services.
A Precautionary Note to Purchasers of
Creation Units
. Because new Shares may be issued on an ongoing basis, a “distribution” of Shares could be occurring at any time. As a dealer, certain activities on your part could, depending on the
circumstances, result in your being deemed a participant in the distribution, in a manner that could render you a statutory underwriter and subject you to the prospectus delivery and liability provisions of the Securities Act of 1933, as amended
(“Securities Act”). For example, you could be deemed a statutory underwriter if you purchase Creation Units from an issuing Fund, break them down into the constituent Shares and sell those Shares directly to customers, or if you choose
to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for Shares. Whether a person is an underwriter depends upon all of the facts and circumstances pertaining to that
person’s activities, and the examples mentioned here should not be considered a complete description of all the activities that could cause you to be deemed an underwriter. Dealers who are not “underwriters,” but are participating
in a distribution (as opposed to engaging in ordinary secondary market transactions), and thus dealing with Shares as part of an “unsold allotment” within the meaning of Section 4(3)(C)
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of the Securities Act, will be unable to take
advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities Act.
A Precautionary Note
to Investment Companies
. For purposes of the Investment Company Act of 1940, as amended (“1940 Act”) each Fund is a registered investment company, and the acquisition of Shares by other investment
companies is subject to the restrictions of Section 12(d)(1) thereof. Section 12(d)(1) of the 1940 Act restricts investments by investment companies in the securities of other investment companies, including shares of each Fund. Provided, generally,
that a Fund’s investments comply with Section 12(d)(1)(A), registered investment companies are permitted to invest in a Fund beyond the limits set forth in Section 12(d)(1) subject to certain terms and conditions, including that such
investment companies enter into an agreement with a Fund.
The Trust and the Funds have obtained
an exemptive order from the U.S. Securities and Exchange Commission (the “SEC”)
allowing a registered investment company to invest
in a Fund beyond the limits of Section 12(d)(1) subject to certain conditions, including that a registered investment company enters into a Participation Agreement with the Trust regarding the terms of the investment. Any investment company
considering purchasing Shares of a Fund in amounts that would cause it to exceed the restrictions under Section 12(d)(1) should contact the Trust.
A Precautionary Note Regarding Unusual
Circumstances
. The Trust can postpone payment of redemption proceeds for any period during which (1) the Exchange is closed other than customary weekend and holiday closings, (2) trading on the Exchange is
restricted, as determined by the SEC, (3) any emergency circumstances exist, as determined by the SEC, or (4) the SEC by order permits for the protection of shareholders of a Fund.
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Share Price of the Funds
A fund’s share price is known
as its NAV. Each Fund’s share price (other than the Fixed Income Funds) is calculated as of the close of regular trading on the NYSE, usually 4:00 p.m. Eastern Time (“Valuation Time”), each day the NYSE is open for business
(“Business Day”). The NYSE is open for business Monday through Friday, except in observation of the following holidays: New Year’s Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. The NYSE may close early on the business day before each of these holidays and on the day after Thanksgiving Day. NYSE holiday schedules are subject to change without notice.
Each Fixed Income Fund also
calculates its NAV as of the close of regular trading on the NYSE, usually 4:00 p.m. Eastern Time each Business Day. However, on days that the bond markets close all day, which currently includes the following holidays: New Year's Day, Martin Luther
King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day (a “Bond Market Holiday”), the Fixed Income Funds do not calculate their NAVs, even if
the NYSE is open for business. On such days, orders for purchase or redemption will receive the NAV next calculated on the following Business Day that is not a Bond Market Holiday. Similarly, on days that the bond markets close early but the NYSE
does not (usually at 2 p.m. Eastern Time, and which currently include the Friday before Memorial Day and New Year’s Eve), the Fixed Income Funds treat the portion of the day that the bond markets are closed as a Bond Market Holiday and
calculates their NAVs as of the recommended closing time for the bond markets, which may be before 4:00 p.m. Eastern Time, subject to the discretion of the Adviser. In such instances, orders for purchase or redemption that are received prior to the
close of bond markets will receive the NAV calculated at the time of the bond markets closure, whereas orders for purchase or redemption that are received thereafter will receive the NAV next calculated on the following Business Day that is not a
Bond Market Holiday.
If the
exchange or market on which a Fund’s investments are primarily traded closes early, the NAV may be calculated prior to its normal calculation time. Creation/redemption transaction order time cutoffs would also be accelerated.
The value of a Fund’s assets that
trade in markets outside the United States or in currencies other than the U.S. Dollar may fluctuate when foreign markets are open but the Fund is not open for business.
Share price is calculated by dividing
a Fund’s net assets by its shares outstanding. In calculating its NAV, each Fund generally values its assets on the basis of market quotations, last sale or settlement prices, or estimates of value furnished by a pricing service or brokers who
make markets in such instruments. If such information is not available for a security held by a Fund, is determined to be unreliable, or (to the Adviser’s knowledge) does not reflect a significant event occurring after the close of the market
on which the security principally trades (but before the close of trading on the NYSE), the security will be valued at fair value estimates by the Adviser under guidelines established by the Board of Trustees. Foreign securities, currencies and
other assets denominated in foreign currencies are translated into U.S. Dollars at the exchange rate of such currencies against the U.S. Dollar, as provided by an independent pricing service or reporting agency. Each Fund also relies on a pricing
service in circumstances where the U.S. securities markets exceed a pre-determined threshold to value foreign securities held in a Fund’s portfolio. The pricing service, its methodology or the threshold may change from time to time. Debt
obligations with maturities of 60 days or less are valued at amortized cost.
Fair Value Pricing
. Securities are priced at a fair value as determined by the Adviser, under the oversight of the Board of Trustees, when reliable market quotations are not readily available, the Funds' pricing service does not provide a
valuation for such securities, the Funds' pricing service provides a valuation that in the judgment of the Adviser does not represent fair value, the Adviser believes that the market price is stale, or an event that affects the value of an
instrument (a “Significant Event”) has occurred since closing prices were established, but before the time as of which a Fund calculates its NAV. Examples of Significant Events may include: (1) events that relate to a single issuer or to
an entire market sector; (2) significant fluctuations in domestic or foreign markets; or (3) occurrences not tied directly to the securities markets, such as natural disasters, armed conflicts, or significant government actions. If such Significant
Events occur, the Funds may value the instruments at fair value, taking into account such events when it calculates each Fund’s NAV. Fair value determinations are made in good faith in accordance with procedures adopted by the Board of
Trustees. In addition, the Funds may also fair value an instrument if trading in a particular instrument is halted and does not resume prior to the closing of the exchange or other market.
Attempts to determine the fair value
of securities introduce an element of subjectivity to the pricing of securities. As a result, the price of a security determined through fair valuation techniques may differ from the price quoted or published by other sources and may not accurately
reflect the market value of the security when trading resumes. If a reliable market quotation becomes available for a security formerly valued through fair valuation techniques, Rafferty compares the market quotation to the fair value price to
evaluate the effectiveness of the Funds' fair valuation procedures and will use that market value in the next calculation of NAV.
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Rule 12b-1 Fees
The Board of Trustees of the Trust
has adopted a Distribution and Service Plan (the “Plan”) pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Plan, each Fund may pay an amount up to 0.25% of its average daily net assets each year for certain
distribution-related activities and shareholder services.
No 12b-1 fees are currently
authorized to be paid by a Fund, and there are no plans to impose these fees. However, in the event 12b-1 fees are charged in the future, because the fees are paid out of each Fund’s assets, over time these fees will increase the cost of your
investment and may cost you more than certain other types of sales charges.
Creations, Redemptions and Transaction
Fees
Creation Units.
Investors such as market makers, large investors and institutions who wish to deal in Creation Units directly with a Fund must have entered into an authorized participant agreement (“Authorized Participant
Agreement”) with the principal underwriter and the transfer agent, or purchase through a dealer that has entered into such an agreement. These investors are known as “Authorized Participants.” Set forth below is a brief description
of the procedures applicable to the purchase and redemption of Creation Units.
Purchase of a Bull Fund
. To purchase Creation Units directly from a Bull Fund, you must deposit with the Fund a basket of securities and/or cash. Each Business Day, prior to the opening of trading on the Exchange, an agent of the Fund
(“Index Receipt Agent”) will make available through the National Securities Clearing Corporation (“NSCC”) a list of the names and number of shares of each security, if any, to be included in that day’s creation basket
(“Deposit Securities”). The identity and number of shares of the Deposit Securities required for a Creation Unit will change from time to time. Each Bull Fund reserves the right to permit or require the substitution of an amount of cash
–
i.e.
, a “cash in
lieu” amount
–
to be added to the Balancing Amount (defined below) to replace
any Deposit Security that may not be available in sufficient quantity for delivery, eligible for transfer through the clearing process (discussed below) or the Federal Reserve System or eligible for trading by an Authorized Participant or the
investor for which it is acting. For such custom orders, “cash in lieu” may be added to the Balancing Amount (defined below). The Balancing Amount and any “cash in lieu” must be paid to the Trust on or before the third
Business Day following the Transmittal Date. You must also pay a Transaction Fee, described below, in cash.
In addition to the in-kind deposit of
securities, Authorized Participants will either pay to, or receive from, a Bull Fund an amount of cash referred to as the “Balancing Amount.” The Balancing Amount is the amount equal to the differential, if any, between the market value
of the Deposit Securities and the NAV of a Creation Unit. Each Bull Fund will publish, on a daily basis, information about the previous day’s Balancing Amount.
All purchase orders for Creation
Units must be placed by or through an Authorized Participant. Purchase orders will be processed either through a manual clearing process run at the DTC (“Manual Clearing Process”) or through an enhanced clearing process (“Enhanced
Clearing Process”) that is available only to those DTC participants that also are participants in the Continuous Net Settlement System of the NSCC. Authorized Participants that do not use the Enhanced Clearing Process will be charged a higher
Transaction Fee (discussed below). A purchase order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent’s automated system, telephone, facsimile or other means
permitted under the Authorized Participant Agreement, in order to receive that day’s NAV per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that
day.
Shares may be issued in
advance of receipt of Deposit Securities subject to various conditions including a requirement to maintain on deposit with the Trust cash in an amount up to 115% of the market value of the missing Deposit Securities. Any such transaction effected
with the Trust must be effected using the Manual Clearing Process consistent with the terms of the Authorized Participant Agreement.
Redemption from a Bull Fund
. Redemption proceeds will be paid either in cash or in-kind with a basket of securities (“Redemption Securities”). Purchase orders will be processed either through a Manual Clearing Process or through
Enhanced Clearing Process that is available only to those DTC participants that also are participants in the Continuous Net Settlement System of the NSCC. Authorized Participants that do not use the Enhanced Clearing Process will be charged a higher
Transaction Fee (discussed below). In most cases, Redemption Securities will be the same as Deposit Securities on a given day. There will be times, however, when the Deposit and Redemption Securities differ. The composition of the Redemption
Securities will be available through the NSCC. Each Bull Fund reserves the right to honor a redemption request with a non-conforming redemption basket.
If the value of a Creation Unit is
higher than the value of the Redemption Securities, you will receive from a Bull Fund a Balancing Amount in cash. If the value of a Creation Unit is lower than the value of the Redemption Securities, you will be required to pay to the Bull Fund a
Balancing Amount in cash. If you are receiving a Balancing Amount, the amount due will be reduced by the amount of the applicable Transaction Fee.
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As with purchases, redemptions may be
processed either through the Manual Clearing Process or the Enhanced Clearing Process. Authorized Participants that do not use the Enhanced Clearing Process will be charged a higher Transaction Fee (discussed below). A redemption order must be
received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent’s automated system, telephone, facsimile or other means permitted under the Authorized Participant Agreement, in
order to receive that day’s NAV per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day.
An investor may request a redemption
in cash, which a Bull Fund may in its sole discretion permit. Investors that elect to receive cash in lieu of one or more of the Redemption Securities are subject to an additional charge. Redemptions of Creation Units for cash (when available)
and/or outside of the Enhanced Clearing Process also require the payment of an additional charge.
Purchase of a Bear Fund.
Each Bear Fund only accepts cash to purchase Creation Units. The purchaser must transfer cash in an amount equal to the value of the Creation Unit(s) purchased and the applicable Transaction Fee. All purchase orders for
Creation Units must be placed by or through an Authorized Participant. Purchase orders will be processed either through a manual clearing process run at the DTC (“Manual Clearing Process”) or through an enhanced clearing process
(“Enhanced Clearing Process”) that is available only to those DTC participants that also are participants in the Continuous Net Settlement System of the National Securities Clearing Corporation (“NSCC”). Authorized
Participants that do not use the Enhanced Clearing Process will be charged a higher Transaction Fee (discussed below). A purchase order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail,
through the transfer agent’s automated system, telephone, facsimile or other means permitted under the Participant Agreement in order to receive that day’s NAV per Share. The Trust will deliver Shares of a Bear Fund upon payment of cash
to the Trust on or before the third Business Day following the Transmittal Date consistent with the terms of the Authorized Participant Agreement.
Redemption from a Bear Fund.
Redemption proceeds will be paid in cash. As with purchases, redemptions may be processed either through the Manual Clearing Process or the Enhanced Clearing Process. Authorized Participants that do not use the Enhanced
Clearing Process will be charged a higher Transaction Fee (discussed below). A redemption order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent’s automated
system, telephone, facsimile or other means permitted under the Participant Agreement in order to receive that day’s NAV per Share. All other procedures set forth in the Participant Agreement must be followed in order for you to receive the
NAV determined on that day.
Transaction Fees on Creation and
Redemption Transactions.
Each Fund will impose Transaction Fees to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units. There is a fixed and a variable component
to the total Transaction Fee on transactions in Creation Units. A fixed Transaction Fee is applicable to each creation and redemption transaction, regardless of the number of Creation Units transacted. Purchasers and redeemers of Creation Units
effected through the Manual Clearing Process may be required to pay an additional charge to compensate for brokerage and other expenses related to the costs of transferring the Deposit Securities to the Trust. A variable Transaction Fee based upon
the value of each Creation Unit also may be applicable to each purchase or redemption transaction. However, in no instance will the fees charged exceed 2% of the value of the Creation Units subject to a redemption transaction. Purchasers and
redeemers of Creation Units are responsible for the costs of transferring securities to and from the Trust in connection with in-kind transactions. Investors who use the services of a broker or other such intermediary may pay additional fees for
such services. In addition, Rafferty may, from time to time, at its own expense, compensate purchasers of Creation Units who have purchased substantial amounts of Creation Units and other financial institutions for administrative or marketing
services.
The table below
summarizes the components of the Transaction Fees.
Direxion
Shares ETF Trust
|
Fixed
Transaction Fee
|
Maximum
Additional
Charge for
Redemptions*
|
|
In-Kind
|
Cash
|
NSCC
|
Outside
NSCC
|
Outside
NSCC
|
Direxion
Daily Mid Cap Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Mid Cap Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily S&P 500
®
Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily S&P 500
®
Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Small Cap Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Small Cap Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Dow 30 Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Dow 30 Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily MSCI Brazil Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily MSCI Canada Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
693
|
Direxion Shares ETF
Trust Prospectus
|
Direxion
Shares ETF Trust
|
Fixed
Transaction Fee
|
Maximum
Additional
Charge for
Redemptions*
|
|
In-Kind
|
Cash
|
NSCC
|
Outside
NSCC
|
Outside
NSCC
|
Direxion
Daily MSCI Canada Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily FTSE China Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily FTSE China Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily MSCI Developed Markets Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily MSCI Developed Markets Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily MSCI Emerging Markets Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily MSCI Emerging Market Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily FTSE Europe Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily MSCI India Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily MSCI Italy Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily MSCI Italy Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily MSCI Japan Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Latin America Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily MSCI Mexico Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily MSCI Mexico Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Russia Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Russia Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily MSCI South Korea Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily EURO STOXX 50
®
Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily EURO STOXX 50
®
Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Aerospace & Defense Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Aerospace & Defense Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily S&P Biotech Bull 3X Shares
|
$300
|
Up
to 300% of NSCC Amount
|
$300
|
Up
to 2.00%
|
Direxion
Daily S&P Biotech Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Communication Services Index Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Communication Services Index Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Consumer Discretionary Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Consumer Discretionary Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Consumer Staples Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Consumer Staples Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Energy Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Energy Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Financial Bull 3X Shares
|
$625
|
Up
to 300% of NSCC Amount
|
$625
|
Up
to 2.00%
|
Direxion
Daily Financial Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Gold Miners Index Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Gold Miners Index Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Healthcare Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Homebuilders & Supplies Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Industrials Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Industrials Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Junior Gold Miners Index Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Junior Gold Miners Index Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Metals & Mining Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Metals & Mining Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Natural Gas Related Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Natural Gas Related Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Pharmaceutical & Medical Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion Shares
ETF Trust Prospectus
|
694
|
Direxion
Shares ETF Trust
|
Fixed
Transaction Fee
|
Maximum
Additional
Charge for
Redemptions*
|
|
In-Kind
|
Cash
|
NSCC
|
Outside
NSCC
|
Outside
NSCC
|
Direxion
Daily Pharmaceutical & Medical Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Preferred Stock Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily MSCI Real Estate Bull 3X Shares
|
$800
|
Up
to 300% of NSCC Amount
|
$800
|
Up
to 2.00%
|
Direxion
Daily MSCI Real Estate Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Regional Banks Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Regional Banks Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Retail Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Semiconductor Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Semiconductor Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Technology Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Technology Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Transportation Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Transportation Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily Utilities Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily Utilities Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily 7-10 Year Treasury Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily 7-10 Year Treasury Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
Direxion
Daily 20+ Year Treasury Bull 3X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 2.00%
|
Direxion
Daily 20+ Year Treasury Bear 3X Shares
|
N/A
|
N/A
|
$250
|
Up
to 2.00%
|
*
|
As a percentage of the amount
invested.
|
Frequent Purchases and Redemptions
. Rafferty expects a significant portion of the Funds' assets to come from professional money managers and investors who use the Funds as part of “asset allocation” and “market timing” investment
strategies. These strategies often call for frequent trading to take advantage of anticipated changes in market conditions. The Trust’s Board of Trustees has determined not to adopt policies and procedures designed to prevent or monitor for
frequent purchases and redemptions of each Fund’s shares because the Fund sells and redeems its shares at NAV only in Creation Units pursuant to the terms of an Authorized Participant Agreement between the Authorized Participant and the
Distributor, and such direct trading between the Fund and Authorized Participants is critical to ensuring that the Fund’s shares trade at or close to NAV. Further, the vast majority of trading in Fund shares occurs on the secondary market,
which does not involve a Fund directly and therefore does not cause a Fund to experience many of the harmful effects of market timing, such as dilution and disruption of portfolio management. In addition, each Fund imposes a Transaction Fee on
Creation Unit transactions, which is designed to offset transfer and other transaction costs incurred by the Fund in connection with the issuance and redemption of Creation Units and may employ fair valuation pricing to minimize potential dilution
from market timing. Although each Fund reserves the right to reject any purchase orders, each Fund does not currently impose any trading restrictions on frequent trading or actively monitor for trading abuses.
How to Buy and Sell Shares
Each Fund issues and redeems Shares
only in large blocks of 50,000 Shares, called “Creation Units.”
Most investors will buy and sell
Shares of each Fund in secondary market transactions through brokers. Individual Shares of each Fund, once listed for trading on the Exchange, can be bought and sold throughout the trading day like other publicly traded securities. The Funds do not
require any minimum investment in such secondary market transactions.
When buying or selling Shares through
a broker, investors may incur customary brokerage commissions and charges, and may pay some or all of the spread between the bid and the offer prices in the secondary market. In addition, because secondary market transactions occur at market prices,
investors may pay more than NAV when buying Shares, and receive less than NAV when selling Shares.
The Adviser may pay brokers and other
financial intermediaries for educational training programs, the development of technology platforms and reporting systems or other administrative services related to a Fund. Ask your salesperson or visit your financial intermediary’s website
for more information.
695
|
Direxion Shares ETF
Trust Prospectus
|
The Funds’ Exchange trading
symbols are as follows:
Fund
|
Symbol
|
Direxion
Daily Mid Cap Bull 3X Shares
|
MIDU
|
Direxion
Daily Mid Cap Bear 3X Shares
|
MIDZ
|
Direxion
Daily S&P 500
®
Bull 3X Shares
|
SPXL
|
Direxion
Daily S&P 500
®
Bear 3X Shares
|
SPXS
|
Direxion
Daily Dow 30 Bull 3X Shares
|
|
Direxion
Daily Dow 30 Bear 3X Shares
|
|
Direxion
Daily Small Cap Bull 3X Shares
|
TNA
|
Direxion
Daily Small Cap Bear 3X Shares
|
TZA
|
Direxion
Daily MSCI Brazil Bull 3X Shares
|
BRZU
|
Direxion
Daily MSCI Canada Bull 3X Shares
|
|
Direxion
Daily MSCI Canada Bear 3X Shares
|
|
Direxion
Daily FTSE China Bull 3X Shares
|
YINN
|
Direxion
Daily FTSE China Bear 3X Shares
|
YANG
|
Direxion
Daily MSCI Developed Markets Bull 3X Shares
|
DZK
|
Direxion
Daily MSCI Developed Markets Bear 3X Shares
|
DPK
|
Direxion
Daily MSCI Emerging Markets Bull 3X Shares
|
EDC
|
Direxion
Daily MSCI Emerging Markets Bear 3X Shares
|
EDZ
|
Direxion
Daily FTSE Europe Bull 3X Shares
|
EURL
|
Direxion
Daily MSCI India Bull 3X Shares
|
INDL
|
Direxion
Daily MSCI Italy Bull 3X Shares
|
|
Direxion
Daily MSCI Italy Bear 3X Shares
|
|
Direxion
Daily MSCI Japan Bull 3X Shares
|
JPNL
|
Direxion
Daily Latin America Bull 3X Shares
|
LBJ
|
Direxion
Daily MSCI Mexico Bull 3X Shares
|
MEXX
|
Direxion
Daily MSCI Mexico Bear 3X Shares
|
|
Direxion
Daily Russia Bull 3X Shares
|
RUSL
|
Direxion
Daily Russia Bear 3X Shares
|
RUSS
|
Direxion
Daily MSCI South Korea Bull 3X Shares
|
KORU
|
Direxion
Daily EURO STOXX 50
®
Bull 3X Shares
|
EUXL
|
Direxion
Daily EURO STOXX 50
®
Bear 3X Shares
|
|
Direxion
Daily Aerospace & Defense Bull 3X Shares
|
DFEN
|
Direxion
Daily Aerospace & Defense Bear 3X Shares
|
|
Direxion
Daily S&P Biotech Bull 3X Shares
|
LABU
|
Direxion
Daily S&P Biotech Bear 3X Shares
|
LABD
|
Direxion
Daily Communication Services Index Bull 3X Shares
|
TAWK
|
Direxion
Daily Communication Services Index Bear 3X Shares
|
MUTE
|
Direxion
Daily Consumer Discretionary Bull 3X Shares
|
WANT
|
Direxion
Daily Consumer Discretionary Bear 3X Shares
|
PASS
|
Direxion
Daily Consumer Staples Bull 3X Shares
|
NEED
|
Direxion
Daily Consumer Staples Bear 3X Shares
|
LACK
|
Direxion
Daily Energy Bull 3X Shares
|
ERX
|
Direxion
Daily Energy Bear 3X Shares
|
ERY
|
Direxion
Daily Financial Bull 3X Shares
|
FAS
|
Direxion
Daily Financial Bear 3X Shares
|
FAZ
|
Direxion
Daily Gold Miners Index Bull 3X Shares
|
NUGT
|
Direxion
Daily Gold Miners Index Bear 3X Shares
|
DUST
|
Direxion
Daily Healthcare Bull 3X Shares
|
CURE
|
Direxion
Daily Homebuilders & Supplies Bull 3X Shares
|
NAIL
|
Direxion
Daily Industrials Bull 3X Shares
|
DUSL
|
Direxion
Daily Industrials Bear 3X Shares
|
|
Direxion
Daily Junior Gold Miners Index Bull 3X Shares
|
JNUG
|
Direxion Shares
ETF Trust Prospectus
|
696
|
Fund
|
Symbol
|
Direxion
Daily Junior Gold Miners Index Bear 3X Shares
|
JDST
|
Direxion
Daily Metals & Mining Bull 3X Shares
|
|
Direxion
Daily Metals & Mining Bear 3X Shares
|
|
Direxion
Daily Natural Gas Related Bull 3X Shares
|
GASL
|
Direxion
Daily Natural Gas Related Bear 3X Shares
|
GASX
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
|
GUSH
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
|
DRIP
|
Direxion
Daily Pharmaceutical & Medical Bull 3X Shares
|
PILL
|
Direxion
Daily Pharmaceutical & Medical Bear 3X Shares
|
|
Direxion
Daily Preferred Stock Bull 3X Shares
|
|
Direxion
Daily MSCI Real Estate Bull 3X Shares
|
DRN
|
Direxion
Daily MSCI Real Estate Bear 3X Shares
|
DRV
|
Direxion
Daily Regional Banks Bull 3X Shares
|
DPST
|
Direxion
Daily Regional Banks Bear 3X Shares
|
WDRW
|
Direxion
Daily Retail Bull 3X Shares
|
RETL
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
|
UBOT
|
Direxion
Daily Semiconductor Bull 3X Shares
|
SOXL
|
Direxion
Daily Semiconductor Bear 3X Shares
|
SOXS
|
Direxion
Daily Technology Bull 3X Shares
|
TECL
|
Direxion
Daily Technology Bear 3X Shares
|
TECS
|
Direxion
Daily Transportation Bull 3X Shares
|
TPOR
|
Direxion
Daily Transportation Bear 3X Shares
|
|
Direxion
Daily Utilities Bull 3X Shares
|
UTSL
|
Direxion
Daily Utilities Bear 3X Shares
|
|
Direxion
Daily 7-10 Year Treasury Bull 3X Shares
|
TYD
|
Direxion
Daily 7-10 Year Treasury Bear 3X Shares
|
TYO
|
Direxion
Daily 20+ Year Treasury Bull 3X Shares
|
TMF
|
Direxion
Daily 20+ Year Treasury Bear 3X Shares
|
TMV
|
Share
prices are reported in dollars and cents per Share. For information about acquiring or selling Shares through a secondary market purchase, please contact your broker.
Book Entry
. Shares are held in book-entry form, which means that no stock certificates are issued. DTC or its nominee is the record owner of all outstanding Shares of the Funds and is recognized as the owner of all Shares for all
purposes.
Investors
owning Shares are beneficial owners as shown on the records of DTC or its participants. DTC serves as the securities depository for all Shares. Participants in DTC include securities brokers and dealers, banks, trust companies, clearing corporations
and other institutions that directly or indirectly maintain a custodial relationship with DTC. As a beneficial owner of Shares, you are not entitled to receive physical delivery of stock certificates or to have Shares registered in your name, and
you are not considered a registered owner of Shares. Therefore, to exercise any right as an owner of Shares, you must rely upon the procedures of DTC and its participants. These procedures are the same as those that apply to any other stocks that
you hold in book entry or “street name” through your brokerage account.
Rafferty provides
investment management services to the Funds. Rafferty has been managing investment companies since 1997. Rafferty is located at 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019. As of October 31, 2018, the Adviser had
approximately $12.8 billion in assets under management.
Pursuant to an investment advisory
agreement between the Trust and Rafferty, each Fund pays Rafferty a fee at an annualized rate based on a percentage of each Fund's average daily net assets of 0.75%.
For the fiscal year ended October 31,
2018, the Adviser received net management fees as a percentage of average daily net assets from each Fund as follows:
Fund
|
Percentage
|
Direxion
Daily Mid Cap Bull 3X Shares
|
0.72%
|
Direxion
Daily Mid Cap Bear 3X Shares
|
0.26%
|
697
|
Direxion Shares ETF
Trust Prospectus
|
Fund
|
Percentage
|
Direxion
Daily S&P 500
®
Bull 3X Shares
|
0.75%
|
Direxion
Daily S&P 500
®
Bear 3X Shares
|
0.74%
|
Direxion
Daily Small Cap Bull 3X Shares
|
0.73%
|
Direxion
Daily Small Cap Bear 3X Shares
|
0.74%
|
Direxion
Daily MSCI Brazil Bull 3X Shares
|
0.76%
|
Direxion
Daily FTSE China Bull 3X Shares
|
0.72%
|
Direxion
Daily FTSE China Bear 3X Shares
|
0.69%
|
Direxion
Daily MSCI Developed Markets Bull 3X Shares
|
0.58%
|
Direxion
Daily MSCI Developed Markets Bear 3X Shares
|
0.00%
|
Direxion
Daily MSCI Emerging Markets Bull 3X Shares
|
0.74%
|
Direxion
Daily MSCI Emerging Markets Bear 3X Shares
|
0.71%
|
Direxion
Daily FTSE Europe Bull 3X Shares
|
0.77%
|
Direxion
Daily MSCI India Bull 3X Shares
|
0.77%
|
Direxion
Daily MSCI Japan Bull 3X Shares
|
0.64%
|
Direxion
Daily Latin America Bull 3X Shares
|
0.59%
|
Direxion
Daily MSCI Mexico Bull 3X Shares
|
0.58%
|
Direxion
Daily Russia Bull 3X Shares
|
0.75%
|
Direxion
Daily Russia Bear 3X Shares
|
0.70%
|
Direxion
Daily MSCI South Korea Bull 3X Shares
|
0.62%
|
Direxion
Daily EURO STOXX 50
®
Bull 3X Shares
|
0.00%
|
Direxion
Daily Aerospace & Defense Bull 3X Shares
|
0.73%
|
Direxion
Daily S&P Biotech Bull 3X Shares
|
0.74%
|
Direxion
Daily S&P Biotech Bear 3X Shares
|
0.73%
|
Direxion
Daily Energy Bull 3X Shares
|
0.75%
|
Direxion
Daily Energy Bear 3X Shares
|
0.71%
|
Direxion
Daily Financial Bull 3X Shares
|
0.74%
|
Direxion
Daily Financial Bear 3X Shares
|
0.75%
|
Direxion
Daily Gold Miners Index Bull 3X Shares
|
0.75%
|
Direxion
Daily Gold Miners Index Bear 3X Shares
|
0.75%
|
Direxion
Daily Healthcare Bull 3X Shares
|
0.74%
|
Direxion
Daily Homebuilders & Supplies Bull 3X Shares
|
0.71%
|
Direxion
Daily Industrials Bull 3X Shares
|
0.22%
|
Direxion
Daily Junior Gold Miners Index Bull 3X Shares
|
0.75%
|
Direxion
Daily Junior Gold Miners Index Bear 3X Shares
|
0.79%
|
Direxion
Daily Natural Gas Related Bull 3X Shares
|
0.70%
|
Direxion
Daily Natural Gas Related Bear 3X Shares
|
0.39%
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
|
0.74%
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
|
0.72%
|
Direxion
Daily Pharmaceutical & Medical Bull 3X Shares
|
0.00%
|
Direxion
Daily MSCI Real Estate Bull 3X Shares
|
0.72%
|
Direxion
Daily MSCI Real Estate Bear 3X Shares
|
0.38%
|
Direxion
Daily Regional Banks Bull 3X Shares
|
0.73%
|
Direxion
Daily Regional Banks Bear 3X Shares
|
0.00%
|
Direxion
Daily Retail Bull 3X Shares
|
0.69%
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
|
0.00%
|
Direxion
Daily Semiconductor Bull 3X Shares
|
0.76%
|
Direxion
Daily Semiconductor Bear 3X Shares
|
0.74%
|
Direxion
Daily Technology Bull 3X Shares
|
0.75%
|
Direxion
Daily Technology Bear 3X Shares
|
0.66%
|
Direxion
Daily Transportation Bull 3X Shares
|
0.33%
|
Direxion
Daily Utilities Bull 3X Shares
|
0.26%
|
Direxion
Daily 7-10 Year Treasury Bull 3X Shares
|
0.19%
|
Direxion
Daily 7-10 Year Treasury Bear 3X Shares
|
0.65%
|
Direxion
Daily 20+ Year Treasury Bull 3X Shares
|
0.77%
|
Direxion
Daily 20+ Year Treasury Bear 3X Shares
|
0.75%
|
Direxion Shares
ETF Trust Prospectus
|
698
|
A discussion
regarding the basis on which the Board of Trustees approved the investment advisory agreement for the Funds is included in the Funds' Annual Report for the period ended October 31, 2018.
Rafferty has entered into an
Operating Expense Limitation Agreement with each Fund. Under this Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse each Fund for Other Expenses through
September 1, 2020, to the extent that a Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable, among other expenses, taxes, swap financing and related costs, acquired
fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses).
Any expense waiver or reimbursement
is subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. Solely at Rafferty’s
option and discretion, Rafferty may pay, reimburse or otherwise assume one or more of the excluded expenses, in which case such expense will be subject to reimbursement by Rafferty in accordance with the Operating Expense Limitation Agreement. This
agreement may be terminated or revised at any time with the consent of the Board of Trustees.
Paul Brigandi and Tony Ng are jointly
and primarily responsible for the day-to-day management of the Funds (the “Portfolio Managers”). An investment trading team of Rafferty employees assists the Portfolio Managers in the day-to-day management of the Funds subject to their
primary responsibility and oversight. The Portfolio Managers work with the investment trading team to decide the target allocation of each Fund’s investments and on a day-to-day basis, an individual portfolio trader executes transactions for
the Funds consistent with the target allocation. The members of the investment trading team rotate periodically among the various series of the Trust, including the Funds, so that no single individual is assigned to a specific Fund for extended
periods of time.
Mr.
Brigandi has been a Portfolio Manager at Rafferty since June 2004. Mr. Brigandi was previously involved in the equity trading training program for Fleet Boston Financial Corporation from August 2002 to April 2004. Mr. Brigandi is a 2002 graduate of
Fordham University.
Mr. Ng has
been a Portfolio Manager at Rafferty since April 2006. Mr. Ng was previously a Team Leader in the Trading Assistant Group with Goldman Sachs from 2004 to 2006. He was employed with Deutsche Asset Management from 1998 to 2004. Mr. Ng graduated from
State University at Buffalo in 1998.
The Funds' Statement of Additional
Information ("SAI") provides additional information about the investment team members’ compensation, other accounts they manage and their ownership of securities in the Funds.
A description of the Funds' policies
and procedures with respect to the disclosure of the Funds' portfolio securities is available in the Funds' SAI.
Foreside Fund Services, LLC
(“Distributor”) serves as the Funds' distributor. U.S. Bancorp Fund Services, LLC (“USBFS”) serves as the Funds' administrator. Bank of New York Mellon (“BNYM”) serves as the Funds' transfer agent, fund
accountant, custodian and index receipt agent. The Distributor is not affiliated with Rafferty, USBFS, or BNYM.
Fund Distributions
. Each Fund pays out dividends from its net investment income, and distributes any net capital gains, if any, to its shareholders at least annually. Each Fund is authorized to declare and pay capital gain distributions
in additional Shares or in cash. A Fund may have extremely high portfolio turnover, which may cause it to generate significant amounts of taxable income. Each Fund will generally need to distribute net short-term capital gain to satisfy certain tax
requirements. As a result of the Funds' high portfolio turnover, they could need to make larger and/or more frequent distributions than traditional ETFs.
Dividend Reinvestment Service
. Brokers may make the DTC book-entry dividend reinvestment service (“Reinvestment Service”) available to their customers who are shareholders of a Fund. If the Reinvestment Service is used with respect to a
Fund, its distributions of both net income and capital gains will automatically be reinvested in additional and fractional Shares thereof purchased in the secondary market. Without the Reinvestment Service, investors will receive Fund distributions
in cash, except as noted above under “Fund Distributions.” To determine whether the Reinvestment Service is available and
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|
Direxion Shares ETF
Trust Prospectus
|
whether there is a commission or other charge for using
the service, consult your broker. Fund shareholders should be aware that brokers may require them to adhere to specific procedures and timetables to use the Reinvestment Service.
As with any investment, you
should consider the tax consequences of buying, holding, and disposing of Shares. The tax information in this Prospectus is only a general summary of some important federal tax considerations generally affecting a Fund and its shareholders. No
attempt is made to present a complete explanation of the federal tax treatment of the Funds' activities, and this discussion is not intended as a substitute for careful tax planning. Accordingly, potential investors are urged to consult their own
tax advisers for more detailed information and for information regarding any state, local, or foreign taxes applicable to the Funds and to an investment in Shares.
Fund distributions to you and your
sale of your Shares will have tax consequences to you unless you hold your Shares through a tax-exempt entity or tax-deferred retirement arrangement, such as an individual retirement account (“IRA”) or 401(k) plan.
Each Fund intends to qualify, or
continue to qualify, each taxable year for taxation as a “regulated investment company” under Subchapter M of the Internal Revenue Code. If a Fund so qualifies and satisfies certain distribution requirements, the Fund will not be subject
to federal income tax on income that is distributed in a timely manner to its shareholders in the form of income dividends or capital gain distributions.
Taxes on Distributions
. Dividends from a Fund’s investment company taxable income
–
generally, the sum of net investment income, the excess of net short-term capital gain over net long-term capital loss, and net gains and losses from certain foreign currency transactions, if any, all determined without
regard to any deduction for dividends paid
–
will be taxable to you as ordinary
income to the extent of its earnings and profits, whether they are paid in cash or reinvested in additional Shares. However, dividends a Fund pays to you that are attributable to its “qualified dividend income” (i.e., dividends it
receives on stock of most domestic and certain foreign corporations with respect to which it satisfies certain holding period and other restrictions) generally will be taxed to you, if you are an individual, trust, or estate and satisfy those
restrictions with respect to your Shares, for federal income tax purposes, at the rates of 15% or 20% for such shareholders with taxable income exceeding certain thresholds (which will be indexed for inflation annually). A portion of a Fund’s
dividends also may be eligible for the dividends-received deduction allowed to corporations
–
the eligible portion may not exceed the aggregate dividends the Fund receives from domestic corporations subject to federal income tax (excluding real estate investment trusts) and excludes dividends from foreign
corporations
–
subject to similar restrictions; however, dividends a corporate
shareholder deducts pursuant to that deduction are subject indirectly to the federal alternative minimum tax. No Fund expects to earn a significant amount of income that would qualify for those maximum rates or that deduction.
Distributions of a Fund’s net
capital gain (which is the excess of net long-term capital gain over net short-term capital loss) that it recognizes on sales or exchanges of capital assets (“capital gain distributions”), if any, will be taxable to you as long-term
capital gains, at the maximum rates mentioned above if you are an individual, trust, or estate, regardless of your holding period for the Shares on which the distributions are paid and regardless of whether they are paid in cash or reinvested in
additional Shares. A Fund’s capital gain distributions may vary considerably from one year to the next as a result of its investment activities and cash flows and the performance of the markets in which it invests. No Fund expects to earn a
significant amount of net capital gain.
Distributions in excess of a
Fund’s current and accumulated earnings and profits, if any, first will reduce your adjusted tax basis in your Shares in the Fund and, after that basis is reduced to zero, will constitute capital gain. That capital gain will be long-term
capital gain, and thus will be taxed at the maximum rates mentioned above if you are an individual, trust, or estate if the distributions are attributable to Shares you held for more than one year.
Investors should be aware that the
price of Shares at any time may reflect the amount of a forthcoming dividend or capital gain distribution, so if they purchase Shares shortly before the record date therefor, they will pay full price for the Shares and receive some part of the
purchase price back as a taxable distribution even though it represents a partial return of invested capital.
In general, distributions are subject to
federal income tax for the year when they are paid. However, certain distributions paid in January may be treated as paid on December 31 of the prior year.
Because of the possibility of high
portfolio turnover, the Funds may generate significant amounts of taxable income. Accordingly, the Funds may need to make larger and/or more frequent distributions than traditional unleveraged ETFs. A substantial portion of that income typically
will be short-term capital gain, which will generally be treated as ordinary income when distributed to shareholders.
Fund distributions to tax-deferred or
qualified plans, such as an IRA, retirement plan or pension plan, generally will not be taxable. However, distributions from such plans will be taxable to the individual participant notwithstanding the character
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ETF Trust Prospectus
|
700
|
of the income earned by the qualified plan. Please
consult a tax adviser for a more complete explanation of the federal, state, local and foreign tax consequences of investing in a Fund through such a plan.
Taxes When Shares are Sold.
Generally, you will recognize taxable gain or loss if you sell or otherwise dispose of your Shares. Any gain arising from such a disposition generally will be treated as long-term capital gain if you held the Shares for
more than one year, taxable at the maximum rates (15% or 20%) mentioned above if you are an individual, trust, or estate; otherwise, the gain will be treated as short-term capital gain. However, any capital loss arising from the disposition of
Shares held for six months or less will be treated as long-term capital loss to the extent of capital gain distributions, if any, received with respect to those Shares. In addition, all or a portion of any loss recognized on a sale or exchange of
Shares of a Fund will be disallowed to the extent other Shares of the same Fund are purchased (whether through reinvestment of distributions or otherwise) within a period of 61 days beginning 30 days before and ending 30 days after the date of the
sale or exchange; in that event, the basis in the newly purchased Shares will be adjusted to reflect the disallowed loss.
Holders of Creation Units
. A person who purchases Shares of a Bull Fund by exchanging securities for a Creation Unit generally will recognize capital gain or loss equal to the difference between the market value of the Creation Unit and the
person’s aggregate basis in the exchanged securities, adjusted for any Balancing Amount paid or received. A shareholder who redeems a Creation Unit generally will recognize gain or loss to the same extent and in the same manner as described in
the immediately preceding paragraph.
Miscellaneous.
Backup Withholding
. A Fund must withhold and remit to the U.S. Treasury 24% of dividends and capital gain distributions otherwise payable to any individual or
certain other non-corporate shareholder who fails to certify that the social security or other taxpayer identification number furnished to the Fund is correct or who furnishes an incorrect number (together with the withholding described in the next
sentence, “backup withholding”). Withholding at that rate also is required from a Fund’s dividends and capital gain distributions otherwise payable to such a shareholder who is subject to backup withholding for any other reason.
Backup withholding is not an additional tax, and any amounts so withheld may be credited against a shareholder’s federal income tax liability or refunded.
Additional Tax
. An individual must pay a 3.8% federal tax on the lesser of (1) the individual’s “net investment income,” which generally includes dividends, interest, and net gains from the disposition of investment
property (including dividends and capital gain distributions a Fund pays and net gains realized on the sale or redemption of Shares), or (2) the excess of the individual’s “modified adjusted gross income” over a threshold amount
($250,000 for married persons filing jointly and $200,000 for single taxpayers). This tax is in addition to any other taxes due on that income. A similar tax will apply for those years to estates and trusts. Shareholders should consult their own tax
advisers regarding the effect, if any, this provision may have on their investment in Fund shares.
Basis Determination
. A shareholder who wants to use the average basis method for determining basis in Shares he or she acquires after December 31, 2011 (“Covered Shares”), must elect to do so in writing (which may be electronic)
with the broker through which he or she purchased the Shares. A shareholder who wishes to use a different IRS-acceptable method for basis determination (
e.g.
, a specific identification method) may elect to do
so. Fund shareholders are urged to consult with their brokers regarding the application of the basis determination rules to them.
You may also be subject to state and
local taxes on Fund distributions and dispositions of Shares.
Non-U.S. Shareholders
. “A “non-U.S. shareholder” is an investor that, for federal tax purposes, is a nonresident alien individual, a foreign corporation or a foreign estate or trust. Except where discussed otherwise, the
following disclosure assumes that a non-U.S. shareholder’s ownership of Shares is not effectively connected with a trade or business conducted by such non-U.S. shareholder in the United States and does not address non-U.S. shareholders who are
present in the United States for 183 days or more during the taxable year. The tax consequences to a non-U.S. shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Non-U.S. shareholders
should consult their tax advisers with respect to the particular tax consequences to them of an investment in a Fund.
Withholding
. Dividends paid by a Fund to non-U.S. shareholders will be subject to withholding tax at a 30% rate or a reduced rate specified by an applicable income tax treaty to the extent derived from investment income (other than
“qualified interest income” or “qualified short-term capital gains,” as described below). In order to obtain a reduced rate of withholding, a non-U.S. shareholder will be required to provide an IRS Form W-8BEN (or substitute
form) certifying its entitlement to benefits under a treaty. The withholding tax does not apply to regular dividends paid to a non-U.S. shareholder who provides an IRS Form W-8ECI, certifying that the dividends are effectively connected with the
non-U.S. shareholder’s conduct of a trade or business within the United States. Instead, the effectively connected dividends will be subject to regular U.S. income tax as if the non-U.S. shareholder were a U.S. shareholder. A non-U.S.
corporation’s earnings and profits attributable to such dividends may also be subject to additional “branch profits tax” imposed at a rate of 30% (or lower treaty rate).
A non-U.S. shareholder who fails to
provide an IRS Form W-8BEN or other applicable form may be subject to backup withholding at the appropriate rate. See the discussion of backup withholding under “Miscellaneous” above.
Exemptions from Withholding
. In general, federal income tax will not apply to gain realized on the sale or other disposition of Shares or to any Fund distributions reported as capital gain dividends, short-term capital gain dividends, or
interest-related dividends.
701
|
Direxion Shares ETF
Trust Prospectus
|
“ Short-term capital gain
dividends” are dividends that are attributable to “qualified short-term gain” a Fund realizes (generally, the excess of a Fund’s net short-term capital gain over long-term capital loss for a taxable year, computed with
certain adjustments). “Interest-related dividends” are dividends that are attributable to “qualified net interest income” from U.S. sources. Depending on its circumstances, a Fund may report all, some or none of its
potentially eligible dividends as short-term capital gain dividends and interest-related dividends and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. To qualify for the exemption, a non-U.S.
shareholder will need to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN or substitute form). In the case of shares held through an intermediary, the
intermediary may withhold even if a Fund designates the payment as a short-term capital gain dividend or an interest-related dividend. Non-U.S. shareholders should contact their intermediaries with respect to the application of these rules to their
accounts.
Foreign Account
Tax Compliance Act (“FATCA”).
Under FATCA, “foreign financial institutions” (“FFIs”) or “non-financial foreign entities” (“NFFEs”) that are Fund
shareholders may be subject to a generally nonrefundable 30% withholding tax on income dividends. As discussed more fully in the Funds' SAI under “Taxes,” the FATCA withholding tax generally can be avoided (a) by an FFI, if it reports
certain information regarding direct and indirect ownership of financial accounts U.S. persons hold with the FFI and (b) by an NFFE, if it certifies as such and, in certain circumstances, that (i) it has no substantial U.S. persons as owners or (ii)
it does have such owners and reports information relating to them to the withholding agent. The U.S. Treasury has negotiated intergovernmental agreements (“IGAs”) with certain countries and is in various stages of negotiations with other
foreign countries with respect to one or more alternative approaches to implement FATCA; entities in those countries may be required to comply with the terms of the IGA instead of Treasury regulations. Non-U.S. shareholders should consult their own
tax advisers regarding the application of these requirements to their own situation and the impact thereof on their investment in a Fund.
More information about taxes is in the
Funds' SAI.
The Trust enters into contractual
arrangements with various parties, which may include, among others, the Funds' investment adviser, custodian, and transfer agent, who provide services to the Funds. Shareholders are not parties to any such contractual arrangements and are not
intended beneficiaries of those contractual arrangements, and those contractual arrangements are not intended to create in any shareholder any right to enforce them against the service providers or to seek any remedy under them against the service
providers, either directly or on behalf of the Trust.
This Prospectus provides information
concerning the Funds that you should consider in determining whether to purchase Fund shares. Neither this Prospectus nor the SAI is intended, or should be read, to be or give rise to an agreement or contract between the Trust or the Funds and any
investor, or to give rise to any rights in any shareholder or other person other than any rights under federal or state law that may not be waived.
Dow Jones Indices
. Direxion Daily Homebuilders & Supplies Bull 3X Shares, Direxion Daily Aerospace & Defense Bull 3X Shares, Direxion Daily Aerospace & Defense Bear 3X Shares, Direxion Daily Dow 30 Bull 3X Shares, Direxion
Daily Dow 30 Bear 3X Shares, Direxion Daily Transportation Bull 3X Shares, and the Direxion Daily Transportation Bear 3X Shares is a product of Dow Jones Indexes, a licensed trademark of CME Group Index Services LLC (“CME”), and has been
licensed for use. “Dow Jones
®
” and the Dow Jones U.S. Select Home Construction Index, Dow Jones U.S. Select Aerospace & Defense
Index, and the Dow Jones Transportation Average
TM
are service marks of Dow Jones Trademark Holdings, LLC (“Dow Jones”) and have been
sublicensed for use for certain purposes by Direxion Shares ETF Trust. Direxion Shares ETF Trust’s Direxion Daily Homebuilders & Supplies Bull 3X Shares, Direxion Daily Aerospace & Defense Bull 3X Shares, Direxion Daily Aerospace &
Defense Bear 3X Shares, Direxion Daily Dow 30 Bull 3X Shares, Direxion Daily Dow 30 Bear 3X Shares, Direxion Daily Transportation Bull 3X Shares, and the Direxion Daily Transportation Bear 3X Shares, based on the Dow Jones Index, are not sponsored,
endorsed, sold or promoted by CME Indexes, Dow Jones or their respective affiliates, and CME Indexes, Dow Jones and their respective affiliates make no representation regarding the advisability of trading in such products.
FTSE/Russell
Indices.
FTSE International Limited (“FTSE”) is an independent company whose sole business is the creation and management of indexes and associated data services. FTSE calculates more than 60,000 indexes
daily, including more than 600 real-time indexes. “FTSETM” is a trademark owned by the London Stock Exchange Group companies (“LSEG”) and is used by FTSE under license. FTSE is not affiliated with the Direxion Daily FTSE
China Bull 3X Shares, Direxion Daily FTSE China Bear 3X Shares and the Direxion Daily FTSE Europe Bull 3X Shares, the Adviser, the Distributor or any of their respective affiliates. The Adviser has entered into a license agreement with FTSE to use
the FTSE China 50 Index and the FTSE Developed Europe Index (the “FTSE Indices”). FTSE has no obligation to continue to provide the FTSE Indices to the Funds beyond the term of the license agreement. The Funds are not in any way
sponsored, endorsed, sold or promoted
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ETF Trust Prospectus
|
702
|
by FTSE or by LSEG (together the “Licensor
Parties”) and none of the Licensor Parties make any warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE Indices and/or the figure at which the said FTSE Index stands
at any particular time on any particular day or otherwise. The Licensor Parties make no representation or warranty, express or implied, to the owners of shares of the Funds or any member of the public regarding the advisability of trading in the
Funds. The FTSE Indices are compiled and calculated by FTSE. None of the Licensor Parties shall be liable (whether in negligence or otherwise) to any person for any error in the Indices and none of the Licensor Parties shall be under any obligation
to advise any person of any error therein. FTSE
®
,
FT-SE
®
, Footsie
®
, FTSE4Good
®
and techMARK
®
are trademarks of the Exchange and
FT and are used by FTSE under license. All-World
®
, All-Share
®
and All-Small
®
are trademarks of FTSE.
Indxx Indices.
“Indxx” is a service mark of Indxx and has been licensed for use for certain purposes by the Adviser. The Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares and the
Direxion Daily Preferred Stock Bull 3X Shares (the “Indxx Funds”) are not sponsored, endorsed, sold or promoted by Indxx. Indxx makes no representation or warranty, express or implied, to the owners of the Indxx Funds or any member of
the public regarding the advisability of investing in securities generally or in the Indxx Funds particularly. Indxx has no obligation to take the needs of the Adviser or the shareholders of the Indxx Funds into consideration in determining,
composing or calculating the Indxx Global Robotics and Artificial Intelligence Thematic Index and the Indxx US High Yield, Low Volatility Preferred Stock Index. Indxx is not responsible for and has not participated in the determination of the
timing, amount or pricing of the Indxx Fund shares to be issued or in the determination or calculation of the equation by which the Indxx Fund shares are to be converted into cash. Indxx has no obligation or liability in connection with the
administration, marketing or trading of the Indxx Funds.
Interactive Data Pricing and Reference
Data, LLC
. The ICE U.S. Treasury 7-10 Year Bond Index and the ICE U.S. Treasury 20+ Year Bond Index (the “ICE Indexes”) are a service mark of Interactive Data Pricing and Reference Data, LLC or its
affiliates ("Interactive Data'') and have been licensed for use by Rafferty in connection with the Direxion Daily 7-10 Year Treasury Bull 3X Shares, Direxion Daily 7-10 Year Treasury Bear 3X Shares, Direxion Daily 20+ Year Treasury Bull 3X Shares,
Direxion Daily 20+ Year Treasury Bear 3X Shares (the “Financial Products”). Neither Rafferty nor the Financial Products are sponsored, endorsed, sold or promoted by Interactive Data. Interactive Data makes no representations or
warranties regarding Rafferty or the Financial Products or the ability of the Direxion Daily 7-10 Year Treasury Bull 3X Shares, Direxion Daily 7-10 Year Treasury Bear 3X Shares, Direxion Daily 20+ Year Treasury Bull 3X Shares, Direxion Daily 20+
Year Treasury Bear 3X Shares to track the applicable Index.
VENDOR MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE ICE INDEX OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL VENDOR HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE,
INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
ISE Index.
The Direxion Daily Natural Gas Related Bull 3X Shares and the Direxion Daily Natural Gas Related Bear 3X Shares are not sponsored endorsed, sold or promoted by Licensor. Licensor makes no representation or warranty,
express or implied, to the owners of the Direxion Daily Natural Gas Related Bull 3X Shares and the Direxion Daily Natural Gas Related Bear 3X Shares or any member of the public regarding the advisability of Direxion Daily Natural Gas Related Bull 3X
Shares and the Direxion Daily Natural Gas Related Bear 3X Shares. Licensor’s only relationship to the Direxion Shares ETF Trust (“Direxion”) is the licensing of certain trademarks and trade names of Licensor and of the ISE-Revere
Natural Gas Index
TM
which is determined, composed and calculated by Licensor without regard to Direxion Daily Natural Gas Related Bull 3X Shares and the
Direxion Daily Natural Gas Related Bear 3X Shares, Licensor has no obligation to take the needs of the Licensee or the owners of the Direxion Daily Natural Gas Related Bull 3X Shares and the Direxion Daily Natural Gas Related Bear 3X Shares into
consideration in determining, composing or calculating the ISE-Revere Natural Gas Index
TM
. Licensor is not responsible for and has not participated in
the determination of the timing of prices at, or quantities of the Direxion Daily Natural Gas Related Bull 3X Shares and the Direxion Daily Natural Gas Related Bear 3X Shares to be listed or in the determination or calculation of the equation by
which the Direxion Daily Natural Gas Related Bull 3X Shares and the Direxion Daily Natural Gas Related Bear 3X Shares are to be converted into cash. Licensor has no obligation or liability in connection with the administration, marketing or trading
of the Direxion Daily Natural Gas Related Bull 3X Shares and the Direxion Daily Natural Gas Related Bear 3X Shares.
LICENSOR DOES NOT GUARANTEE THE
ACCURACY AND/OR THE COMPLETENESS OF THE ISE-REVERE NATURAL GAS INDEXTM OR ANY DATA INCLUDED THEREIN AND LICENSOR SHALL HAVE NO LABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. LICENSOR MAKES NO WARRANTY, EXPRESS OR IMPLIED AS TO RESULTS
TO BE OBTAINED BY DIREXION, OWNERS OF THE DIREXION DAILY NATURAL GAS RELATED BULL 3X SHARES AND THE DIREXION DAILY NATURAL GAS RELATED BEAR 3X SHARES, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE ISE-REVERE NATURAL GAS INDEXTM OR ANY DATA
INCLUDED THEREIN. LICENSOR MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE ISE-REVERE NATURAL GAS INDEXTM OR ANY DATA INCLUDED THEREIN,
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL LICENSOR HAVE ANY LIABILITY FOR ANY LOST PROFITS OR INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING
703
|
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Trust Prospectus
|
LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF
SUCH DAMAGES. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN LICENSOR AND DIREXION.
Market Vectors Indices.
The Product is not sponsored, endorsed, sold or promoted by Market Vectors Index Solutions GmbH (“Licensor”). Licensor makes no representation or warranty, express or implied, to the owners of the Direxion
Daily Junior Gold Miners Index Bull 3X Shares, Direxion Daily Junior Gold Miners Index Bear 3X Shares, Direxion Daily Russia Bull 3X Shares and the Direxion Daily Russia Bear 3X Shares particularly or the ability of the MVIS Global Junior Gold
Miners Index and the MVIS Russia Index (“Market Vector Indices”) to track the performance of the physical commodities market. Licensor’s only relationship to the Licensee is the licensing of certain service marks and trade names of
Licensor and of the Market Vector Indices that is determined, composed and calculated by Licensor without regard to the Licensee or the Direxion Daily Junior Gold Miners Index Bull 3X Shares, Direxion Daily Junior Gold Miners Index Bear 3X Shares,
Direxion Daily Russia Bull 3X Shares and the Direxion Daily Russia Bear 3X Shares. Licensor has no obligation to take the needs of the Licensee or the owners of the Direxion Daily Junior Gold Miners Index Bull 3X Shares, Direxion Daily Junior Gold
Miners Index Bear 3X Shares, Direxion Daily Russia Bull 3X Shares and the Direxion Daily Russia Bear 3X Shares into consideration in determining, composing or calculating the Market Vector Indices. Licensor is not responsible for and has not
participated in the determination of the timing of, prices at, or quantities of the Direxion Daily Junior Gold Miners Index Bull 3X Shares, Direxion Daily Junior Gold Miners Index Bear 3X Shares, Direxion Daily Russia Bull 3X Shares and the Direxion
Daily Russia Bear 3X Shares to be issued or in the determination or calculation of the equation by which the Direxion Daily Junior Gold Miners Index Bull 3X Shares, Direxion Daily Junior Gold Miners Index Bear 3X Shares, Direxion Daily Russia Bull
3X Shares and the Direxion Daily Russia Bear 3X Shares is to be converted into cash. Licensor has no obligation or liability in connection with the administration, marketing or trading of the Direxion Daily Junior Gold Miners Index Bull 3X Shares,
Direxion Daily Junior Gold Miners Index Bear 3X Shares, Direxion Daily Russia Bull 3X Shares and the Direxion Daily Russia Bear 3X Shares.
LICENSOR DOES NOT GUARANTEE THE
ACCURACY AND/OR THE COMPLETENESS OF THE MARKET VECTOR INDICES OR ANY DATA INCLUDED THEREIN AND LICENSOR SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. LICENSOR MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE
OBTAINED BY LICENSEE, OWNERS OF THE DIREXION DAILY JUNIOR GOLD MINERS INDEX BULL 3X SHARES, DIREXION DAILY JUNIOR GOLD MINERS INDEX BEAR 3X SHARES, DIREXION DAILY RUSSIA BULL 3X SHARES AND THE DIREXION DAILY RUSSIA BEAR 3X SHARES, OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE MARKET VECTOR INDICES OR ANY DATA INCLUDED THEREIN. LICENSOR MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE MARKET VECTOR INDICES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL LICENSOR HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
The Direxion Daily Junior Gold Miners
Index Bull 3X Shares, Direxion Daily Junior Gold Miners Index Bear 3X Shares, Direxion Daily Russia Bull 3X Shares and the Direxion Daily Russia Bear 3X Shares are not sponsored, promoted, sold or supported in any other manner by Structured
Solutions AG nor does Structured Solutions AG offer any express or implicit guarantee or assurance either with regard to the results of using the Index and/or Index trade mark or the Index Price at any time or in any other respect. The Index is
calculated and published by Structured Solutions AG. Structured Solutions AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards the Issuer, Structured Solutions AG has no obligation to
point out errors in the Index to third parties including but not limited to investors and/or financial intermediaries of the financial instrument. Neither publication of the Index by Structured Solutions AG nor the licensing of the Index or Index
trade mark for the purpose of use in connection with the financial instrument constitutes a recommendation by Structured Solutions AG to invest capital in said financial instrument nor does it in any way represent an assurance or opinion of
Structured Solutions AG with regard to any investment in this financial instrument. Structured Solutions AG is not responsible for fulfilling the legal requirements concerning the accuracy and completeness of the financial instrument’s
prospectus.
MSCI Indices.
The underlying indicies for the Direxion Daily MSCI Brazil Bull 3X Shares, Direxion Daily MSCI Developed Markets Bull 3X Shares, Direxion Daily MSCI Developed Markets Bear 3X Shares, Direxion Daily MSCI Emerging Markets
Bull 3X Shares, Direxion Daily MSCI Emerging Markets Bear 3X Shares, Direxion Daily MSCI India Bull 3X Shares, Direxion Daily MSCI Japan Bull 3X Shares, Direxion Daily MSCI Real Estate Bull 3X Shares, Direxion Daily MSCI Real Estate Bear 3X Shares,
Direxion Daily MSCI South Korea Bull 3X Shares, Direxion Daily MSCI Canada Bull 3X Shares, Direxion Daily MSCI Canada Bear 3X Shares, Direxion Daily MSCI Italy Bull 3X Shares, Direxion Daily MSCI Italy Bear 3X Shares, Direxion Daily MSCI Mexico Bull
3X Shares, and the Direxion Daily MSCI Mexico Bear 3X Shares are the MSCI Brazil 25/50 Index, MSCI EAFE
®
Index, MSCI Emerging Markets Index℠,
MSCI India Index, MSCI Japan Index, MSCI US REIT Index℠ and the MSCI Korea 25/50 Index. The Funds are not sponsored, endorsed, sold or promoted by Morgan Stanley Capital International Inc. (“MSCI”), any of its affiliates, any of
its information providers or any other third party involved in, or related to, compiling, computing or creating any MSCI Index (collectively, the “MSCI Parties”). The MSCI Indices are the exclusive property of MSCI. MSCI and the MSCI
Indices names are service marks of MSCI or its affiliates and have been licensed for use for certain purposes by the Trust. None of the MSCI Parties makes any representation or warranty, express or implied, to the issuer or shareholders of the Funds
or any other person or entity regarding the advisability of investing in funds generally or in the Funds particularly
Direxion Shares
ETF Trust Prospectus
|
704
|
or the ability of any MSCI Index to track
corresponding stock market performance. MSCI or its affiliates are the licensors of certain trademarks, service marks and trade names and of the MSCI Indices which are determined, composed and calculated by MSCI without regard to the Funds or the
issuer or shareholders of the Funds or any other person or entity into consideration in determining, composing or calculating the MSCI Indices. None of the MSCI Parties are responsible for, or has participated in, the determination of the timing of,
prices at, or quantities of the Funds to be issued or in the determination or calculation of the equation by or the consideration into which the Funds is/are redeemable. Further, none of the MSCI Parties has any obligation or liability to the issuer
or owners of the Funds or any other person or entity in connection with the administration, marketing or offering of the Funds.
Although MSCI shall obtain
information for inclusion in or for use in the calculation of the MSCI Indices from sources that MSCI considers reliable, none of the MSCI Parties warrants or guarantees the originality, accuracy and/or the completeness of any MSCI Index or any data
included therein. None of the MSCI Parties makes any warranty, express or implied, as to results to be obtained by the issuer of the Funds, shareholders of the Funds, or any other person or entity, from the use of any MSCI Index or any data included
therein. None of the MSCI Parties shall have any liability for any errors, omissions or interruptions of, or in connection with, any MSCI Index or any data included therein. Further, none of the MSCI Parties makes any express or implied warranties
of any kind, and the MSCI Parties hereby expressly disclaim all warranties of merchantability and fitness for a particular purpose, with respect to the MSCI Indices and any data included therein. Without limiting any of the foregoing, in no event
shall any of the MSCI Parties have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No purchaser, seller or holder of this
security, product or fund, or any other person or entity, should use or refer to any MSCI trade name, trademark or service mark to sponsor, endorse, market or promote this security without first contacting MSCI to determine whether MSCI’s
permission is required. Under no circumstances may any person or entity claim any affiliation with MSCI without the prior written permission of MSCI.
NYSE Indices
. Neither the Trust nor the Fund(s) are sponsored, endorsed, sold or promoted by NYSE or NYSE EURONEXT or its affiliates (“NYSE”). NYSE makes no representation or warranty regarding the advisability of
investing in securities generally, in the Fund(s) particularly, or the ability of the NYSE Arca Gold Miners Index and the Dynamic Pharmaceutical Intellidex Index (“NYSE Indices”) to track general stock market performance.
NYSE MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE NYSE INDEX OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL NYSE HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE,
INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
PHLX Semiconductor Sector Index
. The Semiconductor Funds are not sponsored, endorsed, sold or promoted by The NASDAQ OMX Group, Inc. or its affiliates (NASDAQ OMX, with its affiliates, are referred to as the “Corporations”). The
Corporations have not passed on the legality or suitability of, or the accuracy or adequacy of descriptions and disclosures relating to, the Semiconductor Funds. The Corporations make no representation or warranty, express or implied to the owners
of the Semiconductor Funds or any member of the public regarding the advisability of investing in securities generally or in the Semiconductor Funds particularly, or the ability of the PHLX Semiconductor SectorSM Index to track general stock market
performance. The Corporations’ only relationship to Rafferty Asset Management, LLC (“Licensee”) is in the licensing of the
Nasdaq
®
, OMX
®
, NASDAQ OMX
®
, PHLX
®
, and PHLX Semiconductor SectorSM Index
registered trademarks, service marks and certain trade names of the Corporations and the use of the PHLX Semiconductor SectorSM Index which is determined, composed and calculated by NASDAQ OMX without regard to Licensee or the Semiconductor Funds.
NASDAQ OMX has no obligation to take the needs of the Licensee or the owners of the Semiconductor Funds into consideration in determining, composing or calculating the PHLX Semiconductor SectorSM Index. The Corporations are not responsible for and
have not participated in the determination of the timing of, prices at, or quantities of the Semiconductor Funds to be issued or in the determination or calculation of the equation by which the Semiconductor Funds are to be converted into cash. The
Corporations have no liability in connection with the administration, marketing or trading of the Semiconductor Funds.
THE CORPORATIONS DO NOT GUARANTEE THE
ACCURACY AND/OR UNINTERRUPTED CALCULATION OF THE PHLX SEMICONDCUTOR SECTOR INDEX OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE SEMICONDUCTOR FUNDS, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE PHLX SEMICONDUCTOR SECTOR INDEX OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE OR USE WITH RESPECT TO THE PHLX SEMICONDUCTOR SECTOR INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL THE CORPORATIONS HAVE ANY LIABILITY FOR ANY LOST PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE,
INDIRECT, OR CONSEQUENTIAL DAMAGES, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Russell Indices.
The Direxion Daily Small Cap Bull 3X Shares, Direxion Daily Small Cap Bear 3X Shares, Direxion Daily Financial Bull 3X Shares and the Direxion Daily Financial Bear 3X Shares are not sponsored, endorsed, sold or promoted
by Frank Russell Company (“Russell”). Russell makes no representation or warranty, express or implied, to the owners of the Direxion Daily Small Cap Bull 3X Shares, Direxion Daily Small Cap Bear 3X Shares, Direxion Daily Financial Bull
3X Shares and the Direxion Daily Financial Bear 3X Shares or any member of the public regarding the advisability of investing in securities
705
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generally or in the Direxion Daily Small Cap Bull 3X
Shares, Direxion Daily Small Cap Bear 3X Shares, Direxion Daily Financial Bull 3X Shares and the Direxion Daily Financial Bear 3X Shares particularly or the ability of the Russell 2000
®
Index and the Russell 1000
®
Financial Services
Index to track general stock market performance or a segment of the same. Russell’s publication of the Russell 2000
®
Index and the Russell
1000
®
Financial Services Index in no way suggests or implies an opinion by Russell as to the advisability of investment in any or all of the
securities upon which the Russell 2000
®
Index and the Russell 1000
®
Financial Services Index is based. Russell’s only relationship to the Trust is the licensing of certain trademarks and trade names of Russell
and of the Russell 2000
®
Index and the Russell
1000
®
Financial Services Index which is determined, composed and calculated by Russell without regard to the Trust or Direxion Daily Small Cap Bull
3X Shares, Direxion Daily Small Cap Bear 3X Shares, Direxion Daily Financial Bull 3X Shares and the Direxion Daily Financial Bear 3X Shares. Russell is not responsible for and has not reviewed the Trust or Direxion Daily Small Cap Bull 3X Shares,
Direxion Daily Small Cap Bear 3X Shares, Direxion Daily Financial Bull 3X Shares and the Direxion Daily Financial Bear 3X Shares nor any associated literature or publications and Russell makes no representation or warranty express or implied as to
their accuracy or completeness, or otherwise. Russell reserves the right, at any time and without notice, to alter, amend, terminate or in any way change the Russell 2000
®
Index and the Russell 1000
®
Financial Services
Index. Russell has no obligation or liability in connection with the administration, marketing or trading of the Direxion Daily Small Cap Bull 3X Shares, Direxion Daily Small Cap Bear 3X Shares, Direxion Daily Financial Bull 3X Shares and the
Direxion Daily Financial Bear 3X Shares.
RUSSELL DOES NOT GUARANTEE THE
ACCURACY AND/OR THE COMPLETENESS OF THE Russell 2000
®
Index and the Russell 1000
®
Financial Services Index OR ANY DATA INCLUDED THEREIN AND RUSSELL SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. RUSSELL
MAKES NO WARRANTY, EXPRESS OF IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE TRUST, INVESTORS, OWNERS OF THE Direxion Daily Small Cap Bull 3X Shares, Direxion Daily Small Cap Bear 3X Shares, Direxion Daily Financial Bull 3X Shares and the Direxion
Daily Financial Bear 3X Shares, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE Russell 2000
®
Index and the Russell 1000
®
Financial Services Index OR ANY DATA INCLUDED THEREIN. RUSSELL MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE Russell 2000
®
Index and the Russell 1000
®
Financial Services Index OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL RUSSELL HAVE ANY LIABILITY FOR ANY
SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
EURO STOXX Index
. The EURO STOXX 50
®
Index is the intellectual property (including registered trademarks) of STOXX Limited, Zurich,
Switzerland (“STOXX”), Deutsche Börse Group or their licensors, which is used under license. Direxion Daily EURO STOXX 50
®
Bull 3X
Shares and the Direxion Daily EURO STOXX 50
®
Bear 3X Shares are neither sponsored nor promoted, distributed or in any other manner supported by
STOXX, Deutsche Börse Group or their licensors, research partners or data providers and STOXX, Deutsche Börse Group and their licensors, research partners or data providers do not give any warranty, and exclude any liability (whether in
negligence or otherwise) with respect thereto generally or specifically in relation to any errors, omissions or interruptions in the EURO STOXX 50
®
Index or its data.
Standard and
Poor’s Indices.
The S&P 500
®
Index, S&P Midcap
®
400 Index, S&P Latin American 40 Index, Energy Select Sector Index, Health Care Select Sector Index, Technology Select Sector Index, S&P
Biotechnology Select Industry Index, S&P Oil & Gas Exploration & Production Select Industry Index, S&P Regional Banks Select Industry Index, S&P Retail Select Industry Index, Consumer Discretionary Select Sector Index, Consumer
Staples Select Sector Index, Industrials Select Sector Index, Utilities Select Sector Index, and the S&P Metals & Mining Select Industry Index (the “S&P Indices”) is/are products of S&P Dow Jones Indices LLC
(“SPDJI”), and has/have been licensed for use by the Trust. Standard & Poor’s
®
, S&P
®
and S&P 500
®
are registered trademarks of
Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones Trademark Holdings LLC
(“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by the Trust. The Funds are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, any of their respective
affiliates (collectively, “S&P Dow Jones Indices”). S&P Dow Jones Indices makes no representation or warranty, express or implied, to the owners of the Funds or any member of the public regarding the advisability of investing in
securities generally or in the Funds particularly or the ability of the S&P Indices to track general market performance. S&P Dow Jones Indices’ only relationship to the Trust with respect to the S&P Indices is the licensing of such
Index(es) and certain trademarks, service marks and/or trade names of S&P Dow Jones Indices or its licensors. The S&P Indices is/are determined, composed and calculated by S&P Dow Jones Indices without regard to the Trust or the Funds.
S&P Dow Jones Indices have no obligation to take the needs of the Trust or the owners of the Funds into consideration in determining, composing or calculating the S&P Indices. S&P Dow Jones Indices is not responsible for and has not
participated in the determination of the prices, and amount of the Funds or the timing of the issuance or sale of the Funds or in the determination or calculation of the equation by which the Funds are to be converted into cash, surrendered or
redeemed, as the case may be. S&P Dow Jones Indices has no obligation or liability in connection with the administration, marketing or trading of the Funds. There is no assurance that investment products based on the S&P Indices will
accurately track index performance or provide positive investment returns. S&P Dow Jones Indices LLC is not an investment advisor. Inclusion of a security within an index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold
such security, nor is it considered to be investment advice. Notwithstanding the foregoing, CME Group Inc. and its affiliates may independently issue and/or sponsor financial products
Direxion Shares
ETF Trust Prospectus
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706
|
based on the S&P 500 Index and other S&P
proprietary indices unrelated to the Funds currently being issued by the Trust, but which may be similar to and competitive with the Funds. CME Group Inc. is an indirect shareholder of S&P Dow Jones Indices LLC.
S&P DOW JONES
INDICES DOES NOT GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE S&P INDICES OR ANY DATA RELATED THERETO OR ANY COMMUNICATION, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING ELECTRONIC
COMMUNICATIONS) WITH RESPECT THERETO. S&P DOW JONES INDICES SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. S&P DOW JONES INDICES MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS
ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY THE TRUST, OWNERS OF THE FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500
®
INDEX, S&P MIDCAP
®
400 INDEX, S&P LATIN
AMERICA 40 INDEX, ENERGY SELECT SECTOR INDEX, HEALTH CARE SELECT SECTOR INDEX, TECHNOLOGY SELECT SECTOR INDEX, S&P BIOTECHNOLOGY SELECT INDUSTRY INDEX S&P OIL & GAS EXPLORATION & PRODUCTION SELECT INDUSTRY INDEX, S&P REGIONAL
BANKS SELECT INDUSTRY INDEX, S&P RETAIL SELECT INDUSTRY INDEX, CONSUMER DISCRETIONARY SELECT SECTOR INDEX, CONSUMER STAPLES SELECT SECTOR INDEX, INDUSTRIALS SELECT SECTOR INDEX, UTILITIES SELECT SECTOR INDEX, AND THE S&P METALS & MINING
SELECT INDUSTRY INDEX OR WITH RESPECT TO ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL S&P DOW JONES INDICES BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES
INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBLITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES
OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN S&P DOW JONES INDICES AND THE TRUST, OTHER THAN THE LICENSORS OF S&P DOW JONES INDICES.
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The financial highlights table is
intended to help you understand the financial performance of the Funds listed below for the periods indicated. The information set forth below was audited by Ernst & Young LLP, Independent Registered Public Accounting Firm, whose report, along
with the Funds’ financial statements, is included in the Annual shareholder report, which are available upon request and incorporated by reference into the Funds’ SAI. Certain information reflects financial results for a single Share.
The total returns in the table represent the rate that an investor would have earned (or lost) on an investment in a Fund (assuming reinvestment of all dividends and distributions).
No financial
information is available for the Direxion Daily Dow 30 Bull 3X Shares, Direxion Daily Dow 30 Bear 3X Shares, Direxion Daily Aerospace & Defense Bear 3X Shares, Direxion Daily Consumer Discretionary Bull 3X Shares, Direxion Daily Consumer
Discretionary Bear 3X Shares, Direxion Daily Consumer Staples Bull 3X Shares, Direxion Daily Consumer Staples Bear 3X Shares, Direxion Daily Industrials Bear 3X Shares, Direxion Daily Metals & Mining Bull 3X Shares, Direxion Daily Metals &
Mining Bear 3X Shares, Direxion Daily Pharmaceutical & Medical Bear 3X Shares, Direxion Daily Transportation Bear 3X Shares, Direxion Daily Utilities Bear 3X Shares, Direxion Daily MSCI Canada Bull 3X Shares, Direxion Daily MSCI Canada Bear 3X
Shares, Direxion Daily MSCI Italy Bull 3X Shares, Direxion Daily MSCI Italy Bear 3X Shares, Direxion Daily MSCI Mexico Bear 3X Shares, Direxion Daily EURO STOXX 50
®
Bear 3X Shares, Direxion Daily Preferred Stock Bull 3X Shares, Direxion Daily Communication Services Index Bull 3X Shares, and the Direxion Daily
Communication Services Index Bear 3X Shares because those Funds had not commenced operations prior to October 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asset Value,
Beginning of
Year/Period
|
Net
Investment
Income (Loss)
1,2
|
Net
Investment
Income (Loss)
1,3
|
Net
Realized and
Unrealized Gain
(Loss) on
Investments
4
|
Net
Increase
(Decrease) in Net
Asset Value
Resulting from
Operations
|
Dividends
from
Net Investment
Income
|
Distributions
from
Realized Capital
Gains
|
Distributions
from
Return of Capital
|
Total
Distributions
|
Net
Asset Value,
End of Year/Period
|
Direxion
Daily Mid Cap Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
42.92
|
$
0.22
|
$
0.29
|
$
(3.42)
|
$
(3.20)
|
$(0.10
)
|
$(1.17
)
|
$
–
|
$(1.27
)
|
$
38.45
|
For
the Year Ended October 31, 2017
|
$
24.95
|
(0.06)
|
(0.03)
|
18.64
|
18.58
|
–
|
(0.61
)
|
–
|
(0.61
)
|
$
42.92
|
For
the Year Ended October 31, 2016
|
$
23.15
|
(0.18)
|
(0.17)
|
1.98
|
1.80
|
–
|
–
|
–
|
–
|
$
24.95
|
For
the Year Ended October 31, 2015
|
$
22.86
|
(0.22)
|
(0.22)
|
0.51
|
0.29
|
–
|
–
|
–
|
–
|
$
23.15
|
For
the Year Ended October 31, 2014
|
$
18.48
|
(0.19)
|
(0.19)
|
5.35
|
5.16
|
–
|
(0.78
)
|
–
|
(0.78
)
|
$
22.86
|
Direxion
Daily Mid Cap Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
15.17
|
0.07
|
0.08
|
(1.21)
|
(1.14)
|
(0.02
)
|
–
|
–
|
(0.02
)
|
$
14.01
|
For
the Year Ended October 31, 2017
|
$
30.02
|
(0.06)
|
(0.06)
|
(14.79)
|
(14.85)
|
–
|
–
|
–
|
–
|
$
15.17
|
For
the Year Ended October 31, 2016
|
$
42.46
|
(0.30)
|
(0.30)
|
(12.14)
|
(12.44)
|
–
|
–
|
–
|
–
|
$
30.02
|
For
the Year Ended October 31, 2015
|
$
54.12
|
(0.42)
|
(0.41)
|
(11.24)
|
(11.66)
|
–
|
–
|
–
|
–
|
$
42.46
|
For
the Year Ended October 31, 2014
|
$
84.52
|
(0.64)
|
(0.64)
|
(29.76)
|
(30.40)
|
–
|
–
|
–
|
–
|
$
54.12
|
Direxion
Daily S&P 500
®
Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
40.86
|
0.31
|
0.34
|
3.71
|
4.02
|
(0.24
)
|
(1.60
)
|
–
|
(1.84
)
|
$
43.04
|
For
the Year Ended October 31, 2017
|
$
22.92
|
0.01
|
0.03
|
17.93
|
17.94
|
–
|
–
|
–
|
–
|
$
40.86
|
For
the Year Ended October 31, 2016
|
$
21.92
|
(0.18)
|
(0.16)
|
1.18
|
1.00
|
–
|
–
|
–
|
–
|
$
22.92
|
For
the Year Ended October 31, 2015
|
$
20.63
|
(0.20)
|
(0.20)
|
1.49
|
1.29
|
–
|
–
|
–
|
–
|
$
21.92
|
For
the Year Ended October 31, 2014
|
$
13.61
|
(0.12)
|
(0.12)
|
7.14
|
7.02
|
–
|
–
|
–
|
–
|
$
20.63
|
Direxion
Daily S&P 500
®
Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
33.94
|
0.18
|
0.18
|
(8.12)
|
(7.94)
|
(0.08
)
|
–
|
–
|
(0.08
)
|
$
25.92
|
For
the Year Ended October 31, 2017
|
$
64.65
|
(0.13)
|
(0.13)
|
(30.58)
|
(30.71)
|
–
|
–
|
–
|
–
|
$
33.94
|
For
the Year Ended October 31, 2016
|
$
83.45
|
(0.55)
|
(0.55)
|
(18.25)
|
(18.80)
|
–
|
–
|
–
|
–
|
$
64.65
|
For
the Year Ended October 31, 2015
|
$112.65
|
(0.90)
|
(0.90)
|
(28.30)
|
(29.20)
|
–
|
–
|
–
|
–
|
$
83.45
|
For
the Year Ended October 31, 2014
|
$198.50
|
(1.35)
|
(1.35)
|
(84.50)
|
(85.85)
|
–
|
–
|
–
|
–
|
$112.65
|
Direxion Shares
ETF Trust Prospectus
|
708
|
Financial Highlights
(continued)
|
|
|
RATIOS
TO AVERAGE NET ASSETS
7
|
|
|
Total
Return
5
|
Net
Assets, End of
Year/Period (000's
omitted)
|
Net
Expenses
2,6
|
Total
Expenses
2
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
2
|
Net
Expenses
3,6
|
Total
Expenses
3
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
3
|
Portfolio
Turnover
Rate
8
|
Direxion
Daily Mid Cap Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(7.90)%
|
$
57,678
|
1.10%
|
1.13%
|
0.46%
|
0.95%
|
0.98%
|
0.61%
|
39%
|
For
the Year Ended October 31, 2017
|
75.11%
|
$
62,242
|
1.04%
|
1.09%
|
(0.18)%
|
0.95%
|
1.00%
|
(0.09)%
|
130%
|
For
the Year Ended October 31, 2016
|
7.78%
|
$
46,170
|
0.99%
|
1.06%
|
(0.78)%
|
0.95%
|
1.02%
|
(0.74)%
|
171%
|
For
the Year Ended October 31, 2015
|
1.27%
|
$
69,466
|
0.96%
|
0.99%
|
(0.88)%
|
0.95%
|
0.98%
|
(0.87)%
|
103%
|
For
the Year Ended October 31, 2014
|
29.26%
|
$
91,439
|
0.98%
|
1.04%
|
(0.93)%
|
0.95%
|
1.01%
|
(0.89)%
|
0%
|
Direxion
Daily Mid Cap Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(7.53)%
|
$
4,404
|
0.97%
|
1.46%
|
0.60%
|
0.95%
|
1.44%
|
0.62%
|
0%
|
For
the Year Ended October 31, 2017
|
(49.47)%
|
$
6,288
|
0.96%
|
1.29%
|
(0.30)%
|
0.95%
|
1.28%
|
(0.29)%
|
0%
|
For
the Year Ended October 31, 2016
|
(29.30)%
|
$
10,941
|
0.97%
|
1.23%
|
(0.80)%
|
0.95%
|
1.21%
|
(0.78)%
|
0%
|
For
the Year Ended October 31, 2015
|
(21.54)%
|
$
11,227
|
0.95%
|
1.23%
|
(0.93)%
|
0.95%
|
1.23%
|
(0.93)%
|
0%
|
For
the Year Ended October 31, 2014
|
(35.97)%
|
$
8,229
|
0.95%
|
1.32%
|
(0.94)%
|
0.95%
|
1.32%
|
(0.94)%
|
0%
|
Direxion
Daily S&P 500
®
Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
9.74%
|
$992,232
|
1.00%
|
1.00%
|
0.68%
|
0.95%
|
0.95%
|
0.73%
|
95%
|
For
the Year Ended October 31, 2017
|
78.31%
|
$692,851
|
1.01%
|
1.00%
|
0.03%
|
0.95%
|
0.94%
|
0.09%
|
99%
|
For
the Year Ended October 31, 2016
|
4.56%
|
$458,407
|
1.02%
|
1.02%
|
(0.85)%
|
0.95%
|
0.95%
|
(0.78)%
|
187%
|
For
the Year Ended October 31, 2015
|
6.24%
|
$574,270
|
0.97%
|
0.96%
|
(0.93)%
|
0.95%
|
0.94%
|
(0.91)%
|
254%
|
For
the Year Ended October 31, 2014
|
51.53%
|
$552,931
|
0.97%
|
0.98%
|
(0.71)%
|
0.95%
|
0.96%
|
(0.68)%
|
110%
|
Direxion
Daily S&P 500
®
Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(23.38)%
|
$267,114
|
0.95%
|
0.96%
|
0.68%
|
0.94%
|
0.95%
|
0.69%
|
1%
|
For
the Year Ended October 31, 2017
|
(47.50)%
|
$381,925
|
0.93%
|
0.96%
|
(0.28)%
|
0.93%
|
0.96%
|
(0.28)%
|
7%
|
For
the Year Ended October 31, 2016
|
(22.53)%
|
$562,025
|
0.95%
|
0.97%
|
(0.78)%
|
0.94%
|
0.96%
|
(0.77)%
|
0%
|
For
the Year Ended October 31, 2015
|
(25.92)%
|
$368,523
|
0.95%
|
0.96%
|
(0.94)%
|
0.95%
|
0.96%
|
(0.94)%
|
0%
|
For
the Year Ended October 31, 2014
|
(43.25)%
|
$204,479
|
0.95%
|
0.97%
|
(0.95)%
|
0.95%
|
0.97%
|
(0.95)%
|
0%
|
709
|
Direxion Shares ETF
Trust Prospectus
|
Financial Highlights
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asset Value,
Beginning of
Year/Period
|
Net
Investment
Income (Loss)
1,2
|
Net
Investment
Income (Loss)
1,3
|
Net
Realized and
Unrealized Gain
(Loss) on
Investments
4
|
Net
Increase
(Decrease) in Net
Asset Value
Resulting from
Operations
|
Dividends
from
Net Investment
Income
|
Distributions
from
Realized Capital
Gains
|
Distributions
from
Return of Capital
|
Total
Distributions
|
Net
Asset Value,
End of Year/Period
|
Direxion
Daily Small Cap Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
66.18
|
0.20
|
0.31
|
(4.47)
|
(4.27)
|
(0.12
)
|
–
|
–
|
(0.12
)
|
$
61.79
|
For
the Year Ended October 31, 2017
|
$
34.41
|
(0.11)
|
(0.07)
|
31.88
|
31.77
|
–
|
–
|
–
|
–
|
$
66.18
|
For
the Year Ended October 31, 2016
|
$
34.44
|
(0.24)
|
(0.23)
|
0.21
|
(0.03)
|
–
|
–
|
–
|
–
|
$
34.41
|
For
the Year Ended October 31, 2015
|
$
37.88
|
(0.35)
|
(0.34)
|
(2.86)
|
(3.20)
|
–
|
(0.24
)
|
–
|
(0.24
)
|
$
34.44
|
For
the Year Ended October 31, 2014
|
$
33.45
|
(0.33)
|
(0.32)
|
5.36
|
5.03
|
–
|
(0.60
)
|
–
|
(0.60
)
|
$
37.88
|
Direxion
Daily Small Cap Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
13.30
|
0.08
|
0.08
|
(1.77)
|
(1.69)
|
(0.05
)
|
–
|
–
|
(0.05
)
|
$
11.56
|
For
the Year Ended October 31, 2017
|
$
30.73
|
(0.04)
|
(0.04)
|
(17.39)
|
(17.43)
|
–
|
–
|
–
|
–
|
$
13.30
|
For
the Year Ended October 31, 2016
|
$
43.77
|
(0.29)
|
(0.29)
|
(12.75)
|
(13.04)
|
–
|
–
|
–
|
–
|
$
30.73
|
For
the Year Ended October 31, 2015
|
$
54.16
|
(0.42)
|
(0.42)
|
(9.97)
|
(10.39)
|
–
|
–
|
–
|
–
|
$
43.77
|
For
the Year Ended October 31, 2014
|
$
82.96
|
(0.64)
|
(0.64)
|
(28.16)
|
(28.80)
|
–
|
–
|
–
|
–
|
$
54.16
|
Direxion
Daily EURO STOXX 50
®
Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
30.49
|
0.39
|
0.40
|
(12.44)
|
(12.05)
|
(0.42
)
|
(2.15
)
|
(0.02
)
|
(2.59
)
|
$
15.85
|
For
the Period July 12, 2017
9
through October 31, 2017
|
$
25.00
|
0.00
10
|
0.00
10
|
5.49
|
5.49
|
–
|
–
|
–
|
–
|
$
30.49
|
Direxion
Daily FTSE China Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
32.66
|
0.48
|
0.50
|
(14.78)
|
(14.30)
|
(0.51
)
|
–
|
–
|
(0.51
)
|
$
17.85
|
For
the Year Ended October 31, 2017
|
$
17.25
|
(0.09)
|
(0.07)
|
15.50
|
15.41
|
–
|
–
|
–
|
–
|
$
32.66
|
For
the Year Ended October 31, 2016
|
$
21.73
|
(0.10)
|
(0.10)
|
(4.38)
|
(4.48)
|
–
|
–
|
–
|
–
|
$
17.25
|
For
the Year Ended October 31, 2015
|
$
31.65
|
(0.27)
|
(0.26)
|
(9.58)
|
(9.85)
|
–
|
(0.07
)
|
–
|
(0.07
)
|
$
21.73
|
For
the Year Ended October 31, 2014
|
$
30.02
|
(0.24)
|
(0.23)
|
1.87
|
1.63
|
–
|
–
|
–
|
–
|
$
31.65
|
Direxion
Daily FTSE China Bear 3X Shares
11
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
65.30
|
0.39
|
0.43
|
5.52
|
5.91
|
(0.17
)
|
–
|
–
|
(0.17
)
|
$
71.04
|
For
the Year Ended October 31, 2017
|
$154.50
|
(0.30)
|
(0.30)
|
(88.90)
|
(89.20)
|
–
|
–
|
–
|
–
|
$
65.30
|
For
the Year Ended October 31, 2016
|
$216.50
|
(1.80)
|
(1.70)
|
(60.20)
|
(62.00)
|
–
|
–
|
–
|
–
|
$154.50
|
For
the Year Ended October 31, 2015
|
$360.50
|
(2.00)
|
(2.00)
|
(142.00)
|
(144.00)
|
–
|
–
|
–
|
–
|
$216.50
|
For
the Year Ended October 31, 2014
|
$568.50
|
(4.80)
|
(4.80)
|
(203.20)
|
(208.00)
|
–
|
–
|
–
|
–
|
$360.50
|
Direxion
Daily FTSE Europe Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
36.99
|
0.54
|
0.56
|
(12.34)
|
(11.80)
|
(0.65
)
|
–
|
–
|
(0.65
)
|
$
24.54
|
For
the Year Ended October 31, 2017
|
$
18.88
|
0.22
|
0.25
|
17.89
|
18.11
|
–
|
–
|
–
|
–
|
$
36.99
|
For
the Year Ended October 31, 2016
|
$
27.78
|
(0.15)
|
(0.15)
|
(8.75)
|
(8.90)
|
–
|
–
|
–
|
–
|
$
18.88
|
For
the Year Ended October 31, 2015
|
$
32.10
|
(0.10)
|
(0.10)
|
(4.17)
|
(4.27)
|
(0.05
)
|
–
|
–
|
(0.05
)
|
$
27.78
|
For
the Period January 22, 2014
9
through October 31, 2014
|
$
40.00
|
0.27
|
0.27
|
(7.99)
|
(7.72)
|
(0.18
)
|
–
|
–
|
(0.18
)
|
$
32.10
|
Direxion Shares
ETF Trust Prospectus
|
710
|
Financial Highlights
(continued)
|
|
|
RATIOS
TO AVERAGE NET ASSETS
7
|
|
|
Total
Return
5
|
Net
Assets, End of
Year/Period (000's
omitted)
|
Net
Expenses
2,6
|
Total
Expenses
2
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
2
|
Net
Expenses
3,6
|
Total
Expenses
3
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
3
|
Portfolio
Turnover
Rate
8
|
Direxion
Daily Small Cap Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(6.49)%
|
$
883,562
|
1.10%
|
1.12%
|
0.26%
|
0.95%
|
0.97%
|
0.41%
|
51%
|
For
the Year Ended October 31, 2017
|
92.36%
|
$
658,510
|
1.02%
|
1.03%
|
(0.21)%
|
0.95%
|
0.96%
|
(0.14)%
|
185%
|
For
the Year Ended October 31, 2016
|
(0.09)%
|
$
729,433
|
0.99%
|
1.01%
|
(0.78)%
|
0.95%
|
0.97%
|
(0.74)%
|
0%
|
For
the Year Ended October 31, 2015
|
(8.50)%
|
$
836,739
|
0.97%
|
0.98%
|
(0.88)%
|
0.95%
|
0.97%
|
(0.86)%
|
4838%
|
For
the Year Ended October 31, 2014
|
15.30%
|
$1,090,966
|
0.98%
|
1.02%
|
(0.93)%
|
0.95%
|
0.99%
|
(0.90)%
|
0%
|
Direxion
Daily Small Cap Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(12.65)%
|
$
282,984
|
0.95%
|
0.96%
|
0.73%
|
0.95%
|
0.96%
|
0.73%
|
0%
|
For
the Year Ended October 31, 2017
|
(56.72)%
|
$
647,079
|
0.96%
|
0.98%
|
(0.23)%
|
0.95%
|
0.97%
|
(0.22)%
|
0%
|
For
the Year Ended October 31, 2016
|
(29.79)%
|
$
586,011
|
0.97%
|
1.00%
|
(0.79)%
|
0.95%
|
0.98%
|
(0.77)%
|
0%
|
For
the Year Ended October 31, 2015
|
(19.18)%
|
$
504,280
|
0.95%
|
0.98%
|
(0.94)%
|
0.95%
|
0.98%
|
(0.94)%
|
0%
|
For
the Year Ended October 31, 2014
|
(34.72)%
|
$
606,361
|
0.95%
|
1.02%
|
(0.95)%
|
0.95%
|
1.02%
|
(0.95)%
|
0%
|
Direxion
Daily EURO STOXX 50
®
Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(42.78)%
|
$
2,377
|
0.96%
|
1.98%
|
1.59%
|
0.95%
|
1.97%
|
1.60%
|
53%
|
For
the Period July 12, 2017
9
through October 31, 2017
|
21.96%
|
$
4,573
|
0.95%
|
3.13%
|
0.04%
|
0.95%
|
3.13%
|
0.04%
|
70%
|
Direxion
Daily FTSE China Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(44.39)%
|
$
307,058
|
1.02%
|
1.05%
|
1.63%
|
0.95%
|
0.98%
|
1.70%
|
158%
|
For
the Year Ended October 31, 2017
|
89.33%
|
$
236,786
|
1.03%
|
1.08%
|
(0.41)%
|
0.95%
|
1.00%
|
(0.33)%
|
112%
|
For
the Year Ended October 31, 2016
|
(20.62)%
|
$
150,955
|
0.99%
|
1.04%
|
(0.67)%
|
0.95%
|
1.00%
|
(0.63)%
|
80%
|
For
the Year Ended October 31, 2015
|
(31.19)%
|
$
159,741
|
0.97%
|
1.00%
|
(0.80)%
|
0.95%
|
0.98%
|
(0.78)%
|
71%
|
For
the Year Ended October 31, 2014
|
5.43%
|
$
110,784
|
0.96%
|
1.03%
|
(0.88)%
|
0.95%
|
1.02%
|
(0.87)%
|
103%
|
Direxion
Daily FTSE China Bear 3X Shares
11
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
9.14%
|
$
80,084
|
1.02%
|
1.08%
|
0.69%
|
0.95%
|
1.01%
|
0.76%
|
0%
|
For
the Year Ended October 31, 2017
|
(57.73)%
|
$
40,664
|
0.96%
|
1.05%
|
(0.28)%
|
0.95%
|
1.04%
|
(0.27)%
|
0%
|
For
the Year Ended October 31, 2016
|
(28.64)%
|
$
67,613
|
1.01%
|
1.09%
|
(0.84)%
|
0.95%
|
1.03%
|
(0.78)%
|
0%
|
For
the Year Ended October 31, 2015
|
(39.95)%
|
$
106,669
|
0.97%
|
1.05%
|
(0.95)%
|
0.95%
|
1.03%
|
(0.93)%
|
0%
|
For
the Year Ended October 31, 2014
|
(36.59)%
|
$
13,986
|
0.96%
|
1.18%
|
(0.95)%
|
0.95%
|
1.18%
|
(0.94)%
|
0%
|
Direxion
Daily FTSE Europe Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(32.39)%
|
$
46,632
|
1.00%
|
0.98%
|
1.52%
|
0.95%
|
0.93%
|
1.57%
|
54%
|
For
the Year Ended October 31, 2017
|
95.92%
|
$
64,737
|
1.03%
|
1.06%
|
0.78%
|
0.95%
|
0.98%
|
0.86%
|
0%
|
For
the Year Ended October 31, 2016
|
(32.04)%
|
$
26,433
|
0.97%
|
1.04%
|
(0.69)%
|
0.95%
|
1.02%
|
(0.67)%
|
210%
|
For
the Year Ended October 31, 2015
|
(13.33)%
|
$
51,389
|
0.95%
|
0.96%
|
(0.31)%
|
0.95%
|
0.96%
|
(0.31)%
|
0%
|
For
the Period January 22, 2014
9
through October 31, 2014
|
(19.35)%
|
$
9,631
|
0.95%
|
1.74%
|
0.91%
|
0.95%
|
1.74%
|
0.91%
|
0%
|
711
|
Direxion Shares ETF
Trust Prospectus
|
Financial Highlights
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asset Value,
Beginning of
Year/Period
|
Net
Investment
Income (Loss)
1,2
|
Net
Investment
Income (Loss)
1,3
|
Net
Realized and
Unrealized Gain
(Loss) on
Investments
4
|
Net
Increase
(Decrease) in Net
Asset Value
Resulting from
Operations
|
Dividends
from
Net Investment
Income
|
Distributions
from
Realized Capital
Gains
|
Distributions
from
Return of Capital
|
Total
Distributions
|
Net
Asset Value,
End of Year/Period
|
Direxion
Daily Latin America Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
31.54
|
0.29
|
0.31
|
(7.87)
|
(7.58)
|
(0.21
)
|
–
|
(0.01
)
|
(0.22
)
|
$
23.74
|
For
the Year Ended October 31, 2017
|
$
28.79
|
(0.08)
|
(0.04)
|
2.83
|
2.75
|
–
|
–
|
–
|
–
|
$
31.54
|
For
the Year Ended October 31, 2016
|
$
16.48
|
(0.16)
|
(0.14)
|
12.47
|
12.31
|
–
|
–
|
–
|
–
|
$
28.79
|
For
the Year Ended October 31, 2015
|
$
74.16
|
(0.30)
|
(0.30)
|
(57.38)
|
(57.68)
|
–
|
–
|
–
|
–
|
$
16.48
|
For
the Year Ended October 31, 2014
|
$104.32
|
(0.48)
|
(0.44)
|
(29.68)
|
(30.16)
|
–
|
–
|
–
|
–
|
$
74.16
|
Direxion
Daily MSCI Brazil Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
40.29
|
0.40
|
0.45
|
(10.88)
|
(10.48)
|
(0.39
)
|
–
|
(0.02
)
|
(0.41
)
|
$
29.40
|
For
the Year Ended October 31, 2017
|
$
47.45
|
(0.03)
|
0.04
|
(7.13)
|
(7.16)
|
–
|
–
|
–
|
–
|
$
40.29
|
For
the Year Ended October 31, 2016
|
$
16.48
|
(0.15)
|
(0.12)
|
31.12
|
30.97
|
–
|
–
|
–
|
–
|
$
47.45
|
For
the Year Ended October 31, 2015
|
$151.00
|
(0.40)
|
(0.40)
|
(134.12)
|
(134.52)
|
–
|
–
|
–
|
–
|
$
16.48
|
For
the Year Ended October 31, 2014
|
$284.30
|
(0.70)
|
(0.70)
|
(132.60)
|
(133.30)
|
–
|
–
|
–
|
–
|
$151.00
|
Direxion
Daily MSCI Developed Markets Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
79.38
|
0.95
|
1.00
|
(23.54)
|
(22.59)
|
(1.22
)
|
(0.34
)
|
–
|
(1.56
)
|
$
55.23
|
For
the Year Ended October 31, 2017
|
$
44.52
|
0.17
|
0.21
|
34.69
|
34.86
|
–
|
–
|
–
|
–
|
$
79.38
|
For
the Year Ended October 31, 2016
|
$
55.47
|
(0.05)
|
(0.04)
|
(10.90)
|
(10.95)
|
–
|
–
|
–
|
–
|
$
44.52
|
For
the Year Ended October 31, 2015
|
$
65.42
|
(0.46)
|
(0.44)
|
(9.49)
|
(9.95)
|
–
|
–
|
–
|
–
|
$
55.47
|
For
the Year Ended October 31, 2014
|
$
69.40
|
(0.54)
|
(0.53)
|
(3.44)
|
(3.98)
|
–
|
–
|
–
|
–
|
$
65.42
|
Direxion
Daily MSCI Developed Markets Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
13.08
|
0.09
|
0.09
|
2.75
|
2.84
|
(0.06
)
|
–
|
–
|
(0.06
)
|
$
15.86
|
For
the Year Ended October 31, 2017
|
$
25.28
|
(0.07)
|
(0.06)
|
(12.13)
|
(12.20)
|
–
|
–
|
–
|
–
|
$
13.08
|
For
the Year Ended October 31, 2016
|
$
28.83
|
(0.25)
|
(0.24)
|
(3.30)
|
(3.55)
|
–
|
–
|
–
|
–
|
$
25.28
|
For
the Year Ended October 31, 2015
|
$
32.48
|
(0.29)
|
(0.29)
|
(3.36)
|
(3.65)
|
–
|
–
|
–
|
–
|
$
28.83
|
For
the Year Ended October 31, 2014
|
$
36.33
|
(0.31)
|
(0.31)
|
(3.54)
|
(3.85)
|
–
|
–
|
–
|
–
|
$
32.48
|
Direxion
Daily MSCI Emerging Markets Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$115.85
|
1.02
|
1.05
|
(53.34)
|
(52.32)
|
(0.77
)
|
–
|
(0.02
)
|
(0.79
)
|
$
62.74
|
For
the Year Ended October 31, 2017
|
$
62.59
|
(0.37)
|
(0.28)
|
53.63
|
53.26
|
–
|
–
|
–
|
–
|
$115.85
|
For
the Year Ended October 31, 2016
|
$
57.28
|
(0.42)
|
(0.40)
|
5.73
|
5.31
|
–
|
–
|
–
|
–
|
$
62.59
|
For
the Year Ended October 31, 2015
|
$110.88
|
(0.68)
|
(0.68)
|
(52.92)
|
(53.60)
|
–
|
–
|
–
|
–
|
$
57.28
|
For
the Year Ended October 31, 2014
|
$119.48
|
(0.84)
|
(0.84)
|
(7.76)
|
(8.60)
|
–
|
–
|
–
|
–
|
$110.88
|
Direxion Shares
ETF Trust Prospectus
|
712
|
Financial Highlights
(continued)
|
|
|
RATIOS
TO AVERAGE NET ASSETS
7
|
|
|
Total
Return
5
|
Net
Assets, End of
Year/Period (000's
omitted)
|
Net
Expenses
2,6
|
Total
Expenses
2
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
2
|
Net
Expenses
3,6
|
Total
Expenses
3
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
3
|
Portfolio
Turnover
Rate
8
|
Direxion
Daily Latin America Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(24.04)%
|
$
13,512
|
1.03%
|
1.19%
|
0.99%
|
0.95%
|
1.11%
|
1.07%
|
56%
|
For
the Year Ended October 31, 2017
|
9.55%
|
$
14,796
|
1.12%
|
1.35%
|
(0.30)%
|
0.95%
|
1.18%
|
(0.13)%
|
58%
|
For
the Year Ended October 31, 2016
|
74.70%
|
$
17,823
|
1.06%
|
1.36%
|
(0.87)%
|
0.95%
|
1.25%
|
(0.76)%
|
101%
|
For
the Year Ended October 31, 2015
|
(77.78)%
|
$
10,216
|
0.96%
|
1.15%
|
(0.87)%
|
0.95%
|
1.14%
|
(0.86)%
|
0%
|
For
the Year Ended October 31, 2014
|
(28.91)%
|
$
21,879
|
0.96%
|
1.18%
|
(0.54)%
|
0.95%
|
1.17%
|
(0.52)%
|
64%
|
Direxion
Daily MSCI Brazil Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(25.98)%
|
$407,268
|
1.15%
|
1.14%
|
1.54%
|
0.95%
|
0.94%
|
1.74%
|
133%
|
For
the Year Ended October 31, 2017
|
(15.09)%
|
$153,270
|
1.13%
|
1.15%
|
(0.08)%
|
0.95%
|
0.97%
|
0.10%
|
42%
|
For
the Year Ended October 31, 2016
|
187.92%
|
$
78,470
|
1.10%
|
1.17%
|
(0.77)%
|
0.95%
|
1.02%
|
(0.62)%
|
164%
|
For
the Year Ended October 31, 2015
|
(89.09)%
|
$
41,284
|
0.95%
|
1.04%
|
(0.92)%
|
0.95%
|
1.04%
|
(0.92)%
|
56%
|
For
the Year Ended October 31, 2014
|
(46.89)%
|
$
40,761
|
0.97%
|
1.38%
|
(0.35)%
|
0.95%
|
1.36%
|
(0.33)%
|
229%
|
Direxion
Daily MSCI Developed Markets Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(29.03)%
|
$
19,332
|
1.01%
|
1.18%
|
1.22%
|
0.95%
|
1.12%
|
1.28%
|
30%
|
For
the Year Ended October 31, 2017
|
78.30%
|
$
31,750
|
1.02%
|
1.27%
|
0.28%
|
0.95%
|
1.20%
|
0.35%
|
87%
|
For
the Year Ended October 31, 2016
|
(19.74)%
|
$
17,806
|
0.96%
|
1.22%
|
(0.11)%
|
0.95%
|
1.21%
|
(0.10)%
|
188%
|
For
the Year Ended October 31, 2015
|
(15.21)%
|
$
33,284
|
0.98%
|
1.12%
|
(0.72)%
|
0.95%
|
1.10%
|
(0.69)%
|
276%
|
For
the Year Ended October 31, 2014
|
(5.73)%
|
$
35,982
|
0.97%
|
1.06%
|
(0.75)%
|
0.95%
|
1.05%
|
(0.73)%
|
32%
|
Direxion
Daily MSCI Developed Markets Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
21.82%
|
$
3,727
|
0.96%
|
2.54%
|
0.70%
|
0.95%
|
2.53%
|
0.71%
|
0%
|
For
the Year Ended October 31, 2017
|
(48.26)%
|
$
3,728
|
0.97%
|
2.28%
|
(0.35)%
|
0.95%
|
2.26%
|
(0.33)%
|
0%
|
For
the Year Ended October 31, 2016
|
(12.31)%
|
$
8,468
|
0.99%
|
1.79%
|
(0.84)%
|
0.95%
|
1.75%
|
(0.80)%
|
0%
|
For
the Year Ended October 31, 2015
|
(11.24)%
|
$
11,097
|
0.96%
|
1.83%
|
(0.95)%
|
0.95%
|
1.82%
|
(0.94)%
|
0%
|
For
the Year Ended October 31, 2014
|
(10.60)%
|
$
9,255
|
0.95%
|
2.09%
|
(0.95)%
|
0.95%
|
2.08%
|
(0.95)%
|
0%
|
Direxion
Daily MSCI Emerging Markets Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(45.51)%
|
$202,745
|
0.98%
|
0.99%
|
0.94%
|
0.95%
|
0.96%
|
0.97%
|
136%
|
For
the Year Ended October 31, 2017
|
85.09%
|
$275,919
|
1.06%
|
1.08%
|
(0.47)%
|
0.95%
|
0.97%
|
(0.36)%
|
38%
|
For
the Year Ended October 31, 2016
|
9.27%
|
$195,996
|
0.99%
|
1.03%
|
(0.83)%
|
0.95%
|
0.99%
|
(0.79)%
|
162%
|
For
the Year Ended October 31, 2015
|
(48.34)%
|
$182,247
|
0.96%
|
0.95%
|
(0.78)%
|
0.95%
|
0.95%
|
(0.77)%
|
226%
|
For
the Year Ended October 31, 2014
|
(7.20)%
|
$287,673
|
0.96%
|
0.99%
|
(0.76)%
|
0.95%
|
0.98%
|
(0.75)%
|
116%
|
713
|
Direxion Shares ETF
Trust Prospectus
|
Financial Highlights
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asset Value,
Beginning of
Year/Period
|
Net
Investment
Income (Loss)
1,2
|
Net
Investment
Income (Loss)
1,3
|
Net
Realized and
Unrealized Gain
(Loss) on
Investments
4
|
Net
Increase
(Decrease) in Net
Asset Value
Resulting from
Operations
|
Dividends
from
Net Investment
Income
|
Distributions
from
Realized Capital
Gains
|
Distributions
from
Return of Capital
|
Total
Distributions
|
Net
Asset Value,
End of Year/Period
|
Direxion
Daily MSCI Emerging Markets Bear 3X Shares
12
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
50.55
|
0.30
|
0.32
|
14.09
|
14.39
|
(0.16
)
|
–
|
–
|
(0.16
)
|
$
64.78
|
For
the Year Ended October 31, 2017
|
$114.55
|
(0.20)
|
(0.20)
|
(63.80)
|
(64.00)
|
–
|
–
|
–
|
–
|
$
50.55
|
For
the Year Ended October 31, 2016
|
$202.20
|
(1.30)
|
(1.25)
|
(86.35)
|
(87.65)
|
–
|
–
|
–
|
–
|
$114.55
|
For
the Year Ended October 31, 2015
|
$163.65
|
(1.70)
|
(1.70)
|
40.25
|
38.55
|
–
|
–
|
–
|
–
|
$202.20
|
For
the Year Ended October 31, 2014
|
$202.25
|
(1.75)
|
(1.75)
|
(36.85)
|
(38.60)
|
–
|
–
|
–
|
–
|
$163.65
|
Direxion
Daily MSCI India Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
95.50
|
0.09
|
0.14
|
(43.76)
|
(43.67)
|
(0.24
)
|
–
|
(0.08
)
|
(0.32
)
|
$
51.51
|
For
the Year Ended October 31, 2017
|
$
57.82
|
(0.34)
|
(0.28)
|
38.02
|
37.68
|
–
|
–
|
–
|
–
|
$
95.50
|
For
the Year Ended October 31, 2016
|
$
58.32
|
(0.30)
|
(0.29)
|
(0.20)
|
(0.50)
|
–
|
–
|
–
|
–
|
$
57.82
|
For
the Year Ended October 31, 2015
|
$101.88
|
(0.56)
|
(0.56)
|
(43.00)
|
(43.56)
|
–
|
–
|
–
|
–
|
$
58.32
|
For
the Year Ended October 31, 2014
|
$
53.56
|
(0.64)
|
(0.64)
|
48.96
|
48.32
|
–
|
–
|
–
|
–
|
$101.88
|
Direxion
Daily MSCI Japan Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
71.93
|
0.14
|
0.17
|
(17.70)
|
(17.56)
|
(0.14
)
|
–
|
(0.00
)
10
|
(0.14
)
|
$
54.23
|
For
the Year Ended October 31, 2017
|
$
46.28
|
(0.19)
|
(0.16)
|
25.84
|
25.65
|
–
|
–
|
–
|
–
|
$
71.93
|
For
the Year Ended October 31, 2016
|
$
47.32
|
(0.20)
|
(0.20)
|
(0.84)
|
(1.04)
|
–
|
–
|
–
|
–
|
$
46.28
|
For
the Year Ended October 31, 2015
|
$
48.91
|
(0.27)
|
(0.26)
|
(1.32)
|
(1.59)
|
–
|
–
|
–
|
–
|
$
47.32
|
For
the Year Ended October 31, 2014
|
$
49.65
|
(0.29)
|
(0.28)
|
(0.14)
|
(0.43)
|
–
|
(0.31
)
|
–
|
(0.31
)
|
$
48.91
|
Direxion
Daily MSCI Mexico Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
21.83
|
0.29
|
0.29
|
(10.88)
|
(10.59)
|
(0.55
)
|
–
|
–
|
(0.55
)
|
$
10.69
|
For
the Period May 3, 2017
9
through October 31, 2017
|
$
25.00
|
0.04
|
0.04
|
(3.21)
|
(3.17)
|
–
|
–
|
–
|
–
|
$
21.83
|
Direxion
Daily MSCI South Korea Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
60.22
|
0.36
|
0.39
|
(34.01)
|
(33.65)
|
(0.60
)
|
(1.84
)
|
–
|
(2.44
)
|
$
24.13
|
For
the Year Ended October 31, 2017
|
$
26.57
|
(0.21)
|
(0.21)
|
33.86
|
33.65
|
–
|
–
|
–
|
–
|
$
60.22
|
For
the Year Ended October 31, 2016
|
$
28.24
|
(0.21)
|
(0.21)
|
(1.46)
|
(1.67)
|
–
|
–
|
–
|
–
|
$
26.57
|
For
the Year Ended October 31, 2015
|
$
38.87
|
(0.30)
|
(0.30)
|
(10.33)
|
(10.63)
|
–
|
–
|
–
|
–
|
$
28.24
|
For
the Year Ended October 31, 2014
|
$
54.54
|
(0.34)
|
(0.33)
|
(14.20)
|
(14.54)
|
–
|
(1.13
)
|
–
|
(1.13
)
|
$
38.87
|
Direxion Shares
ETF Trust Prospectus
|
714
|
Financial Highlights
(continued)
|
|
|
RATIOS
TO AVERAGE NET ASSETS
7
|
|
|
Total
Return
5
|
Net
Assets, End of
Year/Period (000's
omitted)
|
Net
Expenses
2,6
|
Total
Expenses
2
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
2
|
Net
Expenses
3,6
|
Total
Expenses
3
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
3
|
Portfolio
Turnover
Rate
8
|
Direxion
Daily MSCI Emerging Markets Bear 3X Shares
12
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
28.60%
|
$
90,383
|
0.99%
|
1.03%
|
0.64%
|
0.95%
|
0.99%
|
0.68%
|
0%
|
For
the Year Ended October 31, 2017
|
(55.87)%
|
$
84,166
|
0.96%
|
1.00%
|
(0.26)%
|
0.95%
|
0.99%
|
(0.25)%
|
0%
|
For
the Year Ended October 31, 2016
|
(43.35)%
|
$143,830
|
0.97%
|
1.02%
|
(0.79)%
|
0.95%
|
1.00%
|
(0.77)%
|
0%
|
For
the Year Ended October 31, 2015
|
23.56%
|
$124,472
|
0.96%
|
0.98%
|
(0.94)%
|
0.95%
|
0.97%
|
(0.93)%
|
0%
|
For
the Year Ended October 31, 2014
|
(19.09)%
|
$
86,012
|
0.95%
|
1.01%
|
(0.95)%
|
0.95%
|
1.01%
|
(0.95)%
|
0%
|
Direxion
Daily MSCI India Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(45.89)%
|
$100,427
|
1.01%
|
0.99%
|
0.11%
|
0.95%
|
0.93%
|
0.17%
|
59%
|
For
the Year Ended October 31, 2017
|
65.17%
|
$105,023
|
1.04%
|
1.07%
|
(0.49)%
|
0.95%
|
0.98%
|
(0.40)%
|
15%
|
For
the Year Ended October 31, 2016
|
(0.86)%
|
$
75,147
|
0.97%
|
1.03%
|
(0.60)%
|
0.95%
|
1.01%
|
(0.58)%
|
119%
|
For
the Year Ended October 31, 2015
|
(42.76)%
|
$
94,040
|
0.96%
|
0.98%
|
(0.69)%
|
0.95%
|
0.97%
|
(0.68)%
|
355%
|
For
the Year Ended October 31, 2014
|
90.24%
|
$
78,949
|
0.98%
|
1.04%
|
(0.90)%
|
0.95%
|
1.02%
|
(0.87)%
|
195%
|
Direxion
Daily MSCI Japan Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(24.47)%
|
$
13,557
|
1.00%
|
1.11%
|
0.18%
|
0.95%
|
1.06%
|
0.23%
|
6%
|
For
the Year Ended October 31, 2017
|
55.42%
|
$
14,385
|
1.02%
|
1.58%
|
(0.37)%
|
0.95%
|
1.51%
|
(0.30)%
|
0%
|
For
the Year Ended October 31, 2016
|
(2.20)%
|
$
11,569
|
0.96%
|
1.41%
|
(0.50)%
|
0.95%
|
1.40%
|
(0.49)%
|
204%
|
For
the Year Ended October 31, 2015
|
(3.25)%
|
$
14,196
|
0.96%
|
1.30%
|
(0.53)%
|
0.95%
|
1.29%
|
(0.52)%
|
17%
|
For
the Year Ended October 31, 2014
|
(0.87)%
|
$
7,337
|
0.96%
|
1.69%
|
(0.63)%
|
0.95%
|
1.68%
|
(0.63)%
|
0%
|
Direxion
Daily MSCI Mexico Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(49.66)%
|
$
4,809
|
0.96%
|
1.13%
|
1.50%
|
0.95%
|
1.12%
|
1.51%
|
140%
|
For
the Period May 3, 2017
9
through October 31, 2017
|
(12.68)%
|
$
3,274
|
0.96%
|
2.74%
|
0.30%
|
0.95%
|
2.73%
|
0.29%
|
647%
|
Direxion
Daily MSCI South Korea Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(58.26)%
|
$
22,924
|
1.03%
|
1.16%
|
0.76%
|
0.95%
|
1.08%
|
0.84%
|
96%
|
For
the Year Ended October 31, 2017
|
126.65%
|
$
12,044
|
0.97%
|
1.35%
|
(0.53)%
|
0.95%
|
1.33%
|
(0.51)%
|
88%
|
For
the Year Ended October 31, 2016
|
(5.91)%
|
$
3,985
|
0.97%
|
1.67%
|
(0.87)%
|
0.95%
|
1.65%
|
(0.85)%
|
266%
|
For
the Year Ended October 31, 2015
|
(27.35)%
|
$
4,235
|
0.96%
|
1.76%
|
(0.95)%
|
0.95%
|
1.75%
|
(0.94)%
|
45%
|
For
the Year Ended October 31, 2014
|
(27.06)%
|
$
1,943
|
0.97%
|
2.92%
|
(0.69)%
|
0.95%
|
2.90%
|
(0.66)%
|
0%
|
715
|
Direxion Shares ETF
Trust Prospectus
|
Financial Highlights
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asset Value,
Beginning of
Year/Period
|
Net
Investment
Income (Loss)
1,2
|
Net
Investment
Income (Loss)
1,3
|
Net
Realized and
Unrealized Gain
(Loss) on
Investments
4
|
Net
Increase
(Decrease) in Net
Asset Value
Resulting from
Operations
|
Dividends
from
Net Investment
Income
|
Distributions
from
Realized Capital
Gains
|
Distributions
from
Return of Capital
|
Total
Distributions
|
Net
Asset Value,
End of Year/Period
|
Direxion
Daily Russia Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
48.86
|
0.86
|
0.90
|
(11.82)
|
(10.96)
|
(0.90
)
|
–
|
(0.31
)
|
(1.21
)
|
$
36.69
|
For
the Year Ended October 31, 2017
|
$
33.69
|
(0.32)
|
(0.25)
|
15.49
|
15.17
|
–
|
–
|
–
|
–
|
$
48.86
|
For
the Year Ended October 31, 2016
|
$
31.84
|
(0.25)
|
(0.22)
|
2.10
|
1.85
|
–
|
–
|
–
|
–
|
$
33.69
|
For
the Year Ended October 31, 2015
|
$126.96
|
(0.42)
|
(0.42)
|
(94.66)
|
(95.08)
|
–
|
(0.04
)
|
–
|
(0.04
)
|
$
31.84
|
For
the Year Ended October 31, 2014
|
$361.08
|
(1.68)
|
(1.66)
|
(232.44)
|
(234.12)
|
–
|
–
|
–
|
–
|
$126.96
|
Direxion
Daily Russia Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
24.55
|
0.13
|
0.14
|
(6.31)
|
(6.18)
|
(0.06
)
|
–
|
–
|
(0.06
)
|
$
18.31
|
For
the Year Ended October 31, 2017
|
$
51.85
|
(0.09)
|
(0.08)
|
(27.21)
|
(27.30)
|
–
|
–
|
–
|
–
|
$
24.55
|
For
the Year Ended October 31, 2016
|
$158.00
|
(0.65)
|
(0.60)
|
(105.50)
|
(106.15)
|
–
|
–
|
–
|
–
|
$
51.85
|
For
the Year Ended October 31, 2015
|
$296.20
|
(2.00)
|
(2.00)
|
(136.20)
|
(138.20)
|
–
|
–
|
–
|
–
|
$158.00
|
For
the Year Ended October 31, 2014
|
$242.80
|
(2.60)
|
(2.60)
|
56.00
|
53.40
|
–
|
–
|
–
|
–
|
$296.20
|
Direxion
Daily Aerospace & Defense Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
40.03
|
0.20
|
0.27
|
2.81
|
3.01
|
(0.26
)
|
(0.63
)
|
–
|
(0.89
)
|
$
42.15
|
For
the Period May 3, 2017
9
through October 31, 2017
|
$
25.00
|
0.07
|
0.07
|
14.96
|
15.03
|
–
|
–
|
–
|
–
|
$
40.03
|
Direxion
Daily Energy Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
29.16
|
0.42
|
0.46
|
(3.64)
|
(3.22)
|
(0.59
)
|
–
|
(0.01
)
|
(0.60
)
|
$
25.34
|
For
the Year Ended October 31, 2017
|
$
30.40
|
0.27
|
0.29
|
(1.43)
|
(1.16)
|
(0.08
)
|
–
|
–
|
(0.08
)
|
$
29.16
|
For
the Year Ended October 31, 2016
|
$
34.46
|
(0.08)
|
(0.06)
|
(3.98)
|
(4.06)
|
–
|
–
|
–
|
–
|
$
30.40
|
For
the Year Ended October 31, 2015
|
$
84.21
|
(0.17)
|
(0.17)
|
(49.58)
|
(49.75)
|
–
|
–
|
–
|
–
|
$
34.46
|
For
the Year Ended October 31, 2014
|
$
83.24
|
(0.86)
|
(0.80)
|
1.83
|
0.97
|
–
|
–
|
–
|
–
|
$
84.21
|
Direxion
Daily Energy Bear 3X Shares
12
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
55.85
|
0.26
|
0.28
|
(11.08)
|
(10.82)
|
(0.16
)
|
–
|
–
|
(0.16
)
|
$
44.87
|
For
the Year Ended October 31, 2017
|
$
67.00
|
(0.20)
|
(0.15)
|
(10.95)
|
(11.15)
|
–
|
–
|
–
|
–
|
$
55.85
|
For
the Year Ended October 31, 2016
|
$114.50
|
(0.80)
|
(0.70)
|
(46.70)
|
(47.50)
|
–
|
–
|
–
|
–
|
$
67.00
|
For
the Year Ended October 31, 2015
|
$
86.65
|
(1.05)
|
(1.00)
|
28.90
|
27.85
|
–
|
–
|
–
|
–
|
$114.50
|
For
the Year Ended October 31, 2014
|
$111.50
|
(0.85)
|
(0.85)
|
(24.00)
|
(24.85)
|
–
|
–
|
–
|
–
|
$
86.65
|
Direxion Shares
ETF Trust Prospectus
|
716
|
Financial Highlights
(continued)
|
|
|
RATIOS
TO AVERAGE NET ASSETS
7
|
|
|
Total
Return
5
|
Net
Assets, End of
Year/Period (000's
omitted)
|
Net
Expenses
2,6
|
Total
Expenses
2
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
2
|
Net
Expenses
3,6
|
Total
Expenses
3
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
3
|
Portfolio
Turnover
Rate
8
|
Direxion
Daily Russia Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(23.20)%
|
$147,417
|
1.00%
|
1.00%
|
1.91%
|
0.90%
|
0.90%
|
2.01%
|
93%
|
For
the Year Ended October 31, 2017
|
45.03%
|
$142,583
|
1.11%
|
1.07%
|
(0.74)%
|
0.94%
|
0.90%
|
(0.57)%
|
65%
|
For
the Year Ended October 31, 2016
|
5.81%
|
$160,631
|
1.06%
|
1.04%
|
(0.91)%
|
0.95%
|
0.93%
|
(0.80)%
|
179%
|
For
the Year Ended October 31, 2015
|
(74.90)%
|
$197,193
|
0.97%
|
0.96%
|
(0.96)%
|
0.95%
|
0.94%
|
(0.94)%
|
299%
|
For
the Year Ended October 31, 2014
|
(64.84)%
|
$172,460
|
0.96%
|
1.01%
|
(0.96)%
|
0.95%
|
1.00%
|
(0.95)%
|
72%
|
Direxion
Daily Russia Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(25.16)%
|
$
23,701
|
0.99%
|
1.04%
|
0.68%
|
0.95%
|
1.00%
|
0.72%
|
0%
|
For
the Year Ended October 31, 2017
|
(52.65)%
|
$
31,782
|
0.98%
|
1.03%
|
(0.27)%
|
0.95%
|
1.00%
|
(0.24)%
|
0%
|
For
the Year Ended October 31, 2016
|
(67.18)%
|
$
54,709
|
0.98%
|
1.02%
|
(0.79)%
|
0.95%
|
0.99%
|
(0.76)%
|
0%
|
For
the Year Ended October 31, 2015
|
(46.66)%
|
$
41,856
|
0.96%
|
0.99%
|
(0.95)%
|
0.95%
|
0.98%
|
(0.94)%
|
0%
|
For
the Year Ended October 31, 2014
|
21.99%
|
$
16,286
|
0.95%
|
1.14%
|
(0.95)%
|
0.95%
|
1.14%
|
(0.95)%
|
0%
|
Direxion
Daily Aerospace & Defense Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
7.39%
|
$
56,900
|
1.09%
|
1.11%
|
0.40%
|
0.95%
|
0.97%
|
0.54%
|
39%
|
For
the Period May 3, 2017
9
through October 31, 2017
|
60.12%
|
$
42,032
|
0.98%
|
1.34%
|
0.39%
|
0.95%
|
1.31%
|
0.42%
|
7%
|
Direxion
Daily Energy Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(11.59)%
|
$349,655
|
1.08%
|
1.08%
|
1.24%
|
0.95%
|
0.95%
|
1.37%
|
56%
|
For
the Year Ended October 31, 2017
|
(3.77)%
|
$481,130
|
1.00%
|
1.00%
|
0.90%
|
0.95%
|
0.95%
|
0.95%
|
59%
|
For
the Year Ended October 31, 2016
|
(11.78)%
|
$452,886
|
1.01%
|
1.02%
|
(0.30)%
|
0.95%
|
0.96%
|
(0.24)%
|
82%
|
For
the Year Ended October 31, 2015
|
(59.08)%
|
$489,320
|
0.96%
|
0.96%
|
(0.36)%
|
0.95%
|
0.95%
|
(0.35)%
|
70%
|
For
the Year Ended October 31, 2014
|
1.17%
|
$235,801
|
1.02%
|
1.04%
|
(0.90)%
|
0.95%
|
0.97%
|
(0.83)%
|
0%
|
Direxion
Daily Energy Bear 3X Shares
12
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(19.34)%
|
$
51,915
|
1.00%
|
1.04%
|
0.65%
|
0.95%
|
0.99%
|
0.70%
|
0%
|
For
the Year Ended October 31, 2017
|
(16.64)%
|
$
53,454
|
0.96%
|
1.04%
|
(0.31)%
|
0.95%
|
1.03%
|
(0.30)%
|
0%
|
For
the Year Ended October 31, 2016
|
(41.48)%
|
$
68,147
|
1.03%
|
1.09%
|
(0.86)%
|
0.95%
|
1.01%
|
(0.78)%
|
0%
|
For
the Year Ended October 31, 2015
|
32.14%
|
$
67,250
|
0.97%
|
1.00%
|
(0.96)%
|
0.95%
|
0.98%
|
(0.94)%
|
0%
|
For
the Year Ended October 31, 2014
|
(22.29)%
|
$
48,315
|
0.95%
|
1.05%
|
(0.95)%
|
0.95%
|
1.05%
|
(0.95)%
|
0%
|
717
|
Direxion Shares ETF
Trust Prospectus
|
Financial Highlights
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asset Value,
Beginning of
Year/Period
|
Net
Investment
Income (Loss)
1,2
|
Net
Investment
Income (Loss)
1,3
|
Net
Realized and
Unrealized Gain
(Loss) on
Investments
4
|
Net
Increase
(Decrease) in Net
Asset Value
Resulting from
Operations
|
Dividends
from
Net Investment
Income
|
Distributions
from
Realized Capital
Gains
|
Distributions
from
Return of Capital
|
Total
Distributions
|
Net
Asset Value,
End of Year/Period
|
Direxion
Daily Financial Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
60.31
|
0.60
|
0.67
|
(1.70)
|
(1.10)
|
(0.56
)
|
–
|
–
|
(0.56
)
|
$
58.65
|
For
the Year Ended October 31, 2017
|
$
29.34
|
0.11
|
0.15
|
30.86
|
30.97
|
–
|
–
|
–
|
–
|
$
60.31
|
For
the Year Ended October 31, 2016
|
$
30.21
|
(0.03)
|
(0.02)
|
(0.84)
|
(0.87)
|
–
|
–
|
–
|
–
|
$
29.34
|
For
the Year Ended October 31, 2015
|
$
28.51
|
(0.21)
|
(0.20)
|
1.91
|
1.70
|
–
|
–
|
–
|
–
|
$
30.21
|
For
the Year Ended October 31, 2014
|
$
18.96
|
(0.19)
|
(0.18)
|
9.74
|
9.55
|
–
|
–
|
–
|
–
|
$
28.51
|
Direxion
Daily Financial Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
13.46
|
0.07
|
0.07
|
(2.26)
|
(2.19)
|
(0.04
)
|
–
|
–
|
(0.04
)
|
$
11.23
|
For
the Year Ended October 31, 2017
|
$
31.39
|
(0.05)
|
(0.05)
|
(17.88)
|
(17.93)
|
–
|
–
|
–
|
–
|
$
13.46
|
For
the Year Ended October 31, 2016
|
$
41.86
|
(0.30)
|
(0.30)
|
(10.17)
|
(10.47)
|
–
|
–
|
–
|
–
|
$
31.39
|
For
the Year Ended October 31, 2015
|
$
58.32
|
(0.45)
|
(0.45)
|
(16.01)
|
(16.46)
|
–
|
–
|
–
|
–
|
$
41.86
|
For
the Year Ended October 31, 2014
|
$
105.40
|
(0.76)
|
(0.76)
|
(46.32)
|
(47.08)
|
–
|
–
|
–
|
–
|
$
58.32
|
Direxion
Daily Gold Miners Index Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
29.03
|
0.11
|
0.12
|
(15.80)
|
(15.69)
|
(0.02
)
|
–
|
(0.04
)
|
(0.06
)
|
$
13.28
|
For
the Year Ended October 31, 2017
|
$
56.28
|
(0.14)
|
(0.13)
|
(27.11)
|
(27.25)
|
–
|
–
|
–
|
–
|
$
29.03
|
For
the Year Ended October 31, 2016
|
$
27.60
|
(0.44)
|
(0.40)
|
29.12
|
28.68
|
–
|
–
|
–
|
–
|
$
56.28
|
For
the Year Ended October 31, 2015
|
$
88.24
|
(0.56)
|
(0.56)
|
(60.08)
|
(60.64)
|
–
|
–
|
–
|
–
|
$
27.60
|
For
the Year Ended October 31, 2014
|
$
385.92
|
(2.24)
|
(2.24)
|
(295.44)
|
(297.68)
|
–
|
–
|
–
|
–
|
$
88.24
|
Direxion
Daily Gold Miners Index Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
27.34
|
0.11
|
0.15
|
7.63
|
7.74
|
(0.06
)
|
–
|
–
|
(0.06
)
|
$
35.02
|
For
the Year Ended October 31, 2017
|
$
38.22
|
(0.09)
|
(0.07)
|
(10.79)
|
(10.88)
|
–
|
–
|
–
|
–
|
$
27.34
|
For
the Year Ended October 31, 2016
|
$
799.00
|
(0.46)
|
(0.45)
|
(760.32)
|
(760.78)
|
–
|
–
|
–
|
–
|
$
38.22
|
For
the Year Ended October 31, 2015
|
$2,326.00
|
(8.50)
|
(8.50)
|
(1,518.50)
|
(1,527.00)
|
–
|
–
|
–
|
–
|
$
799.00
|
For
the Year Ended October 31, 2014
|
$1,537.50
|
(11.00)
|
(10.50)
|
799.50
|
788.50
|
–
|
–
|
–
|
–
|
$2,326.00
|
Direxion
Daily Healthcare Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
44.17
|
0.20
|
0.25
|
8.94
|
9.14
|
(0.27
)
|
(0.02
)
|
–
|
(0.29
)
|
$
53.02
|
For
the Year Ended October 31, 2017
|
$
25.86
|
(0.01)
|
0.01
|
18.32
|
18.31
|
–
|
–
|
–
|
–
|
$
44.17
|
For
the Year Ended October 31, 2016
|
$
32.66
|
(0.22)
|
(0.21)
|
(6.58)
|
(6.80)
|
–
|
–
|
–
|
–
|
$
25.86
|
For
the Year Ended October 31, 2015
|
$
29.66
|
(0.26)
|
(0.25)
|
3.26
|
3.00
|
–
|
–
|
–
|
–
|
$
32.66
|
For
the Year Ended October 31, 2014
|
$
15.02
|
(0.12)
|
(0.12)
|
14.98
|
14.86
|
–
|
(0.22
)
|
–
|
(0.22
)
|
$
29.66
|
Direxion
Daily Homebuilders & Supplies Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
71.69
|
0.05
|
0.08
|
(42.24)
|
(42.19)
|
(0.02
)
|
(1.15
)
|
–
|
(1.17
)
|
$
28.33
|
For
the Year Ended October 31, 2017
|
$
21.24
|
(0.17)
|
(0.14)
|
50.62
|
50.45
|
–
|
–
|
–
|
–
|
$
71.69
|
For
the Year Ended October 31, 2016
|
$
29.03
|
(0.18)
|
(0.18)
|
(7.61)
|
(7.79)
|
–
|
–
|
–
|
–
|
$
21.24
|
For
the Period August 19, 2015
9
through October 31, 2015
|
$
40.00
|
(0.05)
|
(0.05)
|
(10.92)
|
(10.97)
|
–
|
–
|
–
|
–
|
$
29.03
|
Direxion
Daily Industrials Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
30.93
|
0.22
|
0.25
|
(4.54)
|
(4.32)
|
(0.27
)
|
(0.09
)
|
–
|
(0.36
)
|
$
26.25
|
For
the Period May 3, 2017
9
through October 31, 2017
|
$
25.00
|
0.05
|
0.05
|
5.88
|
5.93
|
–
|
–
|
–
|
–
|
$
30.93
|
Direxion Shares
ETF Trust Prospectus
|
718
|
Financial Highlights
(continued)
|
|
|
RATIOS
TO AVERAGE NET ASSETS
7
|
|
|
Total
Return
5
|
Net
Assets, End of
Year/Period (000's
omitted)
|
Net
Expenses
2,6
|
Total
Expenses
2
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
2
|
Net
Expenses
3,6
|
Total
Expenses
3
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
3
|
Portfolio
Turnover
Rate
8
|
Direxion
Daily Financial Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(1.98)%
|
$1,627,513
|
1.04%
|
1.05%
|
0.89%
|
0.94%
|
0.95%
|
0.99%
|
73%
|
For
the Year Ended October 31, 2017
|
105.56%
|
$1,538,012
|
1.03%
|
1.02%
|
0.24%
|
0.95%
|
0.94%
|
0.32%
|
4%
|
For
the Year Ended October 31, 2016
|
(2.88)%
|
$1,034,205
|
0.98%
|
0.99%
|
(0.12)%
|
0.95%
|
0.96%
|
(0.09)%
|
14%
|
For
the Year Ended October 31, 2015
|
5.96%
|
$1,304,920
|
0.97%
|
0.96%
|
(0.67)%
|
0.95%
|
0.94%
|
(0.65)%
|
6%
|
For
the Year Ended October 31, 2014
|
50.41%
|
$1,262,984
|
0.99%
|
1.00%
|
(0.80)%
|
0.95%
|
0.96%
|
(0.76)%
|
118%
|
Direxion
Daily Financial Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(16.26)%
|
$
141,799
|
0.95%
|
0.96%
|
0.69%
|
0.95%
|
0.96%
|
0.69%
|
0%
|
For
the Year Ended October 31, 2017
|
(57.12)%
|
$
178,750
|
0.95%
|
1.00%
|
(0.26)%
|
0.95%
|
1.00%
|
(0.26)%
|
0%
|
For
the Year Ended October 31, 2016
|
(25.01)%
|
$
313,292
|
0.96%
|
0.99%
|
(0.77)%
|
0.95%
|
0.98%
|
(0.76)%
|
0%
|
For
the Year Ended October 31, 2015
|
(28.22)%
|
$
311,119
|
0.95%
|
0.98%
|
(0.94)%
|
0.95%
|
0.98%
|
(0.94)%
|
0%
|
For
the Year Ended October 31, 2014
|
(44.67)%
|
$
283,539
|
0.95%
|
1.01%
|
(0.95)%
|
0.95%
|
1.01%
|
(0.95)%
|
0%
|
Direxion
Daily Gold Miners Index Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(54.12)%
|
$1,131,021
|
0.94%
|
0.94%
|
0.50%
|
0.91%
|
0.91%
|
0.53%
|
96%
|
For
the Year Ended October 31, 2017
|
(48.42)%
|
$1,337,695
|
0.93%
|
0.93%
|
(0.39)%
|
0.90%
|
0.90%
|
(0.36)%
|
234%
|
For
the Year Ended October 31, 2016
|
103.91%
|
$1,582,218
|
0.99%
|
0.99%
|
(0.84)%
|
0.90%
|
0.90%
|
(0.75)%
|
258%
|
For
the Year Ended October 31, 2015
|
(68.72)%
|
$
610,269
|
0.95%
|
0.95%
|
(0.94)%
|
0.94%
|
0.94%
|
(0.93)%
|
633%
|
For
the Year Ended October 31, 2014
|
(77.14)%
|
$
552,267
|
0.96%
|
0.95%
|
(0.81)%
|
0.95%
|
0.94%
|
(0.80)%
|
435%
|
Direxion
Daily Gold Miners Index Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
28.33%
|
$
154,753
|
1.04%
|
1.04%
|
0.43%
|
0.91%
|
0.91%
|
0.56%
|
0%
|
For
the Year Ended October 31, 2017
|
(28.47)%
|
$
383,331
|
1.01%
|
0.99%
|
(0.31)%
|
0.94%
|
0.92%
|
(0.24)%
|
0%
|
For
the Year Ended October 31, 2016
|
(95.22)%
|
$
258,711
|
0.97%
|
0.97%
|
(0.76)%
|
0.95%
|
0.95%
|
(0.74)%
|
0%
|
For
the Year Ended October 31, 2015
|
(65.65)%
|
$
287,615
|
0.98%
|
0.98%
|
(0.97)%
|
0.95%
|
0.95%
|
(0.94)%
|
0%
|
For
the Year Ended October 31, 2014
|
51.28%
|
$
193,040
|
0.97%
|
0.97%
|
(0.96)%
|
0.95%
|
0.95%
|
(0.94)%
|
0%
|
Direxion
Daily Healthcare Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
20.69%
|
$
151,104
|
1.06%
|
1.07%
|
0.40%
|
0.95%
|
0.96%
|
0.51%
|
43%
|
For
the Year Ended October 31, 2017
|
70.80%
|
$
143,567
|
1.00%
|
1.02%
|
(0.02)%
|
0.95%
|
0.97%
|
0.03%
|
23%
|
For
the Year Ended October 31, 2016
|
(20.82)%
|
$
164,186
|
0.99%
|
1.01%
|
(0.73)%
|
0.95%
|
0.97%
|
(0.69)%
|
0%
|
For
the Year Ended October 31, 2015
|
10.11%
|
$
342,892
|
0.97%
|
0.97%
|
(0.73)%
|
0.95%
|
0.95%
|
(0.71)%
|
32%
|
For
the Year Ended October 31, 2014
|
100.25%
|
$
189,820
|
0.97%
|
1.01%
|
(0.57)%
|
0.95%
|
0.99%
|
(0.55)%
|
46%
|
Direxion
Daily Homebuilders & Supplies Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(59.92)%
|
$
39,667
|
0.99%
|
1.03%
|
0.09%
|
0.95%
|
0.99%
|
0.13%
|
38%
|
For
the Year Ended October 31, 2017
|
237.52%
|
$
39,428
|
1.02%
|
1.45%
|
(0.39)%
|
0.95%
|
1.38%
|
(0.32)%
|
164%
|
For
the Year Ended October 31, 2016
|
(26.83)%
|
$
2,124
|
0.97%
|
2.28%
|
(0.70)%
|
0.95%
|
2.26%
|
(0.68)%
|
41%
|
For
the Period August 19, 2015
9
through October 31, 2015
|
(27.43)%
|
$
2,903
|
0.95%
|
5.31%
|
(0.84)%
|
0.95%
|
5.31%
|
(0.84)%
|
0%
|
Direxion
Daily Industrials Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(14.26)%
|
$
3,937
|
1.05%
|
1.58%
|
0.62%
|
0.95%
|
1.48%
|
0.72%
|
26%
|
For
the Period May 3, 2017
9
through October 31, 2017
|
23.72%
|
$
3,093
|
0.95%
|
3.54%
|
0.34%
|
0.95%
|
3.54%
|
0.34%
|
111%
|
719
|
Direxion Shares ETF
Trust Prospectus
|
Financial Highlights
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asset Value,
Beginning of
Year/Period
|
Net
Investment
Income (Loss)
1,2
|
Net
Investment
Income (Loss)
1,3
|
Net
Realized and
Unrealized Gain
(Loss) on
Investments
4
|
Net
Increase
(Decrease) in Net
Asset Value
Resulting from
Operations
|
Dividends
from
Net Investment
Income
|
Distributions
from
Realized Capital
Gains
|
Distributions
from
Return of Capital
|
Total
Distributions
|
Net
Asset Value,
End of Year/Period
|
Direxion
Daily Junior Gold Miners Index Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
15.13
|
0.04
|
0.05
|
(8.02)
|
(7.98)
|
–
|
–
|
–
|
–
|
$
7.15
|
For
the Year Ended October 31, 2017
|
$
48.96
|
0.08
|
0.08
|
(33.82)
|
(33.74)
|
(0.09
)
|
–
|
–
|
(0.09
)
|
$
15.13
|
For
the Year Ended October 31, 2016
|
$
15.96
|
(0.44)
|
(0.36)
|
33.44
|
33.00
|
–
|
–
|
–
|
–
|
$
48.96
|
For
the Year Ended October 31, 2015
|
$
78.12
|
(0.36)
|
(0.36)
|
(59.56)
|
(59.92)
|
–
|
(2.24
)
|
–
|
(2.24
)
|
$
15.96
|
For
the Year Ended October 31, 2014
|
$
612.00
|
(3.36)
|
(3.36)
|
(530.52)
|
(533.88)
|
–
|
–
|
–
|
–
|
$
78.12
|
Direxion
Daily Junior Gold Miners Index Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
64.48
|
0.28
|
0.33
|
11.12
|
11.40
|
(0.19
)
|
–
|
–
|
(0.19
)
|
$
75.69
|
For
the Year Ended October 31, 2017
|
$
107.44
|
(0.20)
|
(0.14)
|
(42.76)
|
(42.96)
|
–
|
–
|
–
|
–
|
$
64.48
|
For
the Year Ended October 31, 2016
|
$
5,816.00
|
(1.48)
|
(1.48)
|
(5,707.08)
|
(5,708.56)
|
–
|
–
|
–
|
–
|
$
107.44
|
For
the Year Ended October 31, 2015
|
$27,680.00
|
(76.00)
|
(74.00)
|
(21,028.00)
|
(21,104.00)
|
–
|
(760.00
)
|
–
|
(760.00
)
|
$
5,816.00
|
For
the Year Ended October 31, 2014
|
$34,152.00
|
(112.00)
|
(112.00)
|
(6,359.00)
|
(6,471.00)
|
(1.00
)
|
–
|
–
|
(1.00
)
|
$27,680.00
|
Direxion
Daily MSCI Real Estate Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
21.70
|
0.50
|
0.53
|
(2.01)
|
(1.51)
|
(0.48
)
|
–
|
(0.12
)
|
(0.60
)
|
$
19.59
|
For
the Year Ended October 31, 2017
|
$
20.09
|
0.05
|
0.06
|
1.56
|
1.61
|
–
|
–
|
–
|
–
|
$
21.70
|
For
the Year Ended October 31, 2016
|
$
18.61
|
(0.13)
|
(0.12)
|
1.61
|
1.48
|
–
|
–
|
–
|
–
|
$
20.09
|
For
the Year Ended October 31, 2015
|
$
17.76
|
(0.06)
|
(0.06)
|
0.91
|
0.85
|
–
|
–
|
–
|
–
|
$
18.61
|
For
the Year Ended October 31, 2014
|
$
11.17
|
(0.10)
|
(0.10)
|
6.69
|
6.59
|
–
|
–
|
–
|
–
|
$
17.76
|
Direxion
Daily MSCI Real Estate Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
11.28
|
0.08
|
0.08
|
(1.29)
|
(1.21)
|
(0.03
)
|
–
|
–
|
(0.03
)
|
$
10.04
|
For
the Year Ended October 31, 2017
|
$
14.28
|
(0.04)
|
(0.04)
|
(2.96)
|
(3.00)
|
–
|
–
|
–
|
–
|
$
11.28
|
For
the Year Ended October 31, 2016
|
$
21.04
|
(0.11)
|
(0.11)
|
(6.65)
|
(6.76)
|
–
|
–
|
–
|
–
|
$
14.28
|
For
the Year Ended October 31, 2015
|
$
29.83
|
(0.23)
|
(0.23)
|
(8.56)
|
(8.79)
|
–
|
–
|
–
|
–
|
$
21.04
|
For
the Year Ended October 31, 2014
|
$
56.50
|
(0.42)
|
(0.42)
|
(26.25)
|
(26.67)
|
–
|
–
|
–
|
–
|
$
29.83
|
Direxion
Daily Natural Gas Related Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
22.63
|
0.02
|
0.07
|
(9.50)
|
(9.48)
|
–
|
–
|
–
|
–
|
$
13.15
|
For
the Year Ended October 31, 2017
|
$
35.64
|
(0.10)
|
(0.09)
|
(12.91)
|
(13.01)
|
–
|
–
|
–
|
–
|
$
22.63
|
For
the Year Ended October 31, 2016
|
$
194.40
|
(0.30)
|
(0.27)
|
(158.46)
|
(158.76)
|
–
|
–
|
–
|
–
|
$
35.64
|
For
the Year Ended October 31, 2015
|
$
6,425.00
|
(5.00)
|
(5.00)
|
(6,225.60)
|
(6,230.60)
|
–
|
–
|
–
|
–
|
$
194.40
|
For
the Year Ended October 31, 2014
|
$17,400.00
|
(125.00)
|
(115.00)
|
(10,850.00)
|
(10,975.00)
|
–
|
–
|
–
|
–
|
$
6,425.00
|
Direxion
Daily Natural Gas Related Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
29.09
|
0.13
|
0.14
|
(2.36)
|
(2.23)
|
(0.09
)
|
–
|
–
|
(0.09
)
|
$
26.77
|
For
the Year Ended October 31, 2017
|
$
33.81
|
(0.10)
|
(0.09)
|
(4.62)
|
(4.72)
|
–
|
–
|
–
|
–
|
$
29.09
|
For
the Period December 3, 2015
9
through October 31, 2016
|
$
160.00
|
(0.37)
|
(0.34)
|
(125.82)
|
(126.19)
|
–
|
–
|
–
|
–
|
$
33.81
|
Direxion
Daily Pharmaceutical & Medical Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Period November 15, 2017
9
through October 31, 2018
|
$
25.00
|
0.08
|
0.09
|
1.56
|
1.64
|
(0.10
)
|
–
|
(0.01
)
|
(0.11
)
|
$
26.53
|
Direxion Shares
ETF Trust Prospectus
|
720
|
Financial Highlights
(continued)
|
|
|
RATIOS
TO AVERAGE NET ASSETS
7
|
|
|
Total
Return
5
|
Net
Assets, End of
Year/Period (000's
omitted)
|
Net
Expenses
2,6
|
Total
Expenses
2
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
2
|
Net
Expenses
3,6
|
Total
Expenses
3
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
3
|
Portfolio
Turnover
Rate
8
|
Direxion
Daily Junior Gold Miners Index Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(52.74)%
|
$635,801
|
0.93%
|
0.93%
|
0.35%
|
0.89%
|
0.89%
|
0.39%
|
116%
|
For
the Year Ended October 31, 2017
|
(69.00)%
|
$751,846
|
0.94%
|
0.94%
|
0.33%
|
0.90%
|
0.90%
|
0.37%
|
245%
|
For
the Year Ended October 31, 2016
|
207.07%
|
$712,681
|
1.05%
|
1.03%
|
(0.92)%
|
0.94%
|
0.92%
|
(0.81)%
|
289%
|
For
the Year Ended October 31, 2015
|
(78.75)%
|
$106,686
|
0.95%
|
0.98%
|
(0.94)%
|
0.95%
|
0.98%
|
(0.94)%
|
589%
|
For
the Year Ended October 31, 2014
|
(87.25)%
|
$168,091
|
0.96%
|
0.95%
|
(0.96)%
|
0.95%
|
0.94%
|
(0.95)%
|
168%
|
Direxion
Daily Junior Gold Miners Index Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
17.70%
|
$
59,624
|
1.03%
|
0.99%
|
0.51%
|
0.95%
|
0.91%
|
0.59%
|
0%
|
For
the Year Ended October 31, 2017
|
(39.99)%
|
$115,274
|
1.03%
|
1.00%
|
(0.29)%
|
0.95%
|
0.92%
|
(0.21)%
|
0%
|
For
the Year Ended October 31, 2016
|
(98.15)%
|
$
82,096
|
0.97%
|
1.04%
|
(0.74)%
|
0.95%
|
1.02%
|
(0.72)%
|
0%
|
For
the Year Ended October 31, 2015
|
(77.88)%
|
$
68,335
|
0.97%
|
1.00%
|
(0.96)%
|
0.95%
|
0.98%
|
(0.94)%
|
0%
|
For
the Year Ended October 31, 2014
|
(18.94)%
|
$
51,893
|
0.96%
|
1.05%
|
(0.95)%
|
0.95%
|
1.04%
|
(0.95)%
|
0%
|
Direxion
Daily MSCI Real Estate Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(7.13)%
|
$
40,163
|
1.09%
|
1.12%
|
2.55%
|
0.95%
|
0.98%
|
2.69%
|
149%
|
For
the Year Ended October 31, 2017
|
8.01%
|
$
69,453
|
1.00%
|
1.05%
|
0.20%
|
0.95%
|
1.00%
|
0.25%
|
113%
|
For
the Year Ended October 31, 2016
|
7.98%
|
$
74,331
|
1.00%
|
1.04%
|
(0.62)%
|
0.95%
|
0.99%
|
(0.57)%
|
199%
|
For
the Year Ended October 31, 2015
|
4.79%
|
$104,193
|
0.96%
|
0.95%
|
(0.29)%
|
0.95%
|
0.94%
|
(0.28)%
|
29%
|
For
the Year Ended October 31, 2014
|
58.92%
|
$
99,426
|
1.00%
|
1.06%
|
(0.83)%
|
0.95%
|
1.01%
|
(0.78)%
|
167%
|
Direxion
Daily MSCI Real Estate Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(10.68)%
|
$
19,156
|
0.99%
|
1.36%
|
0.71%
|
0.95%
|
1.32%
|
0.75%
|
0%
|
For
the Year Ended October 31, 2017
|
(21.01)%
|
$
15,882
|
0.97%
|
1.36%
|
(0.33)%
|
0.95%
|
1.34%
|
(0.31)%
|
0%
|
For
the Year Ended October 31, 2016
|
(32.13)%
|
$
22,967
|
0.95%
|
1.39%
|
(0.77)%
|
0.95%
|
1.39%
|
(0.77)%
|
0%
|
For
the Year Ended October 31, 2015
|
(29.47)%
|
$
11,745
|
0.96%
|
1.51%
|
(0.94)%
|
0.95%
|
1.50%
|
(0.93)%
|
0%
|
For
the Year Ended October 31, 2014
|
(47.20)%
|
$
9,197
|
0.95%
|
1.54%
|
(0.94)%
|
0.95%
|
1.54%
|
(0.94)%
|
0%
|
Direxion
Daily Natural Gas Related Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(41.89)%
|
$
32,319
|
1.19%
|
1.24%
|
0.08%
|
0.95%
|
1.00%
|
0.32%
|
44%
|
For
the Year Ended October 31, 2017
|
(36.50)%
|
$
53,343
|
0.99%
|
1.07%
|
(0.35)%
|
0.95%
|
1.03%
|
(0.31)%
|
48%
|
For
the Year Ended October 31, 2016
|
(81.67)%
|
$
57,293
|
1.00%
|
1.13%
|
(0.74)%
|
0.95%
|
1.08%
|
(0.69)%
|
839%
|
For
the Year Ended October 31, 2015
|
(96.97)%
|
$
39,588
|
0.96%
|
1.03%
|
(0.55)%
|
0.95%
|
1.02%
|
(0.54)%
|
137%
|
For
the Year Ended October 31, 2014
|
(63.07)%
|
$
42,412
|
0.99%
|
1.19%
|
(0.79)%
|
0.95%
|
1.15%
|
(0.75)%
|
133%
|
Direxion
Daily Natural Gas Related Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(7.53)%
|
$
3,342
|
1.01%
|
1.37%
|
0.61%
|
0.95%
|
1.31%
|
0.67%
|
0%
|
For
the Year Ended October 31, 2017
|
(13.96)%
|
$
5,087
|
0.99%
|
1.74%
|
(0.34)%
|
0.95%
|
1.70%
|
(0.30)%
|
0%
|
For
the Period December 3, 2015
9
through October 31, 2016
|
(78.87)%
|
$
7,602
|
1.01%
|
1.70%
|
(0.82)%
|
0.95%
|
1.64%
|
(0.76)%
|
0%
|
Direxion
Daily Pharmaceutical & Medical Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Period November 15, 2017
9
through October 31, 2018
|
6.49%
|
$
3,979
|
0.98%
|
2.01%
|
0.30%
|
0.95%
|
1.98%
|
0.33%
|
152%
|
721
|
Direxion Shares ETF
Trust Prospectus
|
Financial Highlights
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asset Value,
Beginning of
Year/Period
|
Net
Investment
Income (Loss)
1,2
|
Net
Investment
Income (Loss)
1,3
|
Net
Realized and
Unrealized Gain
(Loss) on
Investments
4
|
Net
Increase
(Decrease) in Net
Asset Value
Resulting from
Operations
|
Dividends
from
Net Investment
Income
|
Distributions
from
Realized Capital
Gains
|
Distributions
from
Return of Capital
|
Total
Distributions
|
Net
Asset Value,
End of Year/Period
|
Direxion
Daily Regional Banks Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
66.98
|
0.62
|
0.67
|
(17.27)
|
(16.65)
|
(0.61
)
|
–
|
–
|
(0.61
)
|
$
49.72
|
For
the Year Ended October 31, 2017
|
$
34.70
|
0.15
|
0.16
|
32.23
|
32.38
|
(0.10
)
|
–
|
–
|
(0.10
)
|
$
66.98
|
For
the Year Ended October 31, 2016
|
$
35.29
|
(0.01)
|
(0.01)
|
(0.58)
|
(0.59)
|
–
|
–
|
–
|
–
|
$
34.70
|
For
the Period August 19, 2015
9
through October 31, 2015
|
$
40.00
|
(0.02)
|
(0.02)
|
(4.69)
|
(4.71)
|
–
|
–
|
–
|
–
|
$
35.29
|
Direxion
Daily Regional Banks Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
35.39
|
0.15
|
0.16
|
(2.23)
|
(2.08)
|
(0.11
)
|
–
|
–
|
(0.11
)
|
$
33.20
|
For
the Year Ended October 31, 2017
|
$104.40
|
(0.05)
|
(0.05)
|
(68.96)
|
(69.01)
|
–
|
–
|
–
|
–
|
$
35.39
|
For
the Year Ended October 31, 2016
|
$193.20
|
(1.45)
|
(1.40)
|
(78.05)
|
(79.50)
|
–
|
(9.30
)
|
–
|
(9.30
)
|
$104.40
|
For
the Period August 19, 2015
9
through October 31, 2015
|
$200.00
|
(0.45)
|
(0.45)
|
(6.35)
|
(6.80)
|
–
|
–
|
–
|
–
|
$193.20
|
Direxion
Daily Retail Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
24.49
|
0.22
|
0.28
|
12.44
|
12.66
|
(0.25
)
|
–
|
–
|
(0.25
)
|
$
36.90
|
For
the Year Ended October 31, 2017
|
$
38.62
|
(0.03)
|
(0.02)
|
(13.15)
|
(13.18)
|
–
|
(0.95
)
|
–
|
(0.95
)
|
$
24.49
|
For
the Year Ended October 31, 2016
|
$
36.58
|
(0.26)
|
(0.24)
|
2.30
|
2.04
|
–
|
–
|
–
|
–
|
$
38.62
|
For
the Year Ended October 31, 2015
|
$
19.68
|
(0.04)
|
(0.04)
|
16.94
|
16.90
|
–
|
–
|
–
|
–
|
$
36.58
|
For
the Year Ended October 31, 2014
|
$
17.76
|
(0.10)
|
(0.10)
|
2.02
|
1.92
|
–
|
–
|
–
|
–
|
$
19.68
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Period April 19, 2018
9
through October 31, 2018
|
$
25.00
|
(0.03)
|
(0.03)
|
(13.19)
|
(13.22)
|
–
|
–
|
(0.00
)
10
|
(0.00
)
10
|
$
11.78
|
Direxion
Daily S&P Biotech Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
76.45
|
0.15
|
0.31
|
(27.03)
|
(26.88)
|
(0.11
)
|
(0.13
)
|
–
|
(0.24
)
|
$
49.33
|
For
the Year Ended October 31, 2017
|
$
28.82
|
(0.22)
|
(0.18)
|
47.85
|
47.63
|
–
|
–
|
–
|
–
|
$
76.45
|
For
the Year Ended October 31, 2016
|
$
76.92
|
(0.29)
|
(0.28)
|
(47.81)
|
(48.10)
|
–
|
–
|
–
|
–
|
$
28.82
|
For
the Period May 28, 2015
9
through October 31, 2015
|
$160.00
|
(0.44)
|
(0.44)
|
(82.64)
|
(83.08)
|
–
|
–
|
–
|
–
|
$
76.92
|
Direxion
Daily S&P Biotech Bear 3X Shares
11
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
50.40
|
0.23
|
0.25
|
(11.31)
|
(11.08)
|
(0.15
)
|
–
|
–
|
(0.15
)
|
$
39.17
|
For
the Year Ended October 31, 2017
|
$275.00
|
(0.10)
|
(0.10)
|
(224.50)
|
(224.60)
|
–
|
–
|
–
|
–
|
$
50.40
|
For
the Year Ended October 31, 2016
|
$410.80
|
(2.40)
|
(2.20)
|
(133.40)
|
(135.80)
|
–
|
–
|
–
|
–
|
$275.00
|
For
the Period May 28, 2015
9
through October 31, 2015
|
$400.00
|
(1.60)
|
(1.60)
|
12.40
|
10.80
|
–
|
–
|
–
|
–
|
$410.80
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
24.43
|
0.06
|
0.09
|
(2.60)
|
(2.54)
|
(0.01
)
|
–
|
–
|
(0.01
)
|
$
21.88
|
For
the Year Ended October 31, 2017
|
$
34.53
|
(0.06)
|
(0.04)
|
(8.38)
|
(8.44)
|
–
|
(1.66
)
|
–
|
(1.66
)
|
$
24.43
|
For
the Year Ended October 31, 2016
|
$
67.45
|
(0.26)
|
(0.25)
|
(32.66)
|
(32.92)
|
–
|
–
|
–
|
–
|
$
34.53
|
For
the Period May 28, 2015
9
through October 31, 2015
|
$200.00
|
(0.25)
|
(0.25)
|
(132.30)
|
(132.55)
|
–
|
–
|
–
|
–
|
$
67.45
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
16.46
|
0.06
|
0.06
|
(7.78)
|
(7.72)
|
(0.04
)
|
–
|
–
|
(0.04
)
|
$
8.70
|
For
the Year Ended October 31, 2017
|
$
24.96
|
(0.07)
|
(0.05)
|
(8.43)
|
(8.50)
|
–
|
–
|
–
|
–
|
$
16.46
|
For
the Year Ended October 31, 2016
|
$
70.96
|
(0.26)
|
(0.26)
|
(45.74)
|
(46.00)
|
–
|
–
|
–
|
–
|
$
24.96
|
For
the Period May 28, 2015
9
through October 31, 2015
|
$
50.00
|
(0.34)
|
(0.33)
|
21.30
|
20.96
|
–
|
–
|
–
|
–
|
$
70.96
|
Direxion Shares
ETF Trust Prospectus
|
722
|
Financial Highlights
(continued)
|
|
|
RATIOS
TO AVERAGE NET ASSETS
7
|
|
|
Total
Return
5
|
Net
Assets, End of
Year/Period (000's
omitted)
|
Net
Expenses
2,6
|
Total
Expenses
2
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
2
|
Net
Expenses
3,6
|
Total
Expenses
3
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
3
|
Portfolio
Turnover
Rate
8
|
Direxion
Daily Regional Banks Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(25.20)%
|
$
29,835
|
1.02%
|
1.04%
|
0.79%
|
0.95%
|
0.97%
|
0.86%
|
76%
|
For
the Year Ended October 31, 2017
|
93.38%
|
$
26,794
|
0.96%
|
1.07%
|
0.25%
|
0.95%
|
1.06%
|
0.26%
|
184%
|
For
the Year Ended October 31, 2016
|
(1.67)%
|
$
1,735
|
0.96%
|
2.67%
|
(0.05)%
|
0.95%
|
2.66%
|
(0.04)%
|
24%
|
For
the Period August 19, 2015
9
through October 31, 2015
|
(11.78)%
|
$
3,529
|
0.95%
|
3.78%
|
(0.35)%
|
0.95%
|
3.78%
|
(0.35)%
|
15%
|
Direxion
Daily Regional Banks Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(5.76)%
|
$
3,319
|
0.99%
|
1.81%
|
0.56%
|
0.95%
|
1.77%
|
0.60%
|
0%
|
For
the Year Ended October 31, 2017
|
(66.10)%
|
$
3,538
|
0.95%
|
2.15%
|
(0.11)%
|
0.95%
|
2.15%
|
(0.11)%
|
0%
|
For
the Year Ended October 31, 2016
|
(43.20)%
|
$
1,044
|
0.98%
|
3.27%
|
(0.84)%
|
0.95%
|
3.24%
|
(0.81)%
|
0%
|
For
the Period August 19, 2015
9
through October 31, 2015
|
(3.40)%
|
$
3,864
|
0.96%
|
2.99%
|
(0.95)%
|
0.95%
|
2.98%
|
(0.94)%
|
0%
|
Direxion
Daily Retail Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
51.66%
|
$
31,367
|
1.09%
|
1.15%
|
0.59%
|
0.95%
|
1.01%
|
0.73%
|
81%
|
For
the Year Ended October 31, 2017
|
(35.22)%
|
$
36,728
|
0.99%
|
1.09%
|
(0.10)%
|
0.95%
|
1.05%
|
(0.06)%
|
659%
|
For
the Year Ended October 31, 2016
|
5.58%
|
$
36,689
|
0.99%
|
1.08%
|
(0.69)%
|
0.95%
|
1.04%
|
(0.65)%
|
59%
|
For
the Year Ended October 31, 2015
|
85.90%
|
$
58,530
|
0.98%
|
1.04%
|
(0.14)%
|
0.95%
|
1.01%
|
(0.11)%
|
24%
|
For
the Year Ended October 31, 2014
|
10.80%
|
$
15,741
|
0.99%
|
1.27%
|
(0.54)%
|
0.95%
|
1.23%
|
(0.50)%
|
2%
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Period April 19, 2018
9
through October 31, 2018
|
(52.88)%
|
$
4,123
|
0.95%
|
2.34%
|
(0.27)%
|
0.95%
|
2.34%
|
(0.27)%
|
75%
|
Direxion
Daily S&P Biotech Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(35.28)%
|
$592,472
|
1.14%
|
1.15%
|
0.18%
|
0.95%
|
0.96%
|
0.37%
|
510%
|
For
the Year Ended October 31, 2017
|
165.27%
|
$379,297
|
1.04%
|
1.04%
|
(0.45)%
|
0.95%
|
0.95%
|
(0.36)%
|
642%
|
For
the Year Ended October 31, 2016
|
(62.53)%
|
$279,883
|
0.98%
|
1.00%
|
(0.79)%
|
0.95%
|
0.97%
|
(0.76)%
|
1619%
|
For
the Period May 28, 2015
9
through October 31, 2015
|
(51.93)%
|
$123,058
|
0.95%
|
1.05%
|
(0.93)%
|
0.95%
|
1.05%
|
(0.93)%
|
0%
|
Direxion
Daily S&P Biotech Bear 3X Shares
11
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(21.81)%
|
$
56,196
|
1.00%
|
1.02%
|
0.74%
|
0.95%
|
0.97%
|
0.79%
|
0%
|
For
the Year Ended October 31, 2017
|
(81.67)%
|
$
98,361
|
0.96%
|
0.99%
|
(0.17)%
|
0.95%
|
0.98%
|
(0.16)%
|
0%
|
For
the Year Ended October 31, 2016
|
(33.06)%
|
$
82,490
|
1.01%
|
1.08%
|
(0.82)%
|
0.95%
|
1.02%
|
(0.76)%
|
0%
|
For
the Period May 28, 2015
9
through October 31, 2015
|
2.70%
|
$
28,753
|
0.96%
|
1.55%
|
(0.95)%
|
0.95%
|
1.54%
|
(0.94)%
|
0%
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(10.42)%
|
$156,655
|
1.04%
|
1.05%
|
0.21%
|
0.95%
|
0.96%
|
0.30%
|
119%
|
For
the Year Ended October 31, 2017
|
(27.03)%
|
$129,723
|
1.02%
|
1.04%
|
(0.24)%
|
0.95%
|
0.97%
|
(0.17)%
|
350%
|
For
the Year Ended October 31, 2016
|
(48.81)%
|
$
59,024
|
0.98%
|
1.06%
|
(0.77)%
|
0.95%
|
1.03%
|
(0.74)%
|
76%
|
For
the Period May 28, 2015
9
through October 31, 2015
|
(66.28)%
|
$
8,770
|
0.95%
|
2.44%
|
(0.76)%
|
0.95%
|
2.44%
|
(0.76)%
|
0%
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(46.86)%
|
$
42,465
|
0.99%
|
1.02%
|
0.77%
|
0.95%
|
0.98%
|
0.81%
|
0%
|
For
the Year Ended October 31, 2017
|
(34.05)%
|
$
30,119
|
1.05%
|
1.18%
|
(0.38)%
|
0.95%
|
1.08%
|
(0.28)%
|
0%
|
For
the Year Ended October 31, 2016
|
(64.83)%
|
$
26,950
|
0.96%
|
1.12%
|
(0.75)%
|
0.95%
|
1.11%
|
(0.74)%
|
0%
|
For
the Period May 28, 2015
9
through October 31, 2015
|
41.93%
|
$
5,677
|
0.98%
|
2.13%
|
(0.97)%
|
0.95%
|
2.10%
|
(0.94)%
|
0%
|
723
|
Direxion Shares ETF
Trust Prospectus
|
Financial Highlights
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asset Value,
Beginning of
Year/Period
|
Net
Investment
Income (Loss)
1,2
|
Net
Investment
Income (Loss)
1,3
|
Net
Realized and
Unrealized Gain
(Loss) on
Investments
4
|
Net
Increase
(Decrease) in Net
Asset Value
Resulting from
Operations
|
Dividends
from
Net Investment
Income
|
Distributions
from
Realized Capital
Gains
|
Distributions
from
Return of Capital
|
Total
Distributions
|
Net
Asset Value,
End of Year/Period
|
Direxion
Daily Semiconductor Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$148.00
|
0.85
|
1.08
|
(47.41)
|
(46.56)
|
(0.92
)
|
–
|
–
|
(0.92
)
|
$100.52
|
For
the Year Ended October 31, 2017
|
$
45.78
|
(0.02)
|
0.08
|
105.00
|
104.98
|
–
|
(2.76
)
|
–
|
(2.76
)
|
$148.00
|
For
the Year Ended October 31, 2016
|
$
26.92
|
(0.13)
|
(0.12)
|
18.99
|
18.86
|
–
|
–
|
–
|
–
|
$
45.78
|
For
the Year Ended October 31, 2015
|
$
27.61
|
(0.18)
|
(0.17)
|
(0.51)
|
(0.69)
|
(0.00
)
10
|
–
|
–
|
(0.00
)
|
$
26.92
|
For
the Year Ended October 31, 2014
|
$
14.63
|
(0.10)
|
(0.09)
|
13.08
|
12.98
|
–
|
–
|
–
|
–
|
$
27.61
|
Direxion
Daily Semiconductor Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
16.25
|
0.08
|
0.09
|
(2.96)
|
(2.88)
|
(0.04
)
|
–
|
–
|
(0.04
)
|
$
13.33
|
For
the Year Ended October 31, 2017
|
$
76.80
|
(0.06)
|
(0.06)
|
(60.49)
|
(60.55)
|
–
|
–
|
–
|
–
|
$
16.25
|
For
the Year Ended October 31, 2016
|
$212.15
|
(1.05)
|
(1.00)
|
(134.30)
|
(135.35)
|
–
|
–
|
–
|
–
|
$
76.80
|
For
the Year Ended October 31, 2015
|
$344.20
|
(2.45)
|
(2.40)
|
(129.60)
|
(132.05)
|
–
|
–
|
–
|
–
|
$212.15
|
For
the Year Ended October 31, 2014
|
$909.60
|
(5.20)
|
(5.20)
|
(560.20)
|
(565.40)
|
–
|
–
|
–
|
–
|
$344.20
|
Direxion
Daily Technology Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$107.62
|
0.39
|
0.68
|
17.95
|
18.34
|
(0.51
)
|
–
|
–
|
(0.51
)
|
$125.45
|
For
the Year Ended October 31, 2017
|
$
47.32
|
0.01
|
0.06
|
60.29
|
60.30
|
–
|
–
|
–
|
–
|
$107.62
|
For
the Year Ended October 31, 2016
|
$
38.56
|
(0.22)
|
(0.22)
|
8.98
|
8.76
|
–
|
–
|
–
|
–
|
$
47.32
|
For
the Year Ended October 31, 2015
|
$
32.73
|
(0.31)
|
(0.31)
|
6.14
|
5.83
|
–
|
–
|
–
|
–
|
$
38.56
|
For
the Year Ended October 31, 2014
|
$
18.88
|
(0.21)
|
(0.20)
|
14.06
|
13.85
|
–
|
–
|
–
|
–
|
$
32.73
|
Direxion
Daily Technology Bear 3X Shares
12
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
36.80
|
0.20
|
0.21
|
(14.70)
|
(14.50)
|
(0.12
)
|
–
|
–
|
(0.12
)
|
$
22.18
|
For
the Year Ended October 31, 2017
|
$
96.30
|
(0.10)
|
(0.10)
|
(59.40)
|
(59.50)
|
–
|
–
|
–
|
–
|
$
36.80
|
For
the Year Ended October 31, 2016
|
$154.05
|
(1.00)
|
(1.00)
|
(56.75)
|
(57.75)
|
–
|
–
|
–
|
–
|
$
96.30
|
For
the Year Ended October 31, 2015
|
$249.00
|
(1.85)
|
(1.85)
|
(93.10)
|
(94.95)
|
–
|
–
|
–
|
–
|
$154.05
|
For
the Year Ended October 31, 2014
|
$517.60
|
(3.40)
|
(3.40)
|
(265.20)
|
(268.60)
|
–
|
–
|
–
|
–
|
$249.00
|
Direxion
Daily Transportation Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
29.44
|
0.19
|
0.19
|
0.66
|
0.85
|
(0.24
)
|
(2.93
)
|
–
|
(3.17
)
|
$
27.12
|
For
the Period May 3, 2017
9
through October 31, 2017
|
$
25.00
|
0.02
|
0.02
|
4.42
|
4.44
|
–
|
–
|
–
|
–
|
$
29.44
|
Direxion
Daily Utilities Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$
31.13
|
0.53
|
0.54
|
(3.31)
|
(2.78)
|
(0.54
)
|
–
|
–
|
(0.54
)
|
$
27.81
|
For
the Period May 3, 2017
9
through October 31, 2017
|
$
25.00
|
0.15
|
0.15
|
5.98
|
6.13
|
–
|
–
|
–
|
–
|
$
31.13
|
Direxion Shares
ETF Trust Prospectus
|
724
|
Financial Highlights
(continued)
|
|
|
RATIOS
TO AVERAGE NET ASSETS
7
|
|
|
Total
Return
5
|
Net
Assets, End of
Year/Period (000's
omitted)
|
Net
Expenses
2,6
|
Total
Expenses
2
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
2
|
Net
Expenses
3,6
|
Total
Expenses
3
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
3
|
Portfolio
Turnover
Rate
8
|
Direxion
Daily Semiconductor Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(31.68)%
|
$582,998
|
1.10%
|
1.09%
|
0.56%
|
0.94%
|
0.93%
|
0.72%
|
101%
|
For
the Year Ended October 31, 2017
|
238.31%
|
$525,405
|
1.06%
|
1.04%
|
(0.02)%
|
0.95%
|
0.93%
|
0.09%
|
17%
|
For
the Year Ended October 31, 2016
|
70.06%
|
$112,149
|
0.97%
|
1.01%
|
(0.44)%
|
0.95%
|
0.99%
|
(0.42)%
|
29%
|
For
the Year Ended October 31, 2015
|
(2.49)%
|
$131,929
|
0.97%
|
1.00%
|
(0.57)%
|
0.95%
|
0.98%
|
(0.55)%
|
26%
|
For
the Year Ended October 31, 2014
|
88.74%
|
$165,650
|
1.01%
|
1.08%
|
(0.45)%
|
0.95%
|
1.02%
|
(0.40)%
|
8%
|
Direxion
Daily Semiconductor Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(17.63)%
|
$
65,459
|
0.97%
|
0.98%
|
0.73%
|
0.95%
|
0.96%
|
0.75%
|
0%
|
For
the Year Ended October 31, 2017
|
(78.84)%
|
$
48,915
|
0.96%
|
1.03%
|
(0.18)%
|
0.95%
|
1.02%
|
(0.17)%
|
0%
|
For
the Year Ended October 31, 2016
|
(63.80)%
|
$
51,460
|
0.96%
|
1.02%
|
(0.77)%
|
0.95%
|
1.01%
|
(0.76)%
|
0%
|
For
the Year Ended October 31, 2015
|
(38.36)%
|
$
38,178
|
0.96%
|
1.08%
|
(0.95)%
|
0.95%
|
1.07%
|
(0.94)%
|
0%
|
For
the Year Ended October 31, 2014
|
(62.16)%
|
$
22,365
|
0.95%
|
1.13%
|
(0.94)%
|
0.95%
|
1.13%
|
(0.94)%
|
0%
|
Direxion
Daily Technology Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
16.99%
|
$671,151
|
1.17%
|
1.17%
|
0.29%
|
0.95%
|
0.95%
|
0.51%
|
41%
|
For
the Year Ended October 31, 2017
|
127.43%
|
$452,001
|
1.03%
|
1.03%
|
0.01%
|
0.95%
|
0.95%
|
0.09%
|
0%
|
For
the Year Ended October 31, 2016
|
22.72%
|
$172,728
|
0.97%
|
0.99%
|
(0.58)%
|
0.95%
|
0.97%
|
(0.56)%
|
153%
|
For
the Year Ended October 31, 2015
|
17.83%
|
$194,728
|
0.97%
|
0.97%
|
(0.89)%
|
0.95%
|
0.95%
|
(0.87)%
|
418%
|
For
the Year Ended October 31, 2014
|
73.38%
|
$189,804
|
0.98%
|
1.01%
|
(0.83)%
|
0.95%
|
0.98%
|
(0.81)%
|
21%
|
Direxion
Daily Technology Bear 3X Shares
12
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(39.38)%
|
$
33,349
|
0.96%
|
1.05%
|
0.85%
|
0.95%
|
1.04%
|
0.86%
|
0%
|
For
the Year Ended October 31, 2017
|
(61.79)%
|
$
17,419
|
0.96%
|
1.15%
|
(0.20)%
|
0.95%
|
1.14%
|
(0.19)%
|
0%
|
For
the Year Ended October 31, 2016
|
(37.49)%
|
$
19,598
|
0.96%
|
1.15%
|
(0.77)%
|
0.95%
|
1.14%
|
(0.76)%
|
0%
|
For
the Year Ended October 31, 2015
|
(38.13)%
|
$
19,030
|
0.95%
|
1.07%
|
(0.94)%
|
0.95%
|
1.07%
|
(0.94)%
|
0%
|
For
the Year Ended October 31, 2014
|
(51.89)%
|
$
13,967
|
0.95%
|
1.14%
|
(0.95)%
|
0.95%
|
1.14%
|
(0.95)%
|
0%
|
Direxion
Daily Transportation Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
1.13%
|
$
10,849
|
0.95%
|
1.37%
|
0.57%
|
0.95%
|
1.37%
|
0.57%
|
0%
|
For
the Period May 3, 2017
9
through October 31, 2017
|
17.76%
|
$
2,945
|
0.95%
|
3.62%
|
0.13%
|
0.95%
|
3.62%
|
0.13%
|
0%
|
Direxion
Daily Utilities Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(8.72)%
|
$
4,172
|
0.96%
|
1.45%
|
2.15%
|
0.95%
|
1.44%
|
2.16%
|
44%
|
For
the Period May 3, 2017
9
through October 31, 2017
|
24.52%
|
$
3,113
|
0.95%
|
3.46%
|
1.04%
|
0.95%
|
3.46%
|
1.04%
|
86%
|
725
|
Direxion Shares ETF
Trust Prospectus
|
Financial Highlights
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asset Value,
Beginning of
Year/Period
|
Net
Investment
Income (Loss)
1,2
|
Net
Investment
Income (Loss)
1,3
|
Net
Realized and
Unrealized Gain
(Loss) on
Investments
4
|
Net
Increase
(Decrease) in Net
Asset Value
Resulting from
Operations
|
Dividends
from
Net Investment
Income
|
Distributions
from
Realized Capital
Gains
|
Distributions
from
Return of Capital
|
Total
Distributions
|
Net
Asset Value,
End of Year/Period
|
Direxion
Daily 7-10 Year Treasury Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$44.25
|
0.31
|
0.34
|
(5.41)
|
(5.10)
|
(0.32
)
|
–
|
–
|
(0.32
)
|
$38.83
|
For
the Year Ended October 31, 2017
|
$51.25
|
(0.02)
|
(0.01)
|
(4.14)
|
(4.16)
|
–
|
(2.84
)
|
–
|
(2.84
)
|
$44.25
|
For
the Year Ended October 31, 2016
|
$46.74
|
(0.41)
|
(0.40)
|
5.65
|
5.24
|
–
|
(0.73
)
|
–
|
(0.73
)
|
$51.25
|
For
the Year Ended October 31, 2015
|
$42.70
|
(0.43)
|
(0.42)
|
4.47
|
4.04
|
–
|
–
|
–
|
–
|
$46.74
|
For
the Year Ended October 31, 2014
|
$38.51
|
(0.37)
|
(0.37)
|
4.56
|
4.19
|
–
|
–
|
–
|
–
|
$42.70
|
Direxion
Daily 7-10 Year Treasury Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$14.01
|
0.07
|
0.08
|
1.47
|
1.54
|
(0.02
)
|
–
|
–
|
(0.02
)
|
$15.53
|
For
the Year Ended October 31, 2017
|
$13.65
|
(0.05)
|
(0.04)
|
0.41
|
0.36
|
–
|
–
|
–
|
–
|
$14.01
|
For
the Year Ended October 31, 2016
|
$16.51
|
(0.11)
|
(0.11)
|
(2.75)
|
(2.86)
|
–
|
–
|
–
|
–
|
$13.65
|
For
the Year Ended October 31, 2015
|
$19.88
|
(0.17)
|
(0.17)
|
(3.20)
|
(3.37)
|
–
|
–
|
–
|
–
|
$16.51
|
For
the Year Ended October 31, 2014
|
$23.93
|
(0.21)
|
(0.21)
|
(3.84)
|
(4.05)
|
–
|
–
|
–
|
–
|
$19.88
|
Direxion
Daily 20+ Year Treasury Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$20.77
|
0.25
|
0.26
|
(5.00)
|
(4.75)
|
(0.26
)
|
–
|
–
|
(0.26
)
|
$15.76
|
For
the Year Ended October 31, 2017
|
$24.07
|
0.07
|
0.08
|
(3.35)
|
(3.28)
|
(0.02
)
|
–
|
–
|
(0.02
)
|
$20.77
|
For
the Year Ended October 31, 2016
|
$19.57
|
(0.10)
|
(0.09)
|
4.60
|
4.50
|
–
|
–
|
–
|
–
|
$24.07
|
For
the Year Ended October 31, 2015
|
$18.04
|
(0.07)
|
(0.07)
|
1.60
|
1.53
|
–
|
–
|
–
|
–
|
$19.57
|
For
the Year Ended October 31, 2014
|
$12.63
|
(0.09)
|
(0.09)
|
5.50
|
5.41
|
–
|
–
|
–
|
–
|
$18.04
|
Direxion
Daily 20+ Year Treasury Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
$19.14
|
0.11
|
0.12
|
3.66
|
3.77
|
(0.06
)
|
–
|
–
|
(0.06
)
|
$22.85
|
For
the Year Ended October 31, 2017
|
$18.81
|
(0.07)
|
(0.06)
|
0.40
|
0.33
|
–
|
–
|
–
|
–
|
$19.14
|
For
the Year Ended October 31, 2016
|
$27.61
|
(0.16)
|
(0.16)
|
(8.64)
|
(8.80)
|
–
|
–
|
–
|
–
|
$18.81
|
For
the Year Ended October 31, 2015
|
$38.96
|
(0.27)
|
(0.27)
|
(11.08)
|
(11.35)
|
–
|
–
|
–
|
–
|
$27.61
|
For
the Year Ended October 31, 2014
|
$64.67
|
(0.48)
|
(0.48)
|
(25.23)
|
(25.71)
|
–
|
–
|
–
|
–
|
$38.96
|
Direxion Shares
ETF Trust Prospectus
|
726
|
Financial Highlights
(continued)
|
|
|
RATIOS
TO AVERAGE NET ASSETS
7
|
|
|
Total
Return
5
|
Net
Assets, End of
Year/Period (000's
omitted)
|
Net
Expenses
2,6
|
Total
Expenses
2
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
2
|
Net
Expenses
3,6
|
Total
Expenses
3
|
Net
Investment
Income (Loss) after
Expense
Reimbursement
3
|
Portfolio
Turnover
Rate
8
|
Direxion
Daily 7-10 Year Treasury Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(11.54)%
|
$
5,824
|
1.01%
|
1.57%
|
0.76%
|
0.95%
|
1.51%
|
0.82%
|
0%
|
For
the Year Ended October 31, 2017
|
(7.60)%
|
$
8,851
|
0.96%
|
1.70%
|
(0.04)%
|
0.95%
|
1.69%
|
(0.03)%
|
134%
|
For
the Year Ended October 31, 2016
|
11.42%
|
$
7,688
|
0.98%
|
1.59%
|
(0.81)%
|
0.95%
|
1.56%
|
(0.78)%
|
0%
|
For
the Year Ended October 31, 2015
|
9.46%
|
$
7,011
|
0.96%
|
1.48%
|
(0.94)%
|
0.95%
|
1.47%
|
(0.93)%
|
0%
|
For
the Year Ended October 31, 2014
|
10.88%
|
$
4,270
|
0.95%
|
2.23%
|
(0.95)%
|
0.95%
|
2.23%
|
(0.95)%
|
0%
|
Direxion
Daily 7-10 Year Treasury Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
11.01%
|
$
20,189
|
1.05%
|
1.15%
|
0.45%
|
0.95%
|
1.05%
|
0.55%
|
0%
|
For
the Year Ended October 31, 2017
|
2.64%
|
$
28,724
|
0.97%
|
1.07%
|
(0.33)%
|
0.95%
|
1.05%
|
(0.31)%
|
0%
|
For
the Year Ended October 31, 2016
|
(17.32)%
|
$
26,612
|
0.95%
|
1.08%
|
(0.78)%
|
0.95%
|
1.08%
|
(0.78)%
|
0%
|
For
the Year Ended October 31, 2015
|
(16.95)%
|
$
40,461
|
0.95%
|
0.94%
|
(0.93)%
|
0.95%
|
0.94%
|
(0.93)%
|
0%
|
For
the Year Ended October 31, 2014
|
(16.92)%
|
$
54,673
|
0.95%
|
0.97%
|
(0.95)%
|
0.95%
|
0.97%
|
(0.95)%
|
0%
|
Direxion
Daily 20+ Year Treasury Bull 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
(23.07)%
|
$100,873
|
0.97%
|
0.95%
|
1.31%
|
0.94%
|
0.92%
|
1.34%
|
0%
|
For
the Year Ended October 31, 2017
|
(13.64)%
|
$
90,347
|
0.98%
|
0.97%
|
0.36%
|
0.95%
|
0.94%
|
0.39%
|
66%
|
For
the Year Ended October 31, 2016
|
23.01%
|
$
67,396
|
0.97%
|
0.97%
|
(0.40)%
|
0.95%
|
0.95%
|
(0.38)%
|
206%
|
For
the Year Ended October 31, 2015
|
8.47%
|
$
62,614
|
0.96%
|
0.94%
|
(0.34)%
|
0.95%
|
0.93%
|
(0.33)%
|
56%
|
For
the Year Ended October 31, 2014
|
42.81%
|
$
57,729
|
0.96%
|
1.03%
|
(0.59)%
|
0.95%
|
1.03%
|
(0.58)%
|
741%
|
Direxion
Daily 20+ Year Treasury Bear 3X Shares
|
|
|
|
|
|
|
|
|
|
For
the Year Ended October 31, 2018
|
19.71%
|
$345,100
|
0.99%
|
0.99%
|
0.54%
|
0.90%
|
0.90%
|
0.63%
|
0%
|
For
the Year Ended October 31, 2017
|
1.75%
|
$371,392
|
0.93%
|
0.93%
|
(0.31)%
|
0.90%
|
0.90%
|
(0.28)%
|
0%
|
For
the Year Ended October 31, 2016
|
(31.87)%
|
$378,946
|
0.92%
|
0.92%
|
(0.77)%
|
0.92%
|
0.92%
|
(0.77)%
|
0%
|
For
the Year Ended October 31, 2015
|
(29.13)%
|
$537,016
|
0.90%
|
0.90%
|
(0.88)%
|
0.89%
|
0.89%
|
(0.87)%
|
0%
|
For
the Year Ended October 31, 2014
|
(39.76)%
|
$527,945
|
0.91%
|
0.91%
|
(0.90)%
|
0.90%
|
0.90%
|
(0.90)%
|
0%
|
1
|
Net investment income (loss)
per share represents net investment income divided by the daily average shares of beneficial interest outstanding throughout each period.
|
2
|
Includes interest expense and
extraordinary expenses which comprise of tax and litigation expenses.
|
3
|
Excludes interest expense and
extraordinary expenses which comprise of tax and litigation expenses.
|
4
|
Due to the timing of sales
and redemptions of capital shares, the net realized and unrealized gain(loss) per share is not in accordance with the Fund's changes in net realized and unrealized gain(loss) on investments, in-kind redemptions, futures, and swaps for the
year/period.
|
5
|
Total return is calculated
assuming an initial investment made at the net asset value at the beginning of the year/period, reinvestment of all dividends and distributions at net asset value during the year/period and redemption on the last day of the period. Total return
calculated for a period of less than one year is not annualized. The total return would have been lower if certain expenses had not been reimbursed/waived or recouped by the investment advisor.
|
6
|
Net expenses include effects
of any reimbursement/waiver or recoupment.
|
7
|
For periods less than a year,
these ratios are annualized.
|
8
|
Portfolio turnover rate is
not annualized and excludes the value of portfolio securities received or delivered as a result of in-kind creations or redemptions of the Fund's capital shares. Portfolio turnover rate does not include effects of turnover of the swap and future
contracts portfolio. Short-term securities with maturities less than or equal to 365 days are also excluded from portfolio turnover calculation.
|
9
|
Commencement of investment
operations.
|
10
|
Between $(0.005) and $0.005.
|
11
|
Effective March 29, 2018, the
Fund had a 1:10 reverse stock split. Share amounts for all periods have been adjusted to give effect to the 1:10 stock split.
|
12
|
Effective March 29, 2018, the
Fund had a 1:5 reverse stock split. Share amounts for all periods have been adjusted to give effect to the 1:5 stock split.
|
727
|
Direxion Shares ETF
Trust Prospectus
|
1301
Avenue of the Americas (6th Avenue), 28th Floor
|
New York,
New York 10019
|
866-476-7523
|
More Information on the Direxion Shares ETF Trust
Statement of Additional Information
(“SAI”):
The Funds' SAI contains
more information on each Fund and its investment policies. The SAI is incorporated in this Prospectus by reference (meaning it is legally part of this Prospectus). A current SAI is on file with the Securities and Exchange Commission
(“SEC”).
Annual and Semi-Annual Reports
to Shareholders:
The Funds' reports will provide
additional information on the Funds' investment holdings, performance data and a letter discussing the market conditions and investment strategies that significantly affected the Funds' performance during that period.
To Obtain the SAI or Fund Reports Free of Charge:
Write
to:
|
Direxion
Shares ETF Trust
|
|
1301 Avenue
of the Americas (6th Avenue), 28th Floor
New York, New York 10019
|
Call:
|
866-476-7523
|
By
Internet:
|
www.direxioninvestments.com
|
These documents and other
information about the Funds can be reviewed and copied at the SEC Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at (202) 551-8090. Reports and other information
about the Funds may be viewed on screen or downloaded from the EDGAR Database on the SEC’s website at http://www.sec.gov. Copies of these documents may be obtained, after paying a duplicating fee, by electronic request at the following e-mail
address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-1520.
SEC File Number: 811-22201
Direxion Shares ETF Trust
Statement of Additional Information
1301
Avenue of the Americas (6th Avenue), 28th Floor
|
New York,
New York 10019
|
866-476-7523
|
www.direxioninvestments.com
The Direxion Shares ETF Trust
(“Trust”) is an investment company that offers shares of a variety of exchange-traded funds to the public. The shares of the funds offered in this Statement of Additional Information (“SAI”) are, or upon commencement of
operations will be, listed and traded on the NYSE Arca, Inc. This SAI relates to the funds listed below (each, a “Fund” and collectively, the “Funds”).
3X
Bull Funds
|
3X Bear Funds
|
Direxion
Daily Mid Cap Bull 3X Shares (MIDU)
|
Direxion
Daily Mid Cap Bear 3X Shares (MIDZ)
|
Direxion
Daily S&P 500
®
Bull 3X Shares (SPXL)
|
Direxion
Daily S&P 500
®
Bear 3X Shares (SPXS)
|
Direxion
Daily Small Cap Bull 3X Shares (TNA)
|
Direxion
Daily Small Cap Bear 3X Shares (TZA)
|
Direxion
Daily Dow 30 Bull 3X Shares
|
Direxion
Daily Dow 30 Bear 3X Shares
|
Direxion
Daily MSCI Brazil Bull 3X Shares (BRZU)
|
|
Direxion
Daily MSCI Canada Bull 3X Shares
|
Direxion
Daily MSCI Canada Bear 3X Shares
|
Direxion
Daily FTSE China Bull 3X Shares (YINN)
|
Direxion
Daily FTSE China Bear 3X Shares (YANG)
|
Direxion
Daily MSCI Developed Markets Bull 3X Shares (DZK)
|
Direxion
Daily MSCI Developed Markets Bear 3X Shares (DPK)
|
Direxion
Daily MSCI Emerging Markets Bull 3X Shares (EDC)
|
Direxion
Daily MSCI Emerging Markets Bear 3X Shares (EDZ)
|
Direxion
Daily FTSE Europe Bull 3X Shares (EURL)
|
|
Direxion
Daily MSCI India Bull 3X Shares (INDL)
|
|
Direxion
Daily MSCI Italy Bull 3X Shares
|
Direxion
Daily MSCI Italy Bear 3X Shares
|
Direxion
Daily MSCI Japan Bull 3X Shares (JPNL)
|
|
Direxion
Daily Latin America Bull 3X Shares (LBJ)
|
|
Direxion
Daily MSCI Mexico Bull 3X Shares (MEXX)
|
Direxion
Daily MSCI Mexico Bear 3X Shares
|
Direxion
Daily Russia Bull 3X Shares (RUSL)
|
Direxion
Daily Russia Bear 3X Shares (RUSS)
|
Direxion
Daily MSCI South Korea Bull 3X Shares (KORU)
|
|
Direxion
Daily EURO STOXX 50
®
Bull 3X Shares (EUXL)
|
Direxion
Daily EURO STOXX 50
®
Bear 3X Shares
|
Direxion
Daily Aerospace & Defense Bull 3X Shares (DFEN)
|
Direxion
Daily Aerospace & Defense Bear 3X Shares
|
Direxion
Daily S&P Biotech Bull 3X Shares (LABU)
|
Direxion
Daily S&P Biotech Bear 3X Shares (LABD)
|
Direxion
Daily Communication Services Index Bull 3X Shares (TAWK)
|
Direxion
Daily Communication Services Index Bear 3X Shares (MUTE)
|
Direxion
Daily Consumer Discretionary Bull 3X Shares (WANT)
|
Direxion
Daily Consumer Discretionary Bear 3X Shares (PASS)
|
Direxion
Daily Consumer Staples Bull 3X Shares (NEED)
|
Direxion
Daily Consumer Staples Bear 3X Shares (LACK)
|
Direxion
Daily Energy Bull 3X Shares (ERX)
|
Direxion
Daily Energy Bear 3X Shares (ERY)
|
Direxion
Daily Financial Bull 3X Shares (FAS)
|
Direxion
Daily Financial Bear 3X Shares (FAZ)
|
Direxion
Daily Gold Miners Index Bull 3X Shares (NUGT)
|
Direxion
Daily Gold Miners Index Bear 3X Shares (DUST)
|
Direxion
Daily Healthcare Bull 3X Shares (CURE)
|
|
Direxion
Daily Homebuilders & Supplies Bull 3X Shares (NAIL)
|
|
Direxion
Daily Industrials Bull 3X Shares (DUSL)
|
Direxion
Daily Industrials Bear 3X Shares
|
Direxion
Daily Junior Gold Miners Index Bull 3X Shares (JNUG)
|
Direxion
Daily Junior Gold Miners Index Bear 3X Shares (JDST)
|
Direxion
Daily Metals & Mining Bull 3X Shares
|
Direxion
Daily Metals & Mining Bear 3X Shares
|
Direxion
Daily Natural Gas Related Bull 3X Shares (GASL)
|
Direxion
Daily Natural Gas Related Bear 3X Shares (GASX)
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares (GUSH)
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares (DRIP)
|
Direxion
Daily Pharmaceutical & Medical Bull 3X Shares (PILL)
|
Direxion
Daily Pharmaceutical & Medical Bear 3X Shares
|
Direxion
Daily Preferred Stock Bull 3X Shares
|
|
Direxion
Daily MSCI Real Estate Bull 3X Shares (DRN)
|
Direxion
Daily MSCI Real Estate Bear 3X Shares (DRV)
|
3X
Bull Funds
|
3X Bear Funds
|
Direxion
Daily Regional Banks Bull 3X Shares (DPST)
|
Direxion
Daily Regional Banks Bear 3X Shares (WDRW)
|
Direxion
Daily Retail Bull 3X Shares (RETL)
|
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares (UBOT)
|
|
Direxion
Daily Semiconductor Bull 3X Shares (SOXL)
|
Direxion
Daily Semiconductor Bear 3X Shares (SOXS)
|
Direxion
Daily Technology Bull 3X Shares (TECL)
|
Direxion
Daily Technology Bear 3X Shares (TECS)
|
Direxion
Daily Transportation Bull 3X Shares (TPOR)
|
Direxion
Daily Transportation Bear 3X Shares
|
Direxion
Daily Utilities Bull 3X Shares (UTSL)
|
Direxion
Daily Utilities Bear 3X Shares
|
Direxion
Daily 7-10 Year Treasury Bull 3X Shares (TYD)
|
Direxion
Daily 7-10 Year Treasury Bear 3X Shares (TYO)
|
Direxion
Daily 20+ Year Treasury Bull 3X Shares (TMF)
|
Direxion
Daily 20+ Year Treasury Bear 3X Shares (TMV)
|
The Funds seek
daily
leveraged
investment results and are intended to be used as short-term trading vehicles. The Funds with “Bull” in their names attempt to provide daily investment results that correspond to three times the performance of an
underlying index and are collectively referred to as the “Bull Funds.” The Funds with “Bear” in their names attempt to provide daily investment results that correspond to three times the inverse (or opposite) of the
performance of an underlying index and are collectively referred to as the “Bear Funds.”
The Funds are not intended to be used by, and are not
appropriate for, investors who do not intend to actively monitor and manage their portfolios. The Funds are very different from most mutual funds and exchange-traded funds. Investors should note that:
(1)
|
The Funds pursue
daily leveraged
investment objectives, which means that the Funds are riskier than alternatives that do not use leverage because the Funds magnify the performance of their underlying index.
|
(2)
|
Each Bear Fund pursues a
daily leveraged
investment objective that is
inverse
to the performance of its underlying index, a result opposite of most mutual funds and exchange-traded funds.
|
(3)
|
The
pursuit of daily investment objectives means that the return of a Fund for a period longer than a full trading day will be the product of a series of daily leveraged returns for each trading day during the relevant period. As a consequence,
especially in periods of market volatility, the volatility of the underlying index may affect a Fund’s return as much as, or more than, the return of the underlying index. Further, the return for investors that invest for periods less than a
full trading day will not be the product of the return of a Fund’s stated daily leveraged investment objective and the performance of the underlying index for the full trading day. During periods of high volatility, the Funds may not perform
as expected and the Funds may have losses when an investor may have expected gains if the Funds are held for a period that is different than one trading day.
|
The Funds are not suitable for all investors. The Funds are
designed to be utilized only by sophisticated investors, such as traders and active investors employing dynamic strategies. Investors in the Funds should:
(a)
|
understand the risks
associated with the use of leverage;
|
(b)
|
understand the consequences
of seeking daily leveraged investment results;
|
(c)
|
for a Bear Fund, understand
the risk of shorting; and
|
(d)
|
intend
to actively monitor and manage their investments.
|
Investors who do not understand the Funds, or do not intend to
actively manage their funds and monitor their investments, should not buy the Funds.
There is no assurance that any Fund will achieve its investment
objective and an investment in a Fund could lose money. No single Fund is a complete investment program.
If a Fund’s underlying index moves
more than 33% on a given trading day in a direction adverse to the Fund, the Fund’s investors would lose all of their money. The Funds’ investment adviser, Rafferty Asset Management, LLC, will attempt to position each Fund’s
portfolio to ensure that a Fund does not gain or lose more than 90% of its net asset value on a given trading day. As a consequence, a Fund’s portfolio should not be responsive to underlying index movements beyond 30% on a given trading day,
whether that movement is favorable or adverse to the Fund. For example, if a Bull Fund’s underlying index was to gain 35% on a given trading day, that Fund should be limited to a gain of 90% for that day, which corresponds to 300% of an
underlying index gain of 30%, rather than 300% of an underlying index gain of 35%.
This SAI, dated February 28, 2019, is not a prospectus. It
should be read in conjunction with the Funds' prospectus dated February 28, 2019 (“Prospectus”). This SAI is incorporated by reference into the Prospectus. In other words, it is legally part of the Prospectus. To receive a copy of the
Prospectus, without charge, write or call the Trust at the address or telephone number listed above.
February 28, 2019
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A-1
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Direxion Shares ETF Trust
The Trust is a
Delaware statutory trust organized on April 23, 2008 and is registered with the Securities and Exchange Commission (“SEC”) as an open-end management investment company under the Investment Company Act of 1940, as amended (“1940
Act”). The Trust currently consists of 120 separate series or “Funds.”
Prior to January 3, 2017, the Direxion
Daily MSCI India Bull 3X Shares sought daily investment results, before fees and expenses, of 300% of the performance of the Indus India Index under its former fund name, the Direxion Daily India Bull 3X Shares.
Prior to February 28, 2017, the
Direxion Daily MSCI Emerging Markets Bull 3X Shares, Direxion Daily MSCI Emerging Markets Bear 3X Shares, Direxion Daily MSCI Developed Markets Bull 3X Shares, Direxion Daily MSCI Developed Markets Bear 3X Shares, Direxion Daily MSCI Real Estate
Bull 3X Shares, Direxion Daily MSCI Real Estate Bear 3X Shares, Direxion Daily MSCI Brazil Bull 3X Shares, Direxion Daily MSCI South Korea Bull 3X Shares and the Direxion Daily MSCI Japan Bull 3X Shares pursued their respective investment strategy
under their respective former fund name: Direxion Daily Emerging Markets Bull 3X Shares, Direxion Daily Emerging Markets Bear 3X Shares, Direxion Daily Developed Markets Bull 3X Shares, Direxion Daily Developed Markets Bear 3X Shares, Direxion Daily
Real Estate Bull 3X Shares, Direxion Daily Real Estate Bear 3X Shares, Direxion Daily Brazil Bull 3X Shares, Direxion Daily South Korea Bull 3X Shares and Direxion Daily Japan Bull 3X Shares, respectively.
The
Direxion Daily 7-10 Year Treasury Bull 3X Shares, Direxion Daily 7-10 Year Treasury Bear 3X Shares, Direxion Daily 20+ Year Treasury Bull 3X Shares, and the Direxion Daily 20+ Year Treasury Bear 3X Shares are collectively referred to as the
“Fixed Income Funds.”
The Funds with the word
“Bull” in their name (collectively, the “Bull Funds”), attempt to provide investment results that correlate positively to the return of an underlying index, meaning the Bull Funds attempt to move in the same direction as the
underlying index. The Funds with the word “Bear” in their name (collectively, the “Bear Funds”), attempt to provide investment results that correlate negatively to the return of an underlying index, meaning that the Bear
Funds attempt to move in the opposite or inverse direction of the underlying index. As used in this Prospectus, the terms “daily,” “day,” and “trading day,” refer to the period from the close of the markets on one
trading day to the close of the markets on the next trading day.
The Bull Funds seek daily leveraged
investment results, before fees and expenses, of 300% of the performance of an underlying index. The Bear Funds seek daily inverse leveraged investment results, before fees and expenses, of 300% of the inverse of the performance of an underlying
index. If, on a given day, the underlying index gains 1%, the Bull Funds are designed to gain approximately 3% (which is equal to 300% of 1%), while the Bear Funds are designed to lose approximately 3%. Conversely, if the the underlying index loses
1% on a given day, the Bull Funds are designed to lose approximately 3%, while the Bear Funds are designed to gain approximately 3% (which is equal to -300% of the 1% index loss). The Funds seek leveraged investment results on a daily basis
—
from the close of regular trading on one trading day to the close on the next trading
day
—
which should not be equated with seeking a leveraged investment objective for any other period.
The Funds are designed as
short-term trading vehicles. The Funds are intended to be used by investors who intend to actively monitor and manage their portfolios.
Shares of each Fund
(“Shares”) are issued and redeemed only in large blocks called “Creation Units.” The Shares offered in this SAI are, or upon commencement of operations will be, listed and traded on the NYSE Arca, Inc. (the
“Exchange”). Most investors will buy and sell Shares of each Fund in secondary market transactions through brokers. Shares can be bought and sold throughout the trading day like other publicly traded shares. There is no minimum
investment. Investors may acquire Shares directly from each Fund, and shareholders may tender their Shares for redemption directly to each Fund, only in Creation Units of 50,000 Shares, as discussed in the “Purchases and Redemptions”
section below.
The
Funds seek daily leveraged investment results and are intended to be used as short-term trading vehicles. The Funds are not intended to be used by, and are not appropriate for, investors who do not intend to actively monitor and manage their
portfolios. The Funds are very different from most mutual funds and exchange-traded funds. Investors in the Funds should note that:
(1)
|
Each Fund pursues a daily
leveraged investment objective, which means that the Funds are riskier than alternatives that do not use leverage because each Fund magnifies the performance of its underlying index.
|
(2)
|
Each Bear Fund pursues a
daily leveraged investment objective that is
inverse
to the performance of its underlying index, a result opposite of most mutual funds and ETFs.
|
(3)
|
The
pursuit of daily leveraged investment objectives means that the return of a Fund for a period different than a trading day will be the product of the series of daily leveraged returns for each trading day during the relevant period. As a
consequence, especially in periods of market volatility, the volatility of the underlying index may affect a Fund’s return as much or more than the return of the underlying index. Further, the return for investors that invest for a period
different than a full trading day will not be the product of the return of a Fund’s stated
|
|
daily leveraged
investment objective and the performance of the underlying index for the full trading day. During periods of high volatility, the Funds may not perform as expected and the Funds may have losses when an investor may have expected gains if the Funds
are held for a period that is different than one trading day.
|
The Funds are not suitable for all
investors. The Funds are designed to be utilized only by sophisticated investors, such as traders and active investors employing dynamic strategies. Investors in the Funds should:
(a)
|
understand the risks
associated with the use of leverage;
|
(b)
|
understand the
consequences of seeking daily leveraged investment results;
|
(c)
|
for the Bear Funds,
understand the risk of shorting; and
|
(d)
|
intend
to actively monitor and manage their investments.
|
Investors who do
not understand the Funds or do not intend to actively manage their funds and monitor their investments should not buy the Funds. There is no assurance that any Fund offered in this SAI will achieve its daily leveraged objective and an investment in
a Fund could lose money. No single Fund is a complete investment program.If a Fund’s underlying index moves more than 33% on a given trading day in a direction adverse to the Fund, the Fund’s investors would lose all of their money.
Rafferty will attempt to position each Fund’s portfolio to ensure that a Fund does not gain or lose more than 90% of its net asset value (“NAV”) on a given trading day. As a consequence, a Fund’s portfolio should not be
responsive to underlying index movements beyond 30% on a given trading day, whether that movement is favorable or adverse to the Fund. For example, if a Bull Fund’s underlying index was to gain 35% on a given trading day, that Fund should be
limited to a gain of 90% for that day, which corresponds to 300% of an underlying index gain of 30%, rather than 300% of an underlying index gain of 35%.
Classification of the Funds
Each Fund is a
“non-diversified” series of the Trust pursuant to the 1940 Act. A Fund is considered “non-diversified” because a relatively high percentage of its assets may be invested in the securities of a limited number of issuers. To
the extent that a Fund assumes large positions in the securities of a small number of issuers, the Fund’s NAV may fluctuate to a greater extent than that of a diversified company as a result of changes in the financial condition or in the
market’s assessment of the issuers, and the Fund may be more susceptible to any single economic, political or regulatory occurrence than a diversified company.
Exchange Listing and Trading
The Shares are, or
upon commencement of operations will be, listed and traded on the Exchange and may trade at prices that differ to some degree from their NAV. There can be no assurance that the requirements of the Exchange necessary to maintain the listing of Shares
of each Fund will continue to be met. The Exchange may, but is not required to, remove the Shares of a Fund from listing if (i) following the initial 12-month period beginning at the commencement of trading of a Fund, there are fewer than 50
beneficial owners of the Shares of the Fund; (ii) the value of the underlying index is no longer calculated or available; (iii) a Fund's underlying index no longer meets various liquidity and other metrics as required by the Exchange’s
continued listing standards; or (iv)such other event shall occur or condition exist that, in the opinion of the Exchange, makes further dealings on the Exchange inadvisable. The Exchange will remove the Shares of a Fund from listing and trading upon
termination of such Fund.
As is
the case with other publicly listed securities, when Shares of a Fund are bought or sold through a broker, an investor may incur a brokerage commission determined by that broker, as well as other charges.
The Trust reserves the right to
adjust the price levels of the Shares in the future to help maintain convenient trading ranges for investors. Any adjustments would be accomplished through stock splits or reverse stock splits, which would have no effect on the net assets of a Fund
or an investor’s equity interest in a Fund.
The trading prices of each
Fund’s shares in the secondary market generally differ from each Fund’s daily NAV per share and are affected by market forces such as supply and demand, economic conditions and other factors. Rafferty Asset Management, LLC ("Rafferty" or
"Adviser") may, from time to time, make payments to certain market makers in the Trust’s shares pursuant to an Exchange authorized program.
In order to provide additional
information regarding the value of Shares of a Fund, the Exchange, a market data vendor or other information provider, disseminates an Intraday Optimized Portfolio Value (“IOPV”) for each Fund. Each Fund’s IOPV is expected to be
disseminated every 15 seconds during the regular trading hours of the Exchange. The IOPV is based on the current market value of the securities and cash required to be deposited in exchange for a Creation Unit. The IOPV does not necessarily reflect
the precise composition of the current portfolio holdings of a Fund as of a particular point in time, or an accurate valuation of the current portfolio. The quotations of certain Fund holdings may not be updated during
U.S. trading hours if
such holdings do not trade in the U.S. The Funds are not involved in, nor responsible for, the calculation or dissemination of the IOPV and make no representations or warranty as to its accuracy.
Investment Policies and Techniques
Each Fund seeks investment
results that correspond to the performance of an underlying index, before fees and expenses, as follows:
Fund
|
Underlying
Index
|
Daily
Leveraged
Investment
Objective
|
Direxion
Daily Mid Cap Bull 3X Shares
|
S&P
Midcap
®
400 Index
|
300%
|
Direxion
Daily Mid Cap Bear 3X Shares
|
-300%
|
Direxion
Daily S&P 500
®
Bull 3X Shares
|
S&P
500
®
Index
|
300%
|
Direxion
Daily S&P 500
®
Bear 3X Shares
|
-300%
|
Direxion
Daily Small Cap Bull 3X Shares
|
Russell
2000
®
Index
|
300%
|
Direxion
Daily Small Cap Bear 3X Shares
|
-300%
|
Direxion
Daily Dow 30 Bull 3X Shares
|
Dow
Jones Industrial
Average Index
|
300%
|
Direxion
Daily Dow 30 Bear 3X Shares
|
-300%
|
Direxion
Daily MSCI Brazil Bull 3X Shares
|
MSCI
Brazil 25/50 Index
|
300%
|
Direxion
Daily MSCI Canada Bull 3X Shares
|
MSCI
Canada Index
|
300%
|
Direxion
Daily MSCI Canada Bear 3X Shares
|
-300%
|
Direxion
Daily FTSE China Bull 3X Shares
|
FTSE
China 50 Index
|
300%
|
Direxion
Daily FTSE China Bear 3X Shares
|
-300%
|
Direxion
Daily MSCI Developed Markets Bull 3X Shares
|
MSCI
EAFE
®
Index
|
300%
|
Direxion
Daily MSCI Developed Markets Bear 3X Shares
|
-300%
|
Direxion
Daily MSCI Emerging Markets Bull 3X Shares
|
MSCI
Emerging
Markets Index
SM
|
300%
|
Direxion
Daily MSCI Emerging Markets Bear 3X Shares
|
-300%
|
Direxion
Daily FTSE Europe Bull 3X Shares
|
FTSE
Developed Europe All Cap Index
|
300%
|
Direxion
Daily MSCI India Bull 3X Shares
|
MSCI
India Index
|
300%
|
Direxion
Daily MSCI Italy Bull 3X Shares
|
MSCI
Italy 25/50 Index
|
300%
|
Direxion
Daily MSCI Italy Bear 3X Shares
|
-300%
|
Direxion
Daily MSCI Japan Bull 3X Shares
|
MSCI
Japan Index
|
300%
|
Direxion
Daily Latin America Bull 3X Shares
|
S&P
Latin America 40 Index
|
300%
|
Direxion
Daily MSCI Mexico Bull 3X Shares
|
MSCI
Mexico IMI 25/50 Index
|
300%
|
Direxion
Daily MSCI Mexico Bear 3X Shares
|
-300%
|
Direxion
Daily Russia Bull 3X Shares
|
MVIS
Russia Index
|
300%
|
Direxion
Daily Russia Bear 3X Shares
|
-300%
|
Direxion
Daily MSCI South Korea Bull 3X Shares
|
MSCI
Korea 25/50 Index
|
300%
|
Direxion
Daily EURO STOXX 50
®
Bull 3X Shares
|
EURO
STOXX 50
®
Index
|
300%
|
Direxion
Daily EURO STOXX 50
®
Bear 3X Shares
|
-300%
|
Direxion
Daily Aerospace & Defense Bull 3X Shares
|
Dow
Jones U.S. Select
Aerospace & Defense Index
|
300%
|
Direxion
Daily Aerospace & Defense Bear 3X Shares
|
-300%
|
Direxion
Daily S&P Biotech Bull 3X Shares
|
S&P
Biotechnology
Select Industry Index
|
300%
|
Direxion
Daily S&P Biotech Bear 3X Shares
|
-300%
|
Direxion
Daily Communication Services Index Bull 3X Shares
|
Communication
Services
Select Sector Index
|
300%
|
Direxion
Daily Communication Services Index Bear 3X Shares
|
-300%
|
Fund
|
Underlying
Index
|
Daily
Leveraged
Investment
Objective
|
Direxion
Daily Consumer Discretionary Bull 3X Shares
|
Consumer
Discretionary
Select Sector Index
|
300%
|
Direxion
Daily Consumer Discretionary Bear 3X Shares
|
-300%
|
Direxion
Daily Consumer Staples Bull 3X Shares
|
Consumer
Staples
Select Sector Index
|
300%
|
Direxion
Daily Consumer Staples Bear 3X Shares
|
-300%
|
Direxion
Daily Energy Bull 3X Shares
|
Energy
Select
Sector Index
|
300%
|
Direxion
Daily Energy Bear 3X Shares
|
-300%
|
Direxion
Daily Financial Bull 3X Shares
|
Russell
1000
®
Financial
Services Index
|
300%
|
Direxion
Daily Financial Bear 3X Shares
|
-300%
|
Direxion
Daily Gold Miners Index Bull 3X Shares
|
NYSE
Arca Gold
Miners Index
|
300%
|
Direxion
Daily Gold Miners Index Bear 3X Shares
|
-300%
|
Direxion
Daily Healthcare Bull 3X Shares
|
Health
Care Select
Sector Index
|
300%
|
Direxion
Daily Homebuilders & Supplies Bull 3X Shares
|
Dow
Jones U.S.
Select Home Construction
Index
|
300%
|
Direxion
Daily Industrials Bull 3X Shares
|
Industrials
Select Sector Index
|
300%
|
Direxion
Daily Industrials Bear 3X Shares
|
-300%
|
Direxion
Daily Junior Gold Miners Index Bull 3X Shares
|
MVIS
Global Junior Gold Miners Index
|
300%
|
Direxion
Daily Junior Gold Miners Index Bear 3X Shares
|
-300%
|
Direxion
Daily Metals & Mining Bull 3X Shares
|
S&P
Metals & Mining
Select Industry Index
|
300%
|
Direxion
Daily Metals & Mining Bear 3X Shares
|
-300%
|
Direxion
Daily Natural Gas Related Bull 3X Shares
|
ISE-Revere
Natural Gas Index
TM
|
300%
|
Direxion
Daily Natural Gas Related Bear 3X Shares
|
-300%
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
|
S&P
Oil & Gas
Exploration & Production
Select Industry Index
|
300%
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
|
-300%
|
Direxion
Daily Pharmaceutical & Medical Bull 3X Shares
|
Dynamic
Pharmaceutical
Intellidex Index
|
300%
|
Direxion
Daily Pharmaceutical & Medical Bear 3X Shares
|
-300%
|
Direxion
Daily Preferred Stock Bull 3X Shares
|
Indxx
US High Yield, Low Volatility
Preferred Stock Index
|
300%
|
Direxion
Daily MSCI Real Estate Bull 3X Shares
|
MSCI
US REIT Index
SM
|
300%
|
Direxion
Daily MSCI Real Estate Bear 3X Shares
|
-300%
|
Direxion
Daily Regional Banks Bull 3X Shares
|
S&P
Regional Banks
Select Industry Index
|
300%
|
Direxion
Daily Regional Banks Bear 3X Shares
|
-300%
|
Direxion
Daily Retail Bull 3X Shares
|
S&P
Retail Select Industry Index
|
300%
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
|
Indxx
Global Robotics and Artificial
Intelligence Thematic Index
|
300%
|
Direxion
Daily Semiconductor Bull 3X Shares
|
PHLX
Semiconductor
Sector Index
|
300%
|
Direxion
Daily Semiconductor Bear 3X Shares
|
-300%
|
Direxion
Daily Technology Bull 3X Shares
|
Technology
Select Sector Index
|
300%
|
Direxion
Daily Technology Bear 3X Shares
|
-300%
|
Direxion
Daily Transportation Bull 3X Shares
|
Dow
Jones Transportation Average
TM
|
300%
|
Direxion
Daily Transportation Bear 3X Shares
|
-300%
|
Direxion
Daily Utilities Bull 3X Shares
|
Utilities
Select Sector Index
|
300%
|
Direxion
Daily Utilities Bear 3X Shares
|
-300%
|
Direxion
Daily 7-10 Year Treasury Bull 3X Shares
|
ICE
U.S. Treasury 7-10 Year Bond Index
|
300%
|
Direxion
Daily 7-10 Year Treasury Bear 3X Shares
|
-300%
|
Fund
|
Underlying
Index
|
Daily
Leveraged
Investment
Objective
|
Direxion
Daily 20+ Year Treasury Bull 3X Shares
|
ICE
U.S. Treasury 20+ Year Bond Index
|
300%
|
Direxion
Daily 20+ Year Treasury Bear 3X Shares
|
-300%
|
Each
Fund’s investment objective is a non-fundamental policy of the Fund that may be changed by the Board without shareholder approval.
With the exception of limitations
described in the “Investment Restrictions” section, each Fund may engage in the investment strategies discussed below. There is no assurance that any of these strategies or any other strategies and methods of investment available to a
Fund will result in the achievement of the Fund’s investment objective.
This section provides a description
of the securities in which a Fund may invest to achieve its investment objective, the strategies it may employ and the corresponding risks of such securities and strategies. The greatest risk of investing in an exchange-traded fund ("ETF") is that
its returns will fluctuate and you could lose money.
A Fund may invest in asset-backed
securities of any rating or maturity. Asset-backed securities are securities issued by trusts and special purpose entities that are backed by pools of assets, such as automobile and credit-card receivables and home equity loans, which pass through
the payments on the underlying obligations to the security holders (less servicing fees paid to the originator or fees for any credit enhancement). Typically, the originator of the loan or accounts receivable paper transfers it to a specially
created trust, which repackages it as securities with a minimum denomination and a specific term. The securities are then privately placed or publicly offered. Examples include certificates for automobile receivables and so-called plastic bonds,
backed by credit card receivables.
The value of an asset-backed security
is affected by, among other things, changes in the market’s perception of the asset backing the security, the creditworthiness of the servicing agent for the loan pool, the originator of the loans and the financial institution providing any
credit enhancement. Payments of principal and interest passed through to holders of asset-backed securities are frequently supported by some form of credit enhancement, such as a letter of credit, surety bond, limited guarantee by another entity or
by having a priority to certain of the borrower’s other assets. The degree of credit enhancement varies, and generally applies to only a portion of the asset-backed security’s par value. Value is also affected if any credit enhancement
has been exhausted.
Money Market Instruments
. A Fund may invest in bankers’ acceptances, certificates of deposit, demand and time deposits, savings shares and commercial paper of domestic
banks and savings and loans that have assets of at least $1 billion and capital, surplus, and undivided profits of over $100 million as of the close of their most recent fiscal year, or instruments that are insured by the Bank Insurance Fund or the
Savings Institution Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”). A Fund also may invest in high quality, short-term, corporate debt obligations, including variable rate demand notes, having terms-to-maturity of
less than 397 days. Because there is no secondary trading market in demand notes, the inability of the issuer to make required payments could impact adversely a Fund’s ability to resell when it deems advisable to do so.
A Fund may invest in foreign money
market instruments, which typically involve more risk than investing in U.S. money market instruments. See “Foreign Securities” below. These risks include, among others, higher brokerage commissions, less public information, and less
liquid markets in which to sell and meet large shareholder redemption requests.
Bankers’ Acceptances
. Bankers’ acceptances generally are negotiable instruments (time drafts) drawn to finance the export, import, domestic shipment or storage
of goods. They are termed “accepted” when a bank writes on the draft its agreement to pay it at maturity, using the word “accepted.” The bank is, in effect, unconditionally guaranteeing to pay the face value of the instrument
on its maturity date. The acceptance may then be held by the accepting bank as an asset, or it may be sold in the secondary market at the going rate of interest for a specified maturity.
Certificates of Deposit (“CDs”)
. The FDIC is an agency of the U.S. government that insures the deposits of certain banks and savings and loan associations up to
$250,000 per deposit. The interest on such deposits may not be insured to the extent this limit is exceeded. Current federal regulations also permit such institutions to issue insured negotiable CDs in amounts of $250,000 or more without regard to
the interest rate ceilings on other deposits. To remain fully insured, these investments must be limited to $250,000 per insured bank or savings and loan association.
Commercial Paper
. Commercial paper includes notes, drafts or similar instruments payable on demand or having a maturity at the time of issuance not exceeding nine months,
exclusive of days of grace or any renewal thereof. A Fund may invest
in commercial paper rated A-l or A-2 by Standard &
Poor’s
®
Ratings Services
(“S&P
®
”) or Prime-1 or Prime-2 by Moody’s Investors Service
®
, Inc. (“Moody’s”), and in other lower quality commercial paper.
Corporate Debt Securities
A Fund may invest in investment
grade corporate debt securities of any rating or maturity. Investment grade corporate bonds are those rated BBB or better by S&P
®
or Baa or
better by Moody’s. Securities rated BBB by S&P
®
are considered investment grade, but Moody’s considers securities rated Baa to have
speculative characteristics. See Appendix A for a description of corporate bond ratings. A Fund may also invest in unrated securities.
Corporate debt securities are
fixed-income securities issued by businesses to finance their operations, although corporate debt instruments may also include bank loans to companies. Notes, bonds, debentures and commercial paper are the most common types of corporate debt
securities, with the primary difference being their maturities and secured or un-secured status. Commercial paper has the shortest term and is usually unsecured.
The broad category of corporate debt
securities includes debt issued by domestic or foreign companies of all kinds, including those with small-, mid- and large-capitalizations. Corporate debt may be rated investment-grade or below investment-grade and may carry variable or floating
rates of interest.
Because of
the wide range of types and maturities of corporate debt securities, as well as the range of creditworthiness of its issuers, corporate debt securities have widely varying potentials for return and risk profiles. For example, commercial paper issued
by a large established domestic corporation that is rated investment grade may have a modest return on principal, but carries relatively limited risk. On the other hand, a long-term corporate note issued by a small foreign corporation from an
emerging market country that has not been rated may have the potential for relatively large returns on principal, but carries a relatively high degree of risk.
Corporate debt securities carry both
credit risk and interest rate risk. Credit risk is the risk that a Fund could lose money if the issuer of a corporate debt security is unable to pay interest or repay principal when it is due. Some corporate debt securities that are rated below
investment grade are generally considered speculative because they present a greater risk of loss, including default, than higher-quality debt securities. The credit risk of a particular issuer’s debt security may vary based on its priority
for repayment. For example, higher ranking (senior) debt securities have a higher priority than lower ranking (subordinated) securities. This means that the issuer might not make payments on subordinated securities while continuing to make payments
on senior securities. In addition, in the event of bankruptcy, holders of higher-ranking senior securities may receive amounts otherwise payable to the holders of more junior securities. Interest rate risk is the risk that the value of certain
corporate debt securities will tend to fall when interest rates rise. In general, corporate debt securities with longer terms tend to fall more in value when interest rates rise than corporate debt securities with shorter terms.
On July 27, 2017, the U.K.-based
Financial Conduct Authority (the “FCA”) announced its intention to cease sustaining LIBOR after 2021. It is possible that the ICE Benchmark Administration (“IBA”) and the banks that offer reference rates could continue to
produce LIBOR on the current basis after 2021, but it cannot be assured that LIBOR will survive in its current form. The effect of the FCA’s decision not to sustain LIBOR, or, if changes are ultimately made to LIBOR, the effect of those
changes, cannot be predicted. In addition, it cannot be predicted what alternative index would be chosen should this occur. If LIBOR in its current form does not survive or if an alternative index is chosen, the market value and/or liquidity of
securities with distributions or interest rates based on LIBOR could be adversely affected.
Common Stocks
. A Fund may invest in common stocks. Common stocks represent the residual ownership interest in the issuer and are entitled to the income and increase in the
value of the assets and business of the entity after all of its obligations and preferred stock are satisfied. Common stocks generally have voting rights. Common stocks fluctuate in price in response to many factors including historical and
prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity.
Convertible Securities
. A Fund may invest in convertible securities that may be considered high yield securities. Convertible securities include corporate bonds, notes and
preferred stock that can be converted into or exchanged for a prescribed amount of common stock of the same or a different issue within a particular period of time at a specified price or formula. A convertible security entitles the holder to
receive interest paid or accrued on debt or dividends paid on preferred stock until the convertible stock matures or is redeemed, converted or exchanged. While no securities investment is without some risk, investments in convertible securities
generally entail less risk than the issuer’s common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a fixed income security. The
market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline. While convertible securities generally offer lower interest or dividend yields than nonconvertible debt
securities of similar quality, they do enable the investor to benefit from increases in the market price of the underlying common stock. When investing in convertible securities, a Fund may invest in the lowest credit rating category.
Preferred Stock
. A Fund may invest in preferred stock. A preferred stock blends the characteristics of a bond and common stock. It can offer the higher yield of a bond and
has priority over common stock in equity ownership, but does not have the seniority of a bond and its participation in the issuer’s growth may be limited. Preferred stock has preference over common stock in the receipt of dividends and in any
residual assets after payment to creditors if the issuer is dissolved. Although the dividend is set at a fixed annual rate, in some circumstances it can be changed or omitted by the issuer. When investing in preferred stocks, a Fund may invest in
the lowest credit rating category.
Warrants and Rights
. A Fund may purchase warrants and rights, which are instruments that permit a Fund to acquire, by subscription, the capital stock of a corporation at a
set price, regardless of the market price for such stock. Warrants may be either perpetual or of limited duration, but they usually do not have voting rights or pay dividends. The market price of warrants is usually significantly less than the
current price of the underlying stock. Thus, there is a greater risk that warrants might drop in value at a faster rate than the underlying stock.
A Fund may have both direct and
indirect exposure to foreign securities through investments in publicly traded securities such as stocks and bonds, stock index futures contracts, options on stock index futures contracts and options on securities and on stock indices to foreign
securities. In most cases, the best available market for foreign securities will be on exchanges or in OTC markets located outside the United States.
Investing in foreign securities
carries political and economic risks distinct from those associated with investing in the United States. Non-U.S. securities may be subject to currency risks or to foreign government taxes. There may be less information publicly available about a
non-U.S. issuer than about a U.S. issuer, and a foreign issuer may or may not be subject uniform accounting, auditing and financial reporting standards and practices comparable to those in the U.S. Other risks of investing in such securities include
political or economic instability in the country involved, the difficulty of predicting international trade patterns and the possibility of the imposition of exchange controls. The prices of such securities may be more volatile than those of U.S.
securities. There maybe also be the possibility of expropriation of assets or nationalization, imposition of withholding taxes on dividend or interest payments, difficulty obtaining and enforcing judgments against foreign entities or diplomatic
developments which could affect investment in these countries. Losses and other expenses may be incurred in converting currencies in connection with purchases and sales of foreign securities.
Non-U.S. stocks markets may not be as
developed or efficient as, and may be more volatile than, those in the U.S. While the volume of shares traded on non-U.S. stock markets generally has been growing, such markets usually have substantially less volume than U.S. markets. Therefore, a
Fund’s investment in non-U.S. equity securities may be less liquid and subject to more rapid and erratic price movements than comparable securities listed for trading on U.S. exchanges. Non-U.S. equity securities may trade at price/earnings
multiples higher than comparable U.S. securities and such levels may not be sustainable. There may be less government supervision and regulation of foreign stock exchanges, brokers, banks and listed companies abroad than in the U.S. Moreover,
settlement practices for transactions in foreign markets may differ from those in U.S. markets. Such differences may include delays beyond periods customary in the U.S. and practices, such as delivery of securities prior to receipt of payment, that
increase the likelihood of a failed settlement, which can result in losses to a Fund. The value of non-U.S. investments and the investment income derived from them may also be affected unfavorably by changes in currency exchange control regulations.
Foreign brokerage commissions, custodial expenses and other fees are also generally higher than for securities traded in the U.S. This may cause a Fund to incur higher portfolio transaction costs than domestic equity funds. Fluctuations in exchanges
rates may also affect the earning power and asset value of the foreign entity issuing a security, even on denominated in U.S. dollars. Dividend and interest payments may be repatriated based on the exchange rate at the time of disbursement, and
restrictions on capital flows may be imposed.
Developing and Emerging Markets
.
Emerging and developing markets abroad may offer special opportunities for
investing,
but may have greater risks than more developed foreign markets, such as those in Europe,
Canada,
Australia,
New Zealand and Japan.
There may be even less liquidity in their securities markets, and settlements of purchases and sales of
securities may be subject to additional delays. They are subject to greater risks of limitations on the repatriation of income and profits because of currency restrictions imposed by local governments. Those countries may also be subject to the risk
of greater political and economic instability, which can greatly affect the volatility of prices of securities in those countries.
Investing in emerging market
securities imposes risks different from, or greater than, risks of investing in foreign developed countries. These risks include: smaller market capitalization of securities markets, which may suffer periods of relative illiquidity; significant
price volatility; restrictions on foreign investment; and possible repatriation of investment income and capital. In addition, foreign investors may be required to register the proceeds of sales; future economic or political crises could lead to
price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization, or creation of government monopolies. The currencies of emerging market countries may experience significant declines against the U.S. Dollar.
Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries. Additional risks of emerging markets securities may include:
greater social, economic and political uncertainty and instability; more substantial governmental involvement in the economy; less governmental supervision and regulation; unavailability of currency hedging techniques; companies that are newly
organized and small;
differences in
auditing and financial reporting standards, which may result in unavailability of material information about issuers; and less developed legal systems. In addition, emerging securities markets may have different clearance and settlement procedures,
which may be unable to keep pace with the volume of securities transactions or otherwise make it difficult to engage in such transactions.
Asia-Pacific Countries
. In addition to the risks associated with foreign and emerging markets, the developing market Asia-Pacific countries in which a Fund may invest are
subject to certain additional or specific risks. A Fund may make substantial investments in Asia-Pacific countries. In the Asia-Pacific markets, there is a high concentration of market capitalization and trading volume in a small number of issuers
representing a limited number of industries, as well as a high concentration of investors and financial intermediaries. Many of these markets also may be affected by developments with respect to more established markets in the region, such as Japan
and Hong Kong. Brokers in developing market Asia-Pacific countries typically are fewer in number and less well-capitalized than brokers in the United States. These factors, combined with the U.S. regulatory requirements for open-end investment
companies and the restrictions on foreign investment, result in potentially fewer investment opportunities for a Fund and may have an adverse impact on a Fund’s investment performance.
Many of the developing market
Asia-Pacific countries may be subject to a greater degree of economic, political and social instability than is the case in the United States and Western European countries. Such instability may result from, among other things: (i) authoritarian
governments or military involvement in political and economic decision-making, including changes in government through extra-constitutional means; (ii) popular unrest associated with demands for improved political, economic and social conditions;
(iii) internal insurgencies; (iv) hostile relations with neighboring countries; and/or (v) ethnic, religious and racial disaffection. In addition, the governments of many of such countries, such as Indonesia, have a heavy role in regulating and
supervising the economy.
An
additional risk common to most such countries is that the economy is heavily export-oriented and, accordingly, is dependent upon international trade. The existence of overburdened infrastructure and obsolete financial systems also present risks in
certain countries, as do environmental problems. Certain economies also depend to a significant degree upon exports of primary commodities and, therefore, are vulnerable to changes in commodity prices that, in turn, may be affected by a variety of
factors. The legal systems in certain developing market Asia-Pacific countries also may have an adverse impact on a Fund. For example, while the potential liability of a shareholder in a U.S. corporation with respect to acts of the corporation is
generally limited to the amount of the shareholder's investment, the notion of limited liability is less clear in certain emerging market Asia-Pacific countries. Similarly, the rights of investors in developing market Asia-Pacific companies may be
more limited than those of shareholders of U.S. corporations. It may be difficult or impossible to obtain and/or enforce a judgment in a developing market Asia-Pacific country.
Governments of many developing
market Asia-Pacific countries have exercised and continue to exercise substantial influence over many aspects of the private sector. In certain cases, the government owns or controls many companies, including the largest in the country. Accordingly,
government actions in the future could have a significant effect on economic conditions in developing market Asia-Pacific countries, which could affect private sector companies and a Fund itself, as well as the value of securities in a Fund's
portfolio. In addition, economic statistics of developing market Asia-Pacific countries may be less reliable than economic statistics of more developed nations.
It is possible that developing market
Asia-Pacific issuers may not be subject to the same accounting, auditing and financial reporting standards as U.S. companies. Inflation accounting rules in some developing market Asia-Pacific countries require companies that keep accounting records
in the local currency, for both tax and accounting purposes, to restate certain assets and liabilities on the company’s balance sheet in order to express items in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits for certain developing market Asia-Pacific companies. In addition, satisfactory custodial services for investment securities may not be available in some developing Asia-Pacific countries, which may result in a
Fund incurring additional costs and delays in providing transportation and custody services for such securities outside such countries.
Certain developing Asia-Pacific
countries are especially large debtors to commercial banks and foreign governments. Fund management may determine that, notwithstanding otherwise favorable investment criteria, it may not be practicable or appropriate to invest in a particular
developing Asia-Pacific country. A Fund may invest in countries in which foreign investors, including management of the Fund, have had no or limited prior experience.
Brazil
. Investing in Brazil involves certain considerations not typically associated with investing in the United States. Additional considerations include: (i) investment
and repatriation controls, which could affect a Fund’s ability to operate, and to qualify for the favorable tax treatment afforded to RICs for U.S. federal income tax purposes; (ii) fluctuations in the rate of exchange between the Brazilian
Real and the U.S. Dollar; (iii) the generally greater price volatility and lesser liquidity that characterize Brazilian securities markets, as compared with U.S. markets; (iv) the effect that balance of trade could have on Brazilian economic
stability and the Brazilian government's economic policy; (v) potentially high rates of inflation, a rising unemployment rate, and a high level of debt, each of which may hinder economic growth; (vi) governmental involvement in and influence on the
private sector; (vii) Brazilian accounting, auditing and financial standards and requirements, which differ from those in the United States; (viii) political and other considerations, including changes in applicable Brazilian tax laws; and (ix)
restrictions on investments by foreigners. In addition, commodities, such as oil, gas and minerals, represent a significant
percentage of Brazil’s exports and, therefore,
its economy is particularly sensitive to fluctuations in commodity prices. Additionally, an investment in Brazil is subject to certain risks stemming from political and economic corruption. For example, the Brazilian Federal Police conducted a
criminal investigation into corruption allegations, known as Operation Car Wash, which led to charges against high level politicians and corporate executives and resulted in substantial fines for some of Brazil’s largest companies. This has
had a widespread political and economic impact and may continue to affect negatively the country and the reputation of Brazilian companies connected with the investigation, and therefore, the trading price of securities issued by those companies.
While the economy of Brazil has enjoyed substantial economic growth in recent years, there can be no guarantee that this growth will continue.
China
. Investing in China involves special considerations not typically associated with investing in countries with more democratic governments or more established economies
or currency markets. These risks include: (i) the risk of nationalization or expropriation of assets or confiscatory taxation; (ii) greater governmental involvement in and control over the economy, interest rates and currency exchange rates; (iii)
controls on foreign investment and limitations on repatriation of invested capital; (iv) greater social, economic and political uncertainty (including the risk of war); (v) dependency on exports and the corresponding importance of international
trade; (vi) currency exchange rate fluctuations; (vii) differences in, or lack of, auditing and financial reporting standards that may result in unavailability of material information about issuers; and (viii) the risk that certain companies in
which the Fund may invest may have dealings with countries subject to sanctions or embargoes imposed by the U.S. government or identified as state sponsors of terrorism.
For over three decades, the Chinese
government has been reforming economic and market practice and has been providing a larger sphere for private ownership of property. While currently contributing to growth and prosperity, the government may decide not to continue to support these
economic reform programs and could possible return to the completely centrally planned economy that existed prior to 1978. There is also a greater risk in China than in many other countries of currency fluctuations, currency non-convertibility,
interest rate fluctuations and higher rates of inflation as a result of internal social unrest or conflicts with other countries. China is an emerging market and demonstrates significantly higher volatility from time to time in comparison to
developed markets. The government of China maintains strict currency controls in support of economic, trade and political objectives and regularly intervenes in the currency market. The government's actions in this respect may not be transparent or
predictable. As a result, the value of the Yuan, and the value of securities designed to provide exposure to the Yuan, can change quickly and arbitrarily. Furthermore, it is difficult for foreign investors to directly access money market securities
in China because of investment and trading restrictions. While the economy of China has enjoyed substantial economic growth in recent years, there can be no guarantee this growth will continue. Reduction in spending on Chinese products and services,
the institution of additional tariffs or other trade barriers, including as a result of heightened trade tensions between China and the United States, or a downturn in any of the economies of China’s key trading partners may have an adverse
impact on the Chinese economy. These and other factors may decrease the value and liquidity of a Fund's investments. The Chinese economy may experience a significant slowdown as a result of, among other things, a deterioration of global demand for
Chinese exports, as well as contraction in spending on domestic goods by Chinese consumers. In addition, China may experience substantial rates of inflation or economic recessions, which would have a negative effect on its economy and securities
market.
Recently, there has
been increased attention from the SEC and the Public Company Accounting Oversight Board (“PCAOB”) with regard to international auditing standards of U.S.-listed companies with significant operations in China as well as PCAOB-registered
auditing firms in China. Currently, the SEC and PCAOB are only able to get limited information about these auditing firms and are restricted from inspecting the audit work and practices of registered accountants in China. These restrictions may
result in the unavailability of material information about the Chinese issuers.
China A-shares are equity securities
of companies based in mainland China that trade on Chinese stock exchanges such as the Shanghai Stock Exchange (“SSE”) and the Shenzhen Stock Exchange (“SZSE”) (“A-shares”). Foreign investment in A-shares on the
SSE and SZSE has historically not been permitted other than through licenses granted by the People’s Republic of China (“PRC”) known as the Qualified Foreign Institutional Investor (“QFII”) and Renminbi Qualified
Foreign Institutional Investor (“RQFII”) licenses. Each license permits investment in A-shares only up to a specified quota.
Because restrictions continue to
exist and capital therefore cannot flow freely into and out of the A-Share market, it is possible that in the event of a market disruption, the liquidity of the A-Share market and trading prices of A-Shares could be more severely affected than the
liquidity and trading prices of markets where securities are freely tradable and capital therefore flows more freely. The nature and duration of such a market disruption or the impact that it may have on the A-Share market are unknown. In the event
that a Fund invests in A-Shares directly, a Fund may incur significant losses, or may not be able fully to implement or pursue its investment objectives or strategies, due to investment restrictions on RQFIIs and QFIIs, illiquidity of the Chinese
securities markets, or delay or disruption in execution or settlement of trades. A-Shares may become subject to frequent and widespread trading halts.
The Chinese government has in the
past taken actions that benefitted holders of A-Shares. As A-Shares become more available to foreign investors, such as a Fund, the Chinese government may be less likely to take action that would benefit holders of A-Shares. In addition, there is no
guarantee that an A-Shares quota will be sufficient for a Fund’s intended scope of investment.
The regulations which apply to
investments by RQFIIs and QFIIs, including the repatriation of capital, are relatively new. The application and interpretation of such regulations are therefore relatively untested. In addition, there is little precedent or certainty evidencing how
such discretion may be exercised now or in the future; and even if there were precedent, it may provide little guidance as PRC authorities would likely continue to have broad discretion.
Investment in eligible A-shares
listed and traded on the SSE is now permitted through the Stock Connect program. Stock Connect is a securities trading and clearing program established by Hong Kong Securities Clearing Company Limited, the SSE and Chinese Securities Depositary and
Clearing Corporation that aims to provide mutual stock market access between China and Hong Kong by permitting investors to trade and settle shares on each market through their local exchanges. Certain Funds may invest in other investment companies
that invest in A-shares through Stock Connect or on such other stock exchanges in China which participate in Stock Connect from time to time. Under Stock Connect, a Fund’s trading of eligible A-shares listed on the SSE would be effectuated
through its Hong Kong broker.
Although no individual investment
quotas or licensing requirements apply to investors in Stock Connect, trading through Stock Connect’s Northbound Trading Link is subject to aggregate and daily investment quota limitations that require that buy orders for A-shares be rejected
once the remaining balance of the relevant quota drops to zero or the daily quota is exceeded (although a Fund will be permitted to sell A-shares regardless of the quota balance). These limitations may restrict a Fund from investing in A-shares on a
timely basis, which could affect a Fund’s ability to effectively pursue its investment strategy. Investment quotas are also subject to change. Investment in eligible A-shares through Stock Connect is subject to trading, clearance and
settlement procedures that could pose risks to a Fund. A-shares purchased through Stock Connect generally may not be sold or otherwise transferred other than through Stock Connect in accordance with applicable rules. In addition, Stock Connect will
only operate on days when both the Chinese and Hong Kong markets are open for trading and when banks in both markets are open on the corresponding settlement days. Therefore, an investment in A-shares through Stock Connect may subject a Fund to a
risk of price fluctuations on days where the Chinese market is open, but Stock Connect is not trading.
Europe
.
Investing in European countries may impose economic and political risks associated with Europe in general and the specific European countries in which it invests.
The economies and markets of European countries are often closely connected and interdependent, and events in one European country can have an adverse impact on other European countries. A Fund makes investments in securities of issuers that are
domiciled in, or have significant operations in, member countries of the Economic and Monetary Union of the European Union (the “EU”), which requires member countries to comply with restrictions on inflation rates, deficits, interest
rates, debt levels and fiscal and monetary controls, each of which may significantly affect every country in Europe. Decreasing imports or exports, changes in governmental or EU regulations on trade, changes in the exchange rate of the euro (the
common currency of certain EU countries), the default or threat of default by an EU member country on its sovereign debt, and/or an economic recession in an EU member country may have a significant adverse effect on the economies of EU member
countries and their trading partners, including some or all of the emerging markets materials sector countries. Although certain European countries do not use the euro, many of these countries are obliged to meet the criteria for joining the euro
zone. Consequently, these countries must comply with many of the restrictions noted above. The European financial markets have experienced volatility and adverse trends in recent years due to concerns about economic downturns, rising government debt
levels and the possible default of government debt in several European countries, including Greece, Ireland, Italy, Portugal and Spain. In order to prevent further economic deterioration, certain countries, without prior warning, can institute
“capital controls.” Countries may use these controls to restrict volatile movements of capital entering and exiting their country. Such controls may negatively affect a Fund’s investments. A default or debt restructuring by any
European country would adversely impact holders of that country’s debt and sellers of credit default swaps linked to that country’s creditworthiness, which may be located in countries other than those listed above. In addition, the
credit ratings of certain European countries were recently downgraded. These downgrades may result in further deterioration of investor confidence. These events have adversely affected the value and exchange rate of the euro and may continue to
significantly affect the economies of every country in Europe, including countries that do not use the euro and non-EU member countries. Responses to the financial problems by European governments, central banks and others, including austerity
measures and reforms, may not produce the desired results, may result in social unrest and may limit future growth and economic recovery or have other unintended consequences. Further defaults or restructurings by governments and other entities of
their debt could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, one or more countries may abandon the euro and/or withdraw from the EU, including, with respect to the latter, the
United Kingdom, which is a significant market in the global economy. The impact of these actions, especially if they occur in a disorderly fashion, is not clear but could be significant and far-reaching and could adversely impact the value of
investments in the region.
In a referendum
held on June 23, 2016, the United Kingdom (the “UK”) resolved to leave the EU (referred to as “Brexit”). The referendum has introduced significant uncertainties and instability in the financial markets as the UK negotiates
its exit from the EU, which is currently scheduled for March 29, 2019, however, this timing could change. The outcome of negotiations and the potential consequences remain uncertain. The effects of Brexit will depend on any agreements the UK makes
to retain access to the EU Common Market either during a transitional period or more permanently. Brexit could lead to legal and tax uncertainty and potentially divergent national laws and regulations as the UK determines which EU
laws to replace or
replicate. Additionally, Brexit could lead to global economic uncertainty and result in significant volatility in the global stock markets and currency exchange rate fluctuations. The UK has one of the largest economies in Europe and is a major
trading partner with the other EU countries and the United States. If implemented, Brexit might negatively affect the City of London’s economy, which is heavily dominated by financial services, as banks might be forced to move staff and comply
with two separate sets of rules or lose business to banks in Continental Europe. In addition, Brexit would likely create additional economic stresses for the UK, including the potential for decreased trade, capital outflows, devaluation of the
British pound, wider corporate bond spreads due to uncertainty, and declines in business and consumer spending as well as foreign direct investment.
Brexit may also have a destabilizing
impact on the EU to the extent that other member states similarly seek to withdraw from the EU. Any further exits from the EU would likely cause additional market disruptions globally and introduce new legal and regulatory uncertainties.
India
. Investments in India involve special considerations not typically associated with investing in countries with more established economies or currency markets.
Political, religious, and border disputes persist in India. India has recently experienced and may continue to experience civil unrest and hostilities with certain of its neighboring countries, including Pakistan, and the Indian government has
confronted separatist movements in several Indian states, including Kashmir. Government control over the economy, currency fluctuations or blockage, and the risk of nationalization or expropriation of assets offer higher potential losses.
Governmental actions could have a negative effect on the economic conditions in India, which could adversely affect the value and liquidity of investments made by a Fund. The securities markets in India are comparatively underdeveloped with some
exceptions and consist of a small number of listed companies with small market capitalization, greater price volatility and substantially less liquidity than companies in more developed markets. The limited liquidity of the Indian securities market
may also affect a Fund’s ability to acquire or dispose of securities at the price or time that it desires or the Fund’s ability to track its underlying index.
The Indian government exercises
significant influence over many aspects of the economy, and the number of public sector enterprises in India is substantial. While the Indian government has implemented economic structural reform with the objectives of liberalizing India's exchange
and trade policies, reducing the fiscal deficit, controlling inflation, promoting a sound monetary policy, reforming the financial sector, and placing greater reliance on market mechanisms to direct economic activity, there can be no assurance that
these policies will continue or that the economic recovery will be sustained.
Global factors and foreign actions
may inhibit the flow of foreign capital on which India is dependent to sustain its growth. In addition, the Reserve Bank of India has imposed limits on foreign ownership of Indian companies, which may decrease the liquidity of a Fund’s
portfolio and result in extreme volatility in the prices of Indian securities. In November 2016, the Indian government eliminated certain large denomination cash notes as legal tender, causing uncertainty in certain financial markets. These factors,
coupled with the lack of extensive accounting, auditing and financial reporting standards and practices, as applicable in the United States, may increase the risk of loss for a Fund.
Securities laws in India are
relatively new and unsettled and, as a result, there is a risk of significant and unpredictable change in laws governing foreign investment, securities regulation, title to securities and shareholder rights. Foreign investors in particular may be
adversely affected by new or amended laws and regulations. Certain Indian regulatory approvals, including approvals from the Securities and Exchange Board of India, the central government and the tax authorities (to the extent that tax benefits need
to be utilized), may be required before a Fund can make investments in Indian companies. Foreign investors in India still face burdensome taxes on investments in income producing securities.
While the Indian economy has enjoyed
substantial economic growth in recent years, there can be no guarantee this growth will continue. Technology and software sectors represent a significant portion of the total capitalization of the Indian securities markets. The value of these
companies will generally fluctuate in response to technological and regulatory developments, and, as a result, a Fund’s holdings are expected to experience correlated fluctuations. Natural disasters, such as tsunamis, flooding or droughts,
could occur in India or surrounding areas and could negatively affect the Indian economy. Agriculture occupies a prominent position in the Indian economy, therefore, it may be negatively affected by adverse weather conditions and the effects of
global climate change. These and other factors may decrease the value and liquidity of a Fund's investments.
Italy
.
Investment in Italian issuers involves risks that are specific to Italy, including, regulatory, political, currency, and economic risks. Italy’s economy is
dependent upon external trade with other economies
—
specifically Germany, France and
other Western European developed countries. As a result, Italy is dependent on the economies of these other countries and any change in the price or demand for Italy’s exports may have an adverse impact on its economy. Interest rates on
Italy’s debt may rise to levels that may make it difficult for it to service high debt levels without significant financial help from the EU and could potentially lead to default. Recently, the Italian economy has experienced volatility due to
concerns about economic downturn and rising government debt levels. Italy has been warned by the Economic and Monetary Union of the EU to reduce its public spending and debt and actions by Italy to cut spending or increase taxes in response could
have significant adverse effects on the Italian economy. These events have adversely impacted the Italian economy, causing credit agencies to lower Italy’s sovereign debt rating and could decrease outside investment in Italian companies. High
amounts of debt and public spending may stifle Italian economic growth or cause prolonged periods of recession.
Japan
. Japanese investments may be significantly affected by events influencing Japan’s economy and changes in the exchange rate between the Japanese yen and the U.S.
Dollar. Japan’s economy fell into a long recession in the 1990s. After a few years of mild recovery in the mid-2000s, Japan’s economy fell into another recession as a result of the recent global economic crisis. Japan is heavily
dependent on exports and foreign oil and may be adversely affected by higher commodity prices, trade tariffs, protectionist measures, competition from emerging economies, and the economic conditions of its trading partners, such as China.
Furthermore, Japan is located in a seismically active area, and in 2011 experienced an earthquake of a sizeable magnitude and a tsunami that significantly affected important elements of its infrastructure and resulted in a nuclear crisis. Since
these events, Japan’s financial markets have fluctuated dramatically. The full extent of the impact of these events on Japan’s economy and on foreign investment in Japan is difficult to estimate. The risks of natural disaster of varying
degrees, such as earthquakes and tsunamis, and the resulting damage, continue to exist. Japan’s economic prospects may be affected by the political and military situations of its near neighbors, notably North and South Korea, China, and
Russia. In addition, Japan’s labor market is adapting to an aging workforce, declining population, and demand for increased labor mobility. These demographic shifts and fundamental structural changes to the labor markets may negatively impact
Japan’s economic competiveness.
South Korea
. South Korean investments may be significantly affected by events influencing its economy, which is heavily dependent on exports and the demand for certain
finished goods. South Korea’s main industries include electronics, automobile production, chemicals, shipbuilding, steel, textiles, clothing, footwear, and food processing. Conditions that weaken demand for such products worldwide or in other
Asian countries could have a negative impact on the South Korean economy as a whole. The South Korean economy’s reliance on international trade makes it highly sensitive to fluctuations in international commodity prices, currency exchanges
rates and government regulation, and vulnerable to downturns of the world economy, particularly with respects to its four largest export markets (the EU, Japan, United States, and China). South Korea has experienced modest economic growth in recent
years, but such continued growth may slow due, in part, to the economic slowdown in China and the increased competitive advantage of Japanese exports with the weakened yen. The South Korean economy’s long-term challenges include an aging
population, inflexible labor market, and overdependence on exports to drive economic growth. Relations with North Korea could also have as significant impact on the economy of South Korea. Relations between South Korea and North Korea remain tense,
as exemplified in periodic acts of hostility, and the possibility of serious military engagement still exists. Armed conflict between North Korea and South Korea could have a severe adverse impact on the South Korean economy and its securities
markets.
Latin America
. Investments in Latin American countries involve special considerations not typically associated with investing in the United States. Most Latin American
countries have experienced, at one time or another, severe and persistent levels of inflation, including, in some cases, hyperinflation. This has, in turn, led to high interest rates, extreme measures by governments to keep inflation in check, and a
generally debilitating effect on economic growth. Although inflation in many countries has lessened, there is no guarantee it will remain at lower levels. In addition, the political history of certain Latin American countries has been characterized
by political uncertainty, military intervention in civilian and economic spheres, and political corruption. Such developments, if they were to reoccur, could reverse favorable trends toward market and economic reform, privatization, and removal of
trade barriers, and result in significant disruption to the securities markets. Certain Latin American countries may also have managed currencies, which are maintained at artificial levels to the U.S. Dollar rather than at levels determined by the
market. This type of system can lead to sudden and large adjustments in the currency which, in turn, can have a disruptive and negative effect on foreign investors. For example, in late 1994, the value of the Mexican peso lost more than one-third of
its value relative to the U.S. Dollar. Certain Latin American countries also restrict the free conversion of their currency into foreign currencies, including the U.S. Dollar. There is no significant foreign exchange market for many currencies and
it would, as a result, be difficult for the Fund to engage in foreign currency transactions designed to protect the value of the Fund’s interests in securities denominated in such currencies. Finally, a number of Latin American countries are
among the largest debtors of developing countries. There have been moratoria on, and reschedulings of, repayment with respect to these debts. Such events can restrict the flexibility of these debtor nations in the international markets and result in
the imposition of onerous conditions on their economies.
Mexico
. Investment in Mexican issuers involves risks that are specific to Mexico, including regulatory, political, and economic risks. In the past, Mexico has experienced
high interest rates, economic volatility, significant devaluation of its currency (the peso), and high unemployment rates. The Mexican economy is dependent upon external trade with other economies, specifically with the United States and certain
Latin American countries. Additionally, a high level of foreign investment in Mexican assets may increase Mexico’s exposure to risks associated with changes in international investor sentiment. Recent political developments in the U.S. may
also have potential implications for the current trade arrangements between the U.S. and Mexico, which could affect the value of securities held by the Fund. For example, uncertainty regarding the status of the North American Free Trade Agreement
(NAFTA) or its recently negotiated successor -- the United States-Mexico-Canada Agreement -- may have a significant impact on Mexico’s economic outlook and the value of a fund’s investment in Mexico.
The Mexican economy is heavily
dependent on trade with, and foreign investment from, the U.S. and Canada, which are Mexico’s principal trading partners. Any changes in the supply, demand, price or other economic component of Mexico’s imports or exports, as well as any
reductions in foreign investment from, or changes in the economies of, the U.S. or Canada, may have an adverse impact on the Mexican economy. Because commodities such as oil and gas, minerals and metals represent
a large portion of the region’s exports, the
economies of these countries are particularly sensitive to fluctuations in commodity prices. Mexico’s economy has also become increasingly oriented toward manufacturing in the years since NAFTA entered into force. Because Mexico’s top
export is automotive vehicles, its economy is strongly tied to the U.S. automotive market, and changes to certain segments in the U.S. market could have an impact on the Mexican economy. The automotive industry and other industrial products can be
highly cyclical, and companies in these industries may suffer periodic operating losses. These industries can also be significantly affected by labor relations and fluctuating component prices. The agricultural and mining sectors of Mexico’s
economy also account for a large portion of its exports, and Mexico is susceptible to fluctuations in the price and demand for agricultural products and natural resources. In addition, Mexico has privatized or has begun the process of privatization
of certain entities and industries, and some investors have suffered losses due to the inability of the newly privatized entities to adjust to a competitive environment and changing regulatory standards.
Mexico has been destabilized by local
insurrections, social upheavals and drug related violence. Additionally, violence near border areas, border-related political disputes, and other social upheaval may lead to strained international relations. Mexico has also experienced contentious
and very closely decided elections. Changes in political parties and other political events may affect the economy and contribute to additional instability. Recurrence of these or similar conditions may adversely impact the Mexican economy.
Russia
. Investing in Russia involves risks and special considerations not typically associated with investing in United States. Since the breakup of the Soviet Union at the
end of 1991, Russia has experienced dramatic political, economic, and social change. The political system in Russia is emerging from a long history of extensive state involvement in economic affairs. The country is undergoing a rapid transition from
a centrally-controlled command system to a market-oriented, democratic model. As a result, companies in Russia are characterized by a lack of: (i) management with experience of operating in a market economy; (ii) modern technology; and, (iii) a
sufficient capital base with which to develop and expand their operations. It is unclear what will be the future effect on Russian companies, if any, of Russia’s continued attempts to move toward a more market-oriented economy. Russia’s
economy has experienced severe economic recession, if not depression, since 1990 during which time the economy has been characterized by high rates of inflation, high rates of unemployment, declining gross domestic product, deficit government
spending, and a devalued currency. The economic reform program has involved major disruptions and dislocations in various sectors of the economy, and those problems have been exacerbated by growing liquidity problems. Russia’s economy is also
heavily reliant on the energy and defense-related sectors, and is therefore susceptible to the risks associated with these industries. Further, Russia presently receives significant financial assistance from a number of countries through various
programs. To the extent these programs are reduced or eliminated in the future, Russian economic development may be adversely impacted. The laws and regulations in Russia affecting Western business investment continue to evolve in an unpredictable
manner. Russian laws and regulations, particularly those involving taxation, foreign investment and trade, title to property or securities, and transfer of title, which may be applicable to a Fund’s activities are relatively new and can change
quickly and unpredictably in a manner far more volatile than in the United States or other developed market economies. Although basic commercial laws are in place, they are often unclear or contradictory and subject to varying interpretation, and
may at any time be amended, modified, repealed or replaced in a manner adverse to the interest of the Funds.
As a result of
recent events involving Ukraine and Russia and other political conflicts, the United States and the European Union imposed sanctions on certain Russian individuals and companies, including certain financial institutions, and have limited certain
exports and imports to and from Russia. The United States and other nations or international organizations may impose additional, broader economic sanctions or take other actions that may adversely affect Russian-related issuers in the future. These
sanctions, any future sanctions or other actions, or even the threat of further sanctions or other actions, may negatively affect the value and liquidity of a Fund’s investments. Russia may undertake countermeasures or retaliatory actions
which may further impair the value and liquidity of a Fund’s investments.
To the extent a Fund invests in
stocks of foreign corporations, a Fund’s investment in such stocks may also be in the form of depositary receipts or other securities convertible into securities of foreign issuers. Depository receipts are receipts, typically issued by a
financial institution, with evidence of underlying securities issued by a non-U.S. issuer. Types of depositary receipts include American Depositary Receipts (“ADRs”), Global Depositary Receipts (“GDRs”) and European
Depositary Receipts (“EDRs”). Depository receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted.
ADRs are receipts typically issued by
an American bank or trust company that evidence ownership of underlying securities issued by a foreign corporation. Investments in ADRs have certain advantages over direct investment in the underlying foreign securities because: (i) ADRs are U.S.
dollar-denominated investments that are easily transferable and for which market quotations are readily available, and (ii) issuers whose securities are represented by ADRs are generally subject to auditing, accounting and financial reporting
standards similar to those applied to domestic issuers. By investing in ADRs
rather than directly in the stock of foreign issuers
outside the U.S. a Fund may avoid certain risks related to investing in foreign securities in non-U.S. markets, however, ADRs do not eliminate all risks inherent in investing in the securities of foreign issuers.
EDRs are receipts issued in Europe
that evidence a similar ownership arrangement. GDRs are receipts issued throughout the world that evidence a similar arrangement. Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are
designed for use in European securities markets. GDRs are tradable both in the United States and in Europe and are designed for use throughout the world.
Depositary receipts may be purchased
through “sponsored” or “unsponsored” facilities, in which a Fund may invest. A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a depositary may establish an
unsponsored facility without participation by the issuer of the depositary security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts of the deposited securities.
Fund investments in depositary receipts,
which include ADRs, GDRs and EDRs, are deemed to be investments in foreign securities for purposes of a Fund’s investment strategy.
A Fund may invest directly and
indirectly in foreign currencies. Investments in foreign currencies are subject to numerous risks not least being the fluctuation of foreign currency exchange rates with respect to the U.S. Dollar. Exchange rates fluctuate for a number of
reasons.
Inflation
. Exchange rates change to reflect changes in a currency’s buying power. Different countries experience different inflation rates due to different monetary
and fiscal policies, different product and labor market conditions, and a host of other factors.
Trade
Deficits
. Countries with trade deficits tend to experience a depreciating currency. Inflation may be the cause of a trade deficit, making a country’s goods more expensive and less competitive and so
reducing demand for its currency.
Interest
Rates
. High interest rates may raise currency values in the short term by making such currencies more attractive to investors. However, since high interest rates are often the result of high inflation,
long-term results may be the opposite.
Budget Deficits and Low Savings Rates
. Countries that run large budget deficits and save little of their national income tend to suffer a depreciating currency because they
are forced to borrow abroad to finance their deficits. Payments of interest on this debt can inundate the currency markets with the currency of the debtor nation. Budget deficits also can indirectly contribute to currency depreciation if a
government chooses inflationary measures to cope with its deficits and debt.
Political
Factors
. Political instability in a country can cause a currency to depreciate. Demand for a certain currency may fall if a country appears a less desirable place in which to invest and do
business.
Government Control
. Through their own buying and selling of currencies, the world’s central banks sometimes manipulate exchange rate movements. In addition,
governments occasionally issue statements to influence people’s expectations about the direction of exchange rates, or they may instigate policies with an exchange rate target as the goal.
The value of a Fund’s
investments is calculated in U.S. Dollars each day that the New York Stock Exchange (“NYSE”) is open for business. As a result, to the extent that a Fund’s assets are invested in instruments denominated in foreign currencies and
the currencies appreciate relative to the U.S. Dollar, a Fund’s NAV per share as expressed in U.S. Dollars (and, therefore, the value of your investment) should increase. If the U.S. Dollar appreciates relative to the other currencies, the
opposite should occur.
The
currency-related gains and losses experienced by a Fund will be based on changes in the value of portfolio securities attributable to currency fluctuations only in relation to the original purchase price of such securities as stated in U.S. Dollars.
Gains or losses on shares of a Fund will be based on changes attributable to fluctuations in the NAV of such shares, expressed in U.S. Dollars, in relation to the original U.S. Dollar purchase price of the shares. The amount of appreciation or
depreciation in a Fund’s assets also will be affected by the net investment income generated by the money market instruments in which each Fund invests and by changes in the value of the securities that are unrelated to changes in currency
exchange rates.
A Fund may incur
currency exchange costs when it sells instruments denominated in one currency and buys instruments denominated in another.
Currency Transactions
. A Fund conducts currency exchange transactions on a spot basis. Currency transactions made on a spot basis are for cash at the spot rate prevailing in
the currency exchange market for buying or selling currency. A Fund also enters into forward currency contracts. See “Futures Contracts, Options, and Other Derivative Strategies” section below. A forward currency contract is an
obligation to buy or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These
contracts are entered into on the interbank market
conducted directly between currency traders (usually large commercial banks) and their customers. A currency forward contract will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the currency that is
purchased, similar to when a fund sells a security denominated in one currency and purchases a security denominated in another currency. For example, a Fund may enter into a forward contract when it owns a security that is denominated in a non-U.S.
currency and desires to “lock in” the U.S. dollar value of the security.
A Fund may invest in a combination of
forward currency contracts and U.S. Dollar-denominated market instruments in an attempt to obtain an investment result that is substantially the same as a direct investment in a foreign currency-denominated instrument. This investment technique
creates a “synthetic” position in the particular foreign-currency instrument whose performance the Adviser is trying to duplicate. For example, the combination of U.S. Dollar-denominated instruments with “long” forward
currency exchange contracts creates a position economically equivalent to a money market instrument denominated in the foreign currency itself. Such combined positions are sometimes necessary when the money market in a particular foreign currency is
small or relatively illiquid.
A
Fund may invest in forward currency contracts to hedge either specific transactions (transaction hedging) or portfolio positions (position hedging). Transaction hedging is the purchase or sale of forward currency contracts with respect to specific
receivables or payables of a Fund in connection with the purchase and sale of portfolio securities. Position hedging is the sale of a forward currency contract on a particular currency with respect to portfolio positions denominated or quoted in
that currency.
A Fund may use
forward currency contracts for position hedging if consistent with its policy of trying to expose its net assets to foreign currencies. A Fund is not required to enter into forward currency contracts for hedging purposes and it is possible that a
Fund may not be able to hedge against a currency devaluation that is so generally anticipated that a Fund is unable to contract to sell the currency at a price above the devaluation level it anticipates. It also is possible, under certain
circumstances, that a Fund may have to limit its currency transactions to qualify, or continue to qualify, as a “regulated investment company” (“RIC”) under Subchapter M of Chapter 1 of Subtitle A of the Internal Revenue Code
of 1986, as amended (“Code”). See “Dividends, Other Distributions and Taxes.”
Each Fund currently does not intend
to enter into a forward currency contract with a term of more than one year, or to engage in position hedging with respect to the currency of a particular country to more than the aggregate market value (at the time the hedging transaction is
entered into) of its portfolio securities denominated in (or quoted in or currently convertible into or directly related through the use of forward currency contracts in conjunction with money market instruments to) that particular currency.
Under definitions adopted by the
Commodity Futures Trading Commission (“CFTC”) and SEC, non-deliverable forwards are considered swaps, and therefore are included in the definition of “commodity interests.” Although non-deliverable forwards have historically
been traded in the over-the-counter (“OTC”) market, as swaps they may in the future be required to be centrally cleared and traded on public facilities. For more information on central clearing and trading of cleared swaps, see
“Cleared swaps,” “Risks of cleared swaps,” “Comprehensive swaps regulation” and “Developing government regulation of derivatives.” Currency forwards that qualify as deliverable forwards are not
regulated as swaps for most purposes, and are not included in the definition of “commodity interests.” However these forwards are subject to some requirements applicable to swaps, including reporting to swap data repositories,
documentation requirements, and business conduct rules applicable to swap dealers. CFTC regulation of currency forwards, especially non-deliverable forwards, may restrict a Fund’s ability to use these instruments in the manner described above
or subject the investment manager to CFTC registration and regulation as a commodity pool operator (“CPO”).
At or before the maturity of a
forward currency contract, a Fund may either sell a portfolio security and make delivery of the currency, or retain the security and terminate its contractual obligation to deliver the currency by buying an “offsetting” contract
obligating it to buy, on the same maturity date, the same amount of the currency. If a Fund engages in an offsetting transaction, it may later enter into a new forward currency contract to sell the currency.
If a Fund engages in an offsetting
transaction, it will incur a gain or loss to the extent that there has been movement in forward currency contract prices. If forward prices go down during the period between the date a Fund enters into a forward currency contract for the sale of a
currency and the date it enters into an offsetting contract for the purchase of the currency, a Fund will realize a gain to the extent that the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to buy. If
forward prices go up, a Fund will suffer a loss to the extent the price of the currency it has agreed to buy exceeds the price of the currency it has agreed to sell.
Since a Fund invests in money market
instruments denominated in foreign currencies, it may hold foreign currencies pending investment or conversion into U.S. Dollars. Although a Fund values its assets daily in U.S. Dollars, it does not convert its holdings of foreign currencies into
U.S. Dollars on a daily basis. A Fund will convert its holdings from time to time, however, and incur the costs of currency conversion. Foreign exchange dealers do not charge a fee for conversion, but they do realize a profit based on the difference
between the prices at which they buy and sell various currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one rate, and offer to buy the currency at a lower rate if a Fund tries to resell the currency to the dealer.
Risks of currency forward contracts
.
The successful use of these transactions will usually depend on the Adviser’s ability to accurately forecast currency exchange
rate movements. Should exchange rates move in an unexpected manner, a Fund may not achieve the anticipated benefits of the transaction, or it may realize losses. In addition, these techniques could result in a loss if the counterparty to the
transaction does not perform as promised, including because of the counterparty’s bankruptcy or insolvency. While a Fund uses only counterparties that meet its credit quality standards, in unusual or extreme market conditions, a
counterparty’s creditworthiness and ability to perform may deteriorate rapidly, and the availability of suitable replacement counterparties may become limited. Currency forward contracts may limit potential gain from a positive change in the
relationship between the U.S. Dollar and foreign currencies. Unanticipated changes in currency prices may result in poorer overall performance for a Fund than if it had not engaged in such contracts. Moreover, there may be an imperfect correlation
between a Fund’s portfolio holdings of securities denominated in a particular currency and the currencies bought or sold in the forward contracts entered into by a Fund. This imperfect correlation may cause a Fund to sustain losses that will
prevent the Fund from achieving a complete hedge or expose the Fund to risk of foreign exchange loss.
Foreign Currency Options
. A Fund may invest in foreign currency-denominated securities and may buy or sell put and call options on foreign currencies. A Fund may buy or sell
put and call options on foreign currencies either on exchanges or in the OTC market. A put option on a foreign currency gives the purchaser of the option the right to sell a foreign currency at the exercise price until the option expires. A call
option on a foreign currency gives the purchaser of the option the right to purchase the currency at the exercise price until the option expires. Currency options traded on U.S. or other exchanges may be subject to position limits which may limit
the ability of a Fund to reduce foreign currency risk using such options. OTC options differ from traded options in that they are two-party contracts with price and other terms negotiated between buyer and seller, and generally do not have as much
market liquidity as exchange-traded options.
Foreign Currency
Exchange-Related Securities
Foreign Currency Warrants
. Foreign currency warrants such as Currency Exchange Warrants
SM
(“CEWs
SM
”) are warrants which entitle the
holder to receive from their issuer an amount of cash (generally, for warrants issued in the United States, in U.S. Dollars) which is calculated pursuant to a predetermined formula and based on the exchange rate between a specified foreign currency
and the U.S. Dollar as of the exercise date of the warrant. Foreign currency warrants generally are exercisable upon their issuance and expire as of a specified date and time. Foreign currency warrants have been issued in connection with U.S.
Dollar-denominated debt offerings by major corporate issuers in an attempt to reduce the foreign currency exchange risk which, from the point of view of prospective purchasers of the securities, is inherent in the international fixed-income
marketplace. Foreign currency warrants may attempt to reduce the foreign exchange risk assumed by purchasers of a security by, for example, providing for a supplemental payment in the event that the U.S. Dollar depreciates against the value of a
major foreign currency such as the Japanese yen or the Euro. The formula used to determine the amount payable upon exercise of a foreign currency warrant may make the warrant worthless unless the applicable foreign currency exchange rate moves in a
particular direction (
e.g.
, unless the U.S. Dollar appreciates or depreciates against the particular foreign currency to which the warrant is linked or indexed). Foreign currency warrants are severable from
the debt obligations with which they may be offered, and may be listed on exchanges. Foreign currency warrants may be exercisable only in certain minimum amounts, and an investor wishing to exercise warrants who possesses less than the minimum
number required for exercise may be required either to sell the warrants or to purchase additional warrants, thereby incurring additional transaction costs. In the case of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate relating to exercise is determined, during which time the exchange rate could change significantly, thereby affecting both the market and cash settlement values of the
warrants being exercised. The expiration date of the warrants may be accelerated if the warrants should be delisted from an exchange or if their trading should be suspended permanently, which would result in the loss of any remaining “time
value” of the warrants (
i.e.
, the difference between the current market value and the exercise value of the warrants), and, in the case the warrants were “out-of-the-money,” in a total loss
of the purchase price of the warrants.
Warrants are generally unsecured
obligations of their issuers and are not standardized foreign currency options issued by the Options Clearing Corporation (“OCC”). Unlike foreign currency options issued by OCC, the terms of foreign exchange warrants generally will not
be amended in the event of governmental or regulatory actions affecting exchange rates or in the event of the imposition of other regulatory controls affecting the international currency markets. The initial public offering price of foreign currency
warrants is generally considerably in excess of the price that a commercial user of foreign currencies might pay in the interbank market for a comparable option involving significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to significant foreign exchange risk, including risks arising from complex political or economic factors.
Principal Exchange Rate Linked Securities
. Principal exchange rate linked securities (“PERLs
SM
”) are debt obligations the principal on which is payable at maturity in an amount that may vary based on the exchange rate between the U.S. Dollar
and a particular foreign currency at or about that time. The return on “standard” principal exchange rate linked securities is enhanced if the foreign currency to which the security is linked appreciates against the U.S. Dollar, and is
adversely affected by increases in the foreign exchange value of the U.S. Dollar; “reverse” principal exchange rate linked securities are like
the “standard” securities, except that
their return is enhanced by increases in the value of the U.S. Dollar and adversely impacted by increases in the value of foreign currency. Interest payments on the securities are generally made in U.S. Dollars at rates that reflect the degree of
foreign currency risk assumed or given up by the purchaser of the notes (
i.e.
, at relatively higher interest rates if the purchaser has assumed some of the foreign exchange risk, or relatively lower interest
rates if the issuer has assumed some of the foreign exchange risk, based on the expectations of the current market). Principal exchange rate linked securities may in limited cases be subject to acceleration of maturity (generally, not without the
consent of the holders of the securities), which may have an adverse impact on the value of the principal payment to be made at maturity.
Performance Indexed Paper
. Performance indexed paper
(“PIPs
SM
”)
is U.S.
Dollar-denominated commercial paper the yield of which
is
linked
to certain foreign exchange rate movements.
The
yield to the investor on
performance indexed paper is established at maturity as a function of spot exchange rates between the U.S. Dollar
and a designated currency as
of
or about that time
(generally, the index maturity two days prior to maturity).
The yield to the
investor will be within a range stipulated at the time of purchase of the obligation, generally with a guaranteed minimum rate of return that is below, and a potential maximum rate of return that is above,
market yields on U.S. Dollar-denominated commercial paper, with both the minimum and
maximum rates
of return
on the investment
corresponding to the minimum and maximum values of the spot exchange rate two business days prior to maturity.
A Fund may invest in hybrid
instruments. A hybrid instrument is a type of potentially high-risk derivative that combines a traditional stock, bond, or commodity with an option or forward contract. Generally, the principal amount, amount payable upon maturity or redemption, or
interest rate of a hybrid is tied (positively or negatively) to the price of some commodity, currency or securities index or another interest rate or some other economic factor (each a “benchmark”). The interest rate or (unlike most
fixed income securities) the principal amount payable at maturity of a hybrid security may be increased or decreased, depending on changes in the value of the benchmark. A hybrid could be, for example, a bond issued by an oil company that pays a
small base level of interest, in addition to interest that accrues when oil prices exceed a certain predetermined level. Such a hybrid instrument would be a combination of a bond and a call option on oil.
Hybrids can be used as an efficient
means of pursuing a variety of investment goals, including currency hedging, and increased total return. Hybrids may not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a result,
may be leveraged and move (up or down) more steeply and rapidly than the benchmark. These benchmarks may be sensitive to economic and political events, such as commodity shortages and currency devaluations, which cannot be readily foreseen by the
purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero. Thus, an investment in a hybrid may entail significant market risks that are not associated with a similar investment in a traditional, U.S.
Dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest. The purchase of hybrids also exposes a Fund to the credit risk of the issuer of the hybrids. These risks may cause significant fluctuations
in the NAV of a Fund.
Certain
issuers of structured products such as hybrid instruments may be deemed to be investment companies as defined in the 1940 Act. As a result, a Fund’s investment in these products may be subject to limits applicable to investments in investment
companies and may be subject to restrictions contained in the 1940 Act.
Illiquid Investments and Restricted
Securities
Each Fund
may purchase and hold illiquid investments. A Fund will not purchase or otherwise acquire any security if, as a result, more than 15% of its net assets (taken at current value) would be invested in investments that are illiquid.
The term “illiquid
investments” for this purpose means any investment that a Fund reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value
of the investment. A Fund will not acquire illiquid securities if, as a result, such securities would comprise more than 15% of the value of the Fund’s net assets. Rafferty, subject to oversight by the Board of Trustees, has the ultimate
authority to determine, to the extent permissible under the federal securities laws, which securities are liquid or illiquid for purposes of this 15% limitation under a Fund’s liquidity risk management program, adopted pursuant to Rule 22e-4
under the 1940 Act. Illiquid securities will be priced at fair value as determined in good faith under procedures adopted by the Board of Trustees. If, through the appreciation of illiquid securities or the depreciation of liquid securities, a Fund
should be in a position where more than 15% of the value of its net assets are invested in illiquid securities, including restricted securities which are not readily marketable, Rafferty will report such occurrence to the Board of Trustees and take
such steps as are deemed advisable to protect liquidity in accordance with a Fund’s liquidity risk management program.
A Fund may not be able to sell
illiquid investments when Rafferty considers it desirable to do so or may have to sell such investments at a price that is lower than the price that could be obtained if the investments were liquid. In addition, the sale of illiquid investments may
require more time and result in higher dealer discounts and other selling expenses than
does the sale of investments that are not illiquid.
Illiquid investments also may be more difficult to value due to the unavailability of reliable market quotations for such investments, and investment in illiquid investments may have an adverse impact on NAV.
Rule 144A
establishes a “safe harbor” from the registration requirements of the 1933 Act for resales of certain securities to qualified institutional buyers. Institutional markets for restricted securities that have developed as a result of Rule
144A provide both readily ascertainable values for certain restricted securities and the ability to liquidate an investment to satisfy share redemption orders. This policy does not include restricted securities eligible for resale pursuant to Rule
144A under the Securities Act of 1933, as amended (“1933 Act”), which the Trust’s Board of Trustees (“Board” or “Trustees”), or Rafferty, under Board-approved guidelines, has determined are liquid. Each Fund
currently does not anticipate investing in such restricted securities. However, to the extent that a Fund does invest in such restricted securities, an insufficient number of qualified institutional buyers interested in purchasing Rule 144A-eligible
securities held by a Fund could adversely affect the marketability of such portfolio securities, and a Fund may be unable to dispose of such securities promptly or at reasonable prices.
A Fund may purchase indexed
securities, which are securities, the value of which varies positively or negatively in relation to the value of other securities, securities indices or other financial indicators, consistent with its investment objective. Indexed securities may be
debt securities or deposits whose value at maturity or coupon rate is determined by reference to a specific instrument or statistic. Recent issuers of indexed securities have included banks, corporations and certain U.S. government agencies.
The performance of indexed securities
depends to a great extent on the performance of the security or other instrument to which they are indexed and also may be influenced by interest rate changes in the United States and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values may decline substantially if the issuer’s creditworthiness deteriorates. Indexed securities may be more volatile than the underlying instruments. Certain indexed
securities that are not traded on an established market may be deemed illiquid. See “Illiquid Investments and Restricted Securities” above.
Inflation Protected Securities
Inflation protected securities
are fixed income securities whose value is periodically adjusted according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers utilize a structure that accrues inflation into the principal value of the bond.
Other issuers pay out the Consumer Price Index (“CPI”) accruals as part of a semiannual coupon. Inflation protected securities issued by the U.S. Treasury have maturities of approximately five, ten or thirty years, although it is
possible that securities with other maturities will be issued in the future. The U.S. Treasury securities pay interest on a semi-annual basis equal to a fixed percentage of the inflation adjusted principal amount.
If the periodic adjustment rate
measuring inflation falls, the principal value of inflation protected bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of
the original bond principal upon maturity (as adjusted for inflation) is guaranteed by the U.S. Treasury in the case of U.S. Treasury inflation indexed bonds, even during a period of deflation. However, the current market value of the bonds is not
guaranteed and will fluctuate. A Fund may also invest in other inflation related bonds which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond to be repaid at maturity
may be less than the original principal amount and, therefore, is subject to credit risk.
The value of inflation protected
bonds is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate
than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation protected bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to
a decrease in value of inflation protected bonds. While these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other
than inflation, investors in these securities may not be protected to the extent that the increase is not reflected in the bond’s inflation measure.
The periodic adjustment of U.S.
inflation protected bonds is tied to the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (“CPI-U”), published monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of
changes in the cost of living, made up of components such as housing, food, transportation and energy.
Any increase in principal for an
inflation protected security resulting from inflation adjustments is considered by the IRS to be taxable income in the year it occurs. A Fund’s distributions to shareholders include interest income and the income attributable to principal
adjustments, both of which will be taxable to shareholders. The tax treatment of the income attributable
to principal adjustments may result in the situation
where a Fund needs to make its required annual distributions to shareholders in amounts that exceed the cash received. As a result, a Fund may need to liquidate certain investments when it is not advantageous to do so. Also, if the principal value
of an inflation protected security is adjusted downward due to deflation, amounts previously distributed in the taxable year may be characterized in some circumstances as a return of capital.
A Fund may invest in lower-rated
debt securities, including securities in the lowest credit rating category, of any maturity, otherwise known as “junk bonds.”
Junk bonds generally offer a higher
current yield than that available for higher-grade issues. However, lower-rated securities involve higher risks, in that they are especially subject to adverse changes in general economic conditions and in the industries in which the issuers are
engaged, to changes in the financial condition of the issuers and to price fluctuations in response to changes in interest rates. During periods of economic downturn or rising interest rates, highly leveraged issuers may experience financial stress
that could adversely affect their ability to make payments of interest and principal and increase the possibility of default. In addition, the market for lower-rated debt securities has expanded rapidly in recent years, and its growth paralleled a
long economic expansion. At times in recent years, the prices of many lower-rated debt securities declined substantially, reflecting an expectation that many issuers of such securities might experience financial difficulties. As a result, the yields
on lower-rated debt securities rose dramatically, but such higher yields did not reflect the value of the income stream that holders of such securities expected, but rather, the risk that holders of such securities could lose a substantial portion
of their value as a result of the issuers’ financial restructuring or default. There can be no assurance that such declines will not recur.
The market for lower-rated debt
issues generally is thinner and less active than that for higher quality securities, which may limit a Fund’s ability to sell such securities at fair value in response to changes in the economy or financial markets. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may also decrease the values and liquidity of lower-rated securities, especially in a thinly traded market. Changes by recognized rating services in their rating of a fixed-income
security may affect the value of these investments. A Fund will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase. However, Rafferty will monitor the investment to determine whether continued
investment in the security will assist in meeting a Fund’s investment objective.
Mortgage-Backed Securities
A Fund may invest in
mortgage-backed securities. A mortgage-backed security is a type of pass-through security, which is a security representing pooled debt obligations repackaged as interests that pass income through an intermediary to investors. In the case of
mortgage-backed securities, the ownership interest is in a pool of mortgage loans.
Mortgage-backed securities are most
commonly issued or guaranteed by the Government National Mortgage Association (“Ginnie Mae
®
” or “GNMA”), Federal National
Mortgage Association (“Fannie Mae
®
” or “FNMA”) or Federal Home Loan Mortgage Corporation (“Freddie Mac
®
” or “FHLMC”), but may also be issued or guaranteed by other private issuers. GNMA is a government-owned corporation that is an
agency of the U.S. Department of Housing and Urban Development. It guarantees, with the full faith and credit of the United States, full and timely payment of all monthly principal and interest on its mortgage-backed securities. FNMA is a publicly
owned, government-sponsored corporation that mostly packages mortgages backed by the Federal Housing Administration, but also sells some non-governmentally backed mortgages. Pass-through securities issued by FNMA are guaranteed as to timely payment
of principal and interest only by FNMA. FHLMC is a publicly chartered agency that buys qualifying residential mortgages from lenders, re-packages them and provides certain guarantees. Pass-through securities issued by FHLMC are guaranteed as to
timely payment of principal and interest only by FHLMC.
The Federal
Housing Finance Agency (“FHFA”) is mandating that Fannie Mae
®
and Freddie Mac
®
cease issuing their own mortgage-backed securities and begin issuing "Uniform Mortgage-Backed Securities" or "UMBS" in 2019. Each UMBS will have a
55-day remittance cycle and can be used as collateral in either a Fannie Mae
®
or Freddie Mac
®
security or held for investment. Investors may be approached to convert existing mortgage-backed securities into UMBS, possibly with an inducement fee
being offered to holders of Freddie Mac
®
mortgage-backed securities. Mortgage-backed securities issued by private issuers, whether or not such
obligations are subject to guarantees by the private issuer, may entail greater risk than obligations directly guaranteed by the U.S. government. The average life of a mortgage-backed security is likely to be substantially less than the original
maturity of the mortgage pools underlying the securities. Prepayments of principal by mortgagors and mortgage foreclosures will usually result in the return of the greater part of principal invested far in advance of the maturity of the mortgages in
the pool.
Collateralized mortgage obligations
(“CMOs”) are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collateral collectively hereinafter referred to as “Mortgage Assets”). Multi-class pass-through securities are interests in a
trust composed of Mortgage Assets and all references in this section to CMOs include multi-class pass-through securities. Principal prepayments on the Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated
maturities or final distribution dates, resulting in a loss of all or part of the premium if any has been paid. Interest is paid
or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal and interest payments on the Mortgage Assets may be allocated among the various classes of CMOs in several ways. Typically, payments of principal, including any prepayments, on the underlying mortgages
are applied to the classes in the order of their respective stated maturities or final distribution dates, so that no payment of principal is made on CMOs of a class until all CMOs of other classes having earlier stated maturities or final
distribution dates have been paid in full.
Stripped
mortgage-backed securities (“SMBS”) are derivative multi-class mortgage securities. A Fund will only invest in SMBS issued by Ginnie
Mae
®
, which are obligations backed by the full faith and credit of the U.S. government. SMBS are usually structured with two or more classes that
receive different proportions of the interest and principal distributions from a pool of Mortgage Assets. A Fund will only invest in SMBS whose Mortgage Assets are U.S. government obligations. A common type of SMBS will be structured so that one
class receives some of the interest and most of the principal from the Mortgage Assets, while the other class receives most of the interest and the remainder of the principal. If the underlying Mortgage Assets experience greater than anticipated
prepayments of principal, each Fund may fail to fully recoup its initial investment in these securities. The market value of any class which consists primarily, or entirely, of principal payments generally is unusually volatile in response to
changes in interest rates.
Investment in mortgage-backed
securities poses several risks, including among others, prepayment, market and credit risk. Prepayment risk reflects the risk that borrowers may prepay their mortgages faster than expected, thereby affecting the investment’s average life and
perhaps its yield. Whether or not a mortgage loan is prepaid is almost entirely controlled by the borrower. Borrowers are most likely to exercise prepayment options at the time when it is least advantageous to investors, generally prepaying
mortgages as interest rates fall, and slowing payments as interest rates rise. Besides the effect of prevailing interest rates, the rate of prepayment and refinancing of mortgages may also be affected by home value appreciation, ease of the
refinancing process and local economic conditions. Market risk reflects the risk that the price of a security may fluctuate over time. The price of mortgage-backed securities may be particularly sensitive to prevailing interest rates, the length of
time the security is expected to be outstanding, and the liquidity of the issue. In a period of unstable interest rates, there may be decreased demand for certain types of mortgage-backed securities, and a Fund invested in such securities wishing to
sell them may find it difficult to find a buyer, which may in turn decrease the price at which they may be sold. Credit risk reflects the risk that a Fund may not receive all or part of its principal because the issuer or credit enhancer has
defaulted on its obligations. Obligations issued by U.S. government-sponsored entities are guaranteed as to the payment of principal and interest, but are not backed by the full faith and credit of the U.S. government. The performance of private
label mortgage-backed securities, issued by private institutions, is based on the financial health of those institutions. With respect to GNMA certificates, although GNMA guarantees timely payment even if homeowners delay or default, tracking the
“pass-through” payments may, at times, be difficult.
A Fund may invest in municipal
obligations. Municipal securities are fixed-income securities issued by states, counties, cities and other political subdivisions and authorities. Although most municipal securities are exempt from federal income tax, municipalities also may issue
taxable securities. Tax exempt securities are generally classified by their source of payment. In addition to the usual risks associated with investing for income, the value of municipal obligations can be affected by changes in the actual or
perceived credit quality of the issuers. The credit quality of a municipal obligation can be affected by, among other factors: a) the financial condition of the issuer or guarantor; b) the issuer’s future borrowing plans and sources of
revenue; c) the economic feasibility of the revenue bond project or general borrowing purpose; d) political or economic developments in the region or jurisdiction where the security is issued; and e) the liquidity of the security. Because municipal
obligations are generally traded OTC, the liquidity of a particular issue often depends on the willingness of dealers to make a market in the security. The liquidity of some municipal issues can be enhanced by demand features, which enable a Fund to
demand payment from the issuer or a financial intermediary on short notice.
Futures Contracts, Options, and
Other Derivative Strategies
Generally, derivatives are
financial instruments whose value depends on, or is derived from, the value of one or more underlying assets, reference rates, or indices or other market factors (“reference assets”) and may relate to stocks bonds, interest rates, credit
currencies, commodities or related indices. Derivative instruments can provide an efficient means to gain long or short exposure to the value of a reference asset without actually owning or selling the instrument. Examples of derivative instruments
include futures contracts, swap agreements, options, options on futures contracts and forward currently contracts.
Each Fund may enter into derivatives
instruments which may include futures contracts, forward contracts, options on currencies, commodities, indices, or futures contracts and swaps which provide long and short exposure to reference assets. Derivatives may be more sensitive to changes
in interest rates or to sudden fluctuations in market prices and thus a Fund’s losses may be greater if it invests in derivatives than if it invests in non-derivative instruments. Derivatives are also subject to counterparty risk, which is the
risk that the other party in the transaction will not fulfill its contractual obligations.
The use of
derivative instruments is subject to applicable regulations of the SEC, the several exchanges upon which they are traded and the CFTC. In addition, a Fund’s ability to use derivative instruments will be limited by tax considerations. See
“Dividends, Other Distributions and Taxes.”
Under current CFTC regulations, if a
Fund uses commodity interests (such as futures contracts, options on futures contracts and swaps) other than for bona fide hedging purposes (as defined by the CFTC) the aggregate initial margin and premiums required to establish these positions
(after taking into account unrealized profits and unrealized losses on any such positions and excluding the amount by which options that are “in-the-money” at the time of purchase) may not exceed 5% of a Fund’s NAV, or
alternatively, the aggregate net notional value of those positions, as determined at the time the most recent position was established, may not exceed 100% of the fund’s NAV (after taking into account unrealized profits and unrealized losses
on any such positions). Accordingly, each Fund has registered, or will register prior to commencement of operations, as a commodity pool, and the Adviser has registered as a CPO, with the National Futures Association.
Each Fund is subject to the risk that
a change in U.S. law and related regulations will impact the way a Fund operates, increase the particular costs of a Fund’s operation and/or change the competitive landscape. In this regard, any further amendment to the Commodity Exchange Act
or its related regulations that subject a Fund to additional regulation may have adverse impacts on a Fund’s operations and expenses.
In addition to the
instruments, strategies and risks described below and in the Prospectus, Rafferty may discover additional opportunities in connection with derivative instruments and other similar or related techniques. These new opportunities may become available
as Rafferty develops new techniques, as regulatory authorities broaden the range of permitted transactions and as new derivative instruments or other techniques are developed. Rafferty may utilize these opportunities to the extent that they are
consistent with a Fund’s investment objective and permitted by a Fund’s investment limitations and applicable regulatory authorities. A Fund’s Prospectus or this SAI will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or in the Prospectus.
Special Risks
. The use of derivative instruments involves special considerations and risks, certain of which are described below. Risks pertaining to particular derivative instruments are described in the sections that
follow.
(1) Options and
futures prices can diverge from the prices of their underlying instruments. Options and futures prices are affected by such factors as current and anticipated short-term interest rates, changes in volatility of the underlying instrument and the time
remaining until expiration of the contract, which may not affect security prices the same way. Imperfect or no correlation also may result from differing levels of demand in the options and futures markets and the securities markets, from structural
differences in how options and futures and securities are traded, and from imposition of daily price fluctuation limits or trading halts.
(2) As described below, a Fund might
be required to maintain assets as “cover,” maintain segregated accounts or make margin payments when it takes positions in Financial Instruments involving obligations to third parties (
e.g.
,
Financial Instruments other than purchased options). If a Fund were unable to close out its positions in such Financial Instruments, it might be required to continue to maintain such assets or accounts or make such payments until the position
expired or matured. These requirements might impair a Fund’s ability to sell a portfolio security or make an investment when it would otherwise be favorable to do so or require that a Fund sell a portfolio security at a disadvantageous time. A
Fund’s ability to close out a position in a Financial Instrument prior to expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of the other party to the
transaction (the “counterparty”) to enter into a transaction closing out the position. Therefore, there is no assurance that any position can be closed out at a time and price that is favorable to a Fund.
(3) Losses may arise due to
unanticipated market price movements, lack of a liquid secondary market for any particular instrument at a particular time or due to losses from premiums paid by a Fund on options transactions.
Cover
. Transactions using derivative instruments, other than purchased options, expose a Fund to an obligation to another party. A Fund will not enter into any such
transactions unless it owns either (1) an offsetting (“covered”) position in securities or other options or futures contracts or (2) cash and liquid assets with a value, marked-to-market daily, sufficient to cover its potential
obligations to the extent not covered as provided in (1) above. Each Fund will comply with SEC guidelines regarding cover for these instruments and will, if the guidelines so require, set aside cash or liquid assets in an account with its custodian,
the Bank of New York Mellon ("BNYM"), in the prescribed amount as determined daily.
Assets used as cover or held in an
account cannot be sold while the position in the corresponding derivative instrument is open, unless they are replaced with other appropriate assets. As a result, the commitment of a large portion of a Fund’s assets to cover or accounts could
impede portfolio management or a Fund’s ability to meet redemption requests or other current obligations.
Futures Contracts
. A Fund may use certain options (traded on an exchange or OTC, or otherwise), futures contracts (sometimes referred to as “futures”) and
options on futures contracts as a substitute for a comparable market position in the underlying security or index, to attempt to hedge or limit the exposure of a Fund’s position, to create a synthetic money market position, for certain
tax-related purposes or to effect closing transactions.
Generally, a
futures contract is a standard binding agreement to buy or sell a specified quantity of an underlying reference instrument, such as a specific security, currency or commodity, at a specified price at a specified later date. A “sale” of a
futures contract means the acquisition of a contractual obligation to deliver the underlying reference instrument called for by the contract at a specified price on a specified date. A “purchase” of a futures contract means the
acquisition of a contractual obligation to acquire the underlying reference instrument called for by the contract at a specified price on a specified date. The purchase or sale of a futures contract will allow a Fund to increase or decrease its
exposure to the underlying reference instrument without having to buy the actual instrument.
The underlying reference instruments
to which futures contracts may relate include non-U.S. currencies, interest rates, stock and bond indices and debt securities, including U.S. government debt obligations. In most cases the contractual obligation under a futures contract may be
offset, or “closed out,” before the settlement date so that the parties do not have to make or take delivery. The closing out of a contractual obligation is usually accomplished by buying or selling, as the case may be, an identical,
offsetting futures contract. This transaction, which is effected through a member of an exchange, cancels the obligation to make or take delivery of the underlying instrument or asset. If the original position entered into is a long position
(futures contract purchased), there will be a gain (loss) if the offsetting sell transaction is carried out at a higher (lower) price, inclusive of commissions. If the original position entered into is a short position (futures contract sold) there
will be a gain (loss) if the offsetting buy transaction is carried out at a lower (higher) price, inclusive of commissions.
Certain futures contracts are
cash-settled, meaning the futures contract obligates the seller to deliver (and purchaser to accept) an amount of cash equal to a specific dollar amount multiplied by the difference between the final settlement price of a specific futures contract
and the price at which the agreement is made. No physical delivery of the underlying asset is made.
Whether a Fund realizes a gain/loss
from futures activities depends generally upon the movements in the underlying reference asset (generally a commodity, currency, security or index). The extent of a Fund’s loss from an unhedged short position in a futures contract is
potentially unlimited, and investors may lose the amount that they invest plus any profits recognized on their investment.
Futures contracts may be bought and
sold on U.S. and non-U.S. exchanges. Futures contracts in the U.S. have been designed by exchanges that have been designated “contract markets” by the CFTC and must be executed through a futures commission merchant (“FCM”),
which is a brokerage firm that is a member of the relevant contract market. Each exchange guarantees performance of the contracts as between the clearing members of the exchange, thereby reducing the risk of counterparty default. Because all
transactions in the futures market are made, offset, or fulfilled by an FCM through a clearinghouse associated with the exchange on which the contracts are traded, a Fund will incur brokerage fees when it buys or sells futures contracts. A Fund
generally buys and sells futures contracts only on contract markets (including exchanges or boards of trade) where there appears to be an active market for the futures contracts, but there is no assurance that an active market will exist for any
particular contract or at any particular time. An active market makes it more likely that futures contracts will be liquid and bought and sold at competitive market prices. In addition, many of the futures contracts available may be relatively new
instruments without a significant trading history. As a result, there can be no assurance that an active market will develop or continue to exist.
When a Fund enters into a futures
contract, it must deliver to an account controlled by the FCM (that has been selected by the Fund), an amount referred to as “initial margin” that is typically calculated as an amount equal to the volatility in market value of a contract
over a fixed period. Initial margin requirements are determined by the respective exchanges on which the futures contracts are traded and the FCM. Thereafter, a “variation margin” amount may be required to be paid by a Fund or received
by a Fund in accordance with margin controls set for such accounts, depending upon changes in the marked-to-market value of the futures contract. The account is marked-to-market daily and the variation margin is monitored by a Fund’s
investment manager and custodian on a daily basis. When the futures contract is closed out, if a Fund has a loss equal to, or greater than, the margin amount, the margin amount is paid to the FCM along with any loss in excess of the margin amount.
If a Fund has a loss of less than the margin amount, the excess margin is returned to a Fund. If a Fund has a gain, the full margin amount and the amount of the gain is paid to the Fund. Some futures contracts provide for the delivery of securities
that are different than those that are specified in the contract. For a futures contract for delivery of debt securities, on the settlement date of the contract, adjustments to the contract can be made to recognize differences in value arising from
the delivery of debt securities with a different interest rate from that of the particular debt securities that were specified in the contract. In some cases, securities called for by a futures contract may not have been issued when the contract was
written.
Risks of futures
contracts.
A Fund’s use of futures contracts is subject to the risks associated with derivative instruments generally. A Fund may not be able to properly effect its strategy when a liquid market is unavailable
for the futures contract the Fund wishes to close, which may at times occur. If a Fund were unable to liquidate a futures position due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial losses.
A Fund would continue to be subject to market risk with respect to the position. In addition, a Fund would continue to be required to make daily variation margin payments and might be required to maintain cash or liquid assets in an
account.
A purchase or sale
of a futures contract may result in losses to a Fund in excess of the amount that the Fund delivered as initial margin. Because of the relatively low margin deposits required, futures trading involves a high degree of leverage; as a result, a
relatively small price movement in a futures contract may result in immediate and substantial loss, or gain, to a Fund. In addition, if a Fund has insufficient cash to meet daily variation margin requirements or close out a futures position, it may
have to sell securities from its portfolio at a time when it may be disadvantageous to do so. Adverse market movements could cause a Fund to experience substantial losses on an investment in a futures contract. There is a risk of loss by a Fund of
the initial and variation margin deposits in the event of bankruptcy of the FCM with which the Fund has an open position in a futures contract. The assets of a Fund may not be fully protected in the event of the bankruptcy of the FCM or central
counterparty because the Fund might be limited to recovering only a pro rata share of all available funds and margin segregated on behalf of an FCM’s customers. If the FCM does not provide accurate reporting, a Fund is also subject to the risk
that the FCM could use a Fund’s assets, which are held in an omnibus account with assets belonging to the FCM’s other customers, to satisfy its own financial obligations or the payment obligations of another customer to the central
counterparty.
The difference
(called the “spread”) between prices in the cash market for the purchase and sale of the underlying reference instrument and the prices in the futures market is subject to fluctuations and distortions due to differences in the nature of
those two markets. First, all participants in the futures market are subject to initial deposit and variation margin requirements. Rather than meeting additional variation margin requirements, investors may close futures contracts through offsetting
transactions that could distort the normal pricing spread between the cash and futures markets. Second, the liquidity of the futures markets depends on participants entering into offsetting transactions rather than making or taking delivery of the
underlying instrument. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, resulting in pricing distortion. Third, from the point of view of speculators, the margin deposit requirements that
apply in the futures market are less onerous than similar margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions. When such distortions occur, a
correct forecast of general trends in the price of an underlying reference instrument by the investment manager may still not necessarily result in a profitable transaction.
Futures contracts that are traded on
non-U.S. exchanges may not be as liquid as those purchased on CFTC-designated contract markets. In addition, non-U.S. futures contracts may be subject to varied regulatory oversight. The price of any non-U.S. futures contract and, therefore, the
potential profit and loss thereon, may be affected by any change in the non-U.S. exchange rate between the time a particular order is placed and the time it is liquidated, offset or exercised.
The CFTC and the various exchanges
have established limits referred to as “speculative position limits” on the maximum net long or net short position that any person, such as a Fund, may hold or control in a particular futures contract. Trading limits are also imposed on
the maximum number of contracts that any person may trade on a particular trading day. An exchange may order the liquidation of positions found to be in violation of these limits and it may impose other sanctions or restrictions. The regulation of
futures, as well as other derivatives, is a rapidly changing area of law.
Futures exchanges may also limit the
amount of fluctuation permitted in certain futures contract prices during a single trading day. This daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day’s settlement
price. Once the daily limit has been reached in a futures contract subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and does not
limit potential losses because the limit may prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of positions and subjecting some holders of futures contracts to substantial losses.
Risks Associated with Commodity Futures
Contracts
. There are several additional risks associated with transactions in commodity futures contracts.
Unlike the financial futures markets,
in the commodity futures markets there are costs of physical storage associated with purchasing the underlying commodity. The price of the commodity futures contract will reflect the storage costs of purchasing the physical commodity, including the
time value of money invested in the physical commodity. To the extent that the storage costs for an underlying commodity change while a Fund is invested in futures contracts on that commodity, the value of the futures contract may change
proportionately.
In the
commodity futures markets, producers of the underlying commodity may decide to hedge the price risk of selling the commodity by selling futures contracts today to lock in the price of the commodity at delivery tomorrow. In order to induce
speculators to purchase the other side of the same futures contract, the commodity producer generally must sell the futures contract at a lower price than the expected future spot price. Conversely, if most hedgers in the futures market are
purchasing futures contracts to hedge against a rise in prices, then speculators will only sell the other side of the futures contract at a higher futures price than the expected future spot price of the commodity. The changing nature of the hedgers
and speculators in the commodity markets will influence whether futures prices are above or below the expected future spot price, which can have significant implications for a Fund. If the nature of hedgers and speculators in futures markets
has shifted when it is time for a Fund to reinvest the
proceeds of a maturing contract in a new futures contract, the Fund might reinvest at higher or lower futures prices, or choose to pursue other investments.
The commodities which underlie
commodity futures contracts may be subject to additional economic and non-economic variables, such as drought, floods, weather, livestock disease, embargoes, tariffs, and international economic, political and regulatory developments. These factors
may have a larger impact on commodity prices and commodity-linked instruments, including futures contracts, than on traditional securities. Certain commodities are also subject to limited pricing flexibility because of supply and demand factors.
Others are subject to broad price fluctuations as a result of the volatility of the prices for certain raw materials and the instability of supplies of other materials. These additional variables may create additional investment risks which subject
a Fund’s investments to greater volatility than investments in traditional securities.
Forward Contracts
. Each Fund may enter into equity, equity index or interest rate forward contracts for purposes of attempting to gain exposure to an index or group of
securities without actually purchasing these securities, or to hedge a position. Forward contracts are two-party contracts pursuant to which one party agrees to pay the counterparty a fixed price for an agreed upon amount of commodities, securities,
or the cash value of the commodities, securities or the securities index, at an agreed upon date. Because they are two-party contracts and may have terms greater than seven days, forward contracts may be considered to be illiquid for a Fund’s
illiquid investment limitations. A Fund will not enter into any forward contract unless Rafferty believes that the other party to the transaction is creditworthy. A Fund bears the risk of loss of the amount expected to be received under a forward
contract in the event of the default or bankruptcy of a counterparty. If such a default occurs, a Fund will have contractual remedies pursuant to the forward contract, but such remedies may be subject to bankruptcy and insolvency laws which could
affect the Fund’s rights as a creditor.
Options
. The value of an option position will reflect, among other things, the current market value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying investment and general market conditions. Options that expire unexercised have no value. Options currently are traded on the Chicago Board Options Exchange
®
and other exchanges, as well as the OTC markets.
By buying a call option on a
security, a Fund has the right, in return for the premium paid, to buy the security underlying the option at the exercise price. By writing (selling) a call option and receiving a premium, a Fund becomes obligated during the term of the option to
deliver securities underlying the option at the exercise price if the option is exercised. By buying a put option, a Fund has the right, in return for the premium, to sell the security underlying the option at the exercise price. By writing a put
option, a Fund becomes obligated during the term of the option to purchase the securities underlying the option at the exercise price.
Because options premiums paid or
received by a Fund are small in relation to the market value of the investments underlying the options, buying and selling put and call options can be more speculative than investing directly in securities.
A Fund may effectively terminate its
right or obligation under an option by entering into a closing transaction. For example, a Fund may terminate its obligation under a call or put option that it had written by purchasing an identical call or put option; this is known as a closing
purchase transaction. Conversely, a Fund may terminate a position in a put or call option it had purchased by writing an identical put or call option; this is known as a closing sale transaction. Closing transactions permit a Fund to realize profits
or limit losses on an option position prior to its exercise or expiration.
Risks of Options on Currencies and
Securities
. Exchange-traded options in the United States are issued by a clearing organization affiliated with the exchange on which the option is listed that, in effect, guarantees completion of every
exchange-traded option transaction. In contrast, OTC options are contracts between a Fund and its counterparty (usually a securities dealer or a bank) with no clearing organization guarantee. Thus, when a Fund purchases an OTC option, it relies on
the counterparty from which it purchased the option to make or take delivery of the underlying investment upon exercise of the option. Failure by the counterparty to do so would result in the loss of any premium paid by a Fund as well as the loss of
any expected benefit of the transaction.
A Fund’s ability to establish
and close out positions in exchange-traded options depends on the existence of a liquid market. However, there can be no assurance that such a market will exist at any particular time. Closing transactions can be made for OTC options only by
negotiating directly with the counterparty, or by a transaction in the secondary market if any such market exists. There can be no assurance that a Fund will in fact be able to close out an OTC option position at a favorable price prior to
expiration. In the event of insolvency of the counterparty, a Fund might be unable to close out an OTC option position at any time prior to its expiration.
If a Fund were unable to effect a
closing transaction for an option it had purchased, it would have to exercise the option to realize any profit. The inability to enter into a closing purchase transaction for a covered call option written by a Fund could cause material losses
because a Fund would be unable to sell the investment used as cover for the written option until the option expires or is exercised.
Options on Indices
. An index fluctuates with changes in the market values of the securities included in the index. Options on indices give the holder the right to receive an
amount of cash upon exercise of the option. Receipt of this cash amount will depend upon the closing level of the index upon which the option is based being greater than (in the case of a call) or less than (in the case of put) the exercise price of
the option. Some stock index options are based on a broad market
index such as the S&P 500
®
Composite Stock Index, the NYSE Composite Index or the NYSE Arca Major Market Index or on a narrower index such as the Philadelphia Stock Exchange
Over-the-Counter Index.
Each of
the exchanges has established limitations governing the maximum number of call or put options on the same index that may be bought or written by a single investor, whether acting alone or in concert with others (regardless of whether such options
are written on the same or different exchanges or are held or written on one or more accounts or through one or more brokers). Under these limitations, option positions of all investment companies advised by Rafferty are combined for purposes of
these limits. Pursuant to these limitations, an exchange may order the liquidation of positions and may impose other sanctions or restrictions. These position limits may restrict the number of listed options that a Fund may buy or sell.
Puts and calls on indices are similar
to puts and calls on securities or futures contracts except that all settlements are in cash and gain or loss depends on changes in the index in question rather than on price movements in individual securities or futures contracts. When a Fund
writes a call on an index, it receives a premium and agrees that, prior to the expiration date, the purchaser of the call, upon exercise of the call, will receive from a Fund an amount of cash if the closing level of the index upon which the call is
based is greater than the exercise price of the call. The amount of cash is equal to the difference between the closing price of the index and the exercise price of the call multiplied by a specific factor (“multiplier”), which
determines the total value for each point of such difference. When a Fund buys a call on an index, it pays a premium and has the same rights to such call as are indicated above. When a Fund buys a put on an index, it pays a premium and has the
right, prior to the expiration date, to require the seller of the put, upon a Fund’s exercise of the put, to deliver to a Fund an amount of cash if the closing level of the index upon which the put is based is less than the exercise price of
the put, which amount of cash is determined by the multiplier, as described above for calls. When a Fund writes a put on an index, it receives a premium and the purchaser of the put has the right, prior to the expiration date, to require a Fund to
deliver to it an amount of cash equal to the difference between the closing level of the index and the exercise price times the multiplier if the closing level is less than the exercise price.
Risks of Options on Indices
. If a Fund has purchased an index option and exercises it before the closing index value for that day is available, it runs the risk that the level of the index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, a Fund will be required to pay the difference between the closing index value and the exercise price of the option (times the applicable multiplier) to the assigned writer.
OTC Options
. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size and strike price, the terms of
OTC options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract. While this type of arrangement allows a Fund great flexibility to tailor the option to its needs, OTC options
generally involve greater risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded.
Options on Futures Contracts
. When a Fund writes an option on a futures contract, it becomes obligated, in return for the premium paid, to assume a position in the futures
contract at a specified exercise price at any time during the term of the option. If a Fund writes a call, it assumes a short futures position. If it writes a put, it assumes a long futures position. When a Fund purchases an option on a futures
contract, it acquires the right in return for the premium it pays to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put).
Whether a Fund realizes a gain or
loss from futures activities depends upon movements in the underlying security or index. The extent of a Fund’s loss from an unhedged short position from writing unhedged call options on futures contracts is potentially unlimited. A Fund only
purchases and sells options on futures contracts that are traded on a U.S. exchange or board of trade.
Purchasers and sellers of options on
futures can enter into offsetting closing transactions, similar to closing transactions in options, by selling or purchasing, respectively, an instrument identical to the instrument purchased or sold. Positions in options on futures contracts may be
closed only on an exchange or board of trade that provides a secondary market. However, there can be no assurance that a liquid secondary market will exist for a particular contract at a particular time. In such event, it may not be possible to
close a futures contract or options position.
Under certain circumstances, futures
exchanges may establish daily limits on the amount that the price of an option on a futures contract can vary from the previous day’s settlement price; once that limit is reached, no trades may be made that day at a price beyond the limit.
Daily price limits do not limit potential losses because prices could move to the daily limit for several consecutive days with little or no trading, thereby preventing liquidation of unfavorable positions.
If a Fund were unable to liquidate an
option on a futures position due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial losses. A Fund would continue to be subject to market risk with respect to the position. In addition, except
in the case of purchased options, a Fund would continue to be required to make daily variation margin payments and might be required to maintain cash or liquid assets in an account.
Risks of Options on Futures Contracts
. The ordinary spreads between prices in the cash and futures markets (including the options on futures markets), due to differences in the natures of those markets, are subject to the following factors, which may create
distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting transactions, which could distort the normal relationships between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into
offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing distortion. Third, from the point of view of speculators, the
deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions.
Combined Positions
.
A Fund may purchase
and write options in combination with each other. For
example, a Fund may purchase a put option and write a call option on the same underlying instrument, in order to construct a combined position whose risk and return characteristics are similar to selling a futures contract. Another possible combined
position would involve writing a call option at one strike price and buying a call option at a lower price, in order to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out.
A Fund may enter into
caps, floors and collars relating to securities, interest rates or currencies. In a cap or floor, the buyer pays a premium (which is generally, but not always, a single up-front amount) for the right to receive payments from the other party if, on
specified payment dates, the applicable rate, index or asset is greater than (in the case of a cap) or less than (in the case of a floor) an agreed level, for the period involved and the applicable notional amount. A collar is a combination
instrument in which the same party buys a cap and sells a floor. Depending upon the terms of the cap and floor comprising the collar, the premiums will partially, or entirely, offset each other. The notional amount of a cap, collar or floor is used
to calculate payments, but is not itself exchanged. A Fund may be both a buyer and seller of these instruments. In addition, a Fund may engage in combinations of put and call options on securities (also commonly known as collars), which may involve
physical delivery of securities. Like swaps, caps, floors and collars are very flexible products. The terms of the transactions entered by the Funds may vary from the typical examples described here.
A Fund may enter into swap and
other derivatives to obtain long and/or short exposure to an underlying asset without actually purchasing such asset. Swap agreements are generally two-party contracts entered into primarily by institutional investors for periods ranging from a day
to more than one year. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be
exchanged or “swapped” between the parties are calculated with respect to a “notional amount,”
i.e.
, the return on, or increase/decrease, in value of a particular dollar amount invested
in a “basket” of securities representing a particular index or an ETF representing a particular index or group of securities.
Each Fund may enter into swaps to
invest in a market without owning or taking physical custody of securities. For example, in one common type of total return swap, a Fund’s counterparty will agree to pay the Fund the rate at which the specified asset or indicator (
e.g.
, an ETF, or securities comprising a benchmark index, plus the dividends or interest that would have been received on those assets) increased in value multiplied by the relevant notional amount of the swap. A
Fund will agree to pay to the counterparty an interest fee (based on the notional amount) and the rate at which, the specified asset or indicator would decreased in value multiplied by the notional amount of the swap, plus, in certain instances,
commissions or trading spreads on the notional amount.
As a result, the swap has a similar
economic effect as if a Fund were to invest in the assets underlying the swap in an amount equal to the notional amount of the swap. The return to the Fund on such swap should be the gain or loss on the notional amount plus dividends or interest on
the assets less the interest paid by a Fund on the notional amount. However, unlike cash investments in the underlying assets, a Fund will not be an owner of the underlying assets and will not have voting or similar rights in respect of such
assets.
As a trading technique,
Rafferty may substitute physical securities with a swap having investment characteristics substantially similar to the underlying securities. A Fund may also enter into swaps that provide the opposite return of their benchmark or a security. Their
operations are similar to that of the swaps discussed above except that the counterparty pays interest to each Fund on the notional amount outstanding and that dividends or interest on the underlying instruments reduce the value of the swap, plus,
in certain instances, each Fund will agree to pay to the counterparty commissions or trading spreads on the notional amount. These amounts are often netted with any unrealized gain or loss to determine the value of the swap.
The use of swaps is a highly
specialized activity which involves investment techniques and risks in addition to, and in some cases different from, those associated with ordinary portfolio securities transactions. The primary risks associated with the use of swaps are mispricing
or improper valuation, imperfect correlation between movements in the notional amount and the price of the underlying investments, and the inability of the counterparties or clearing organization to perform. If a
counterparty’s creditworthiness for an
over-the-counter swap declines, the value of the swap would likely decline. Moreover, there is no guarantee that a Fund could eliminate its exposure under an outstanding swap by entering into an offsetting swap with the same or another party. In
addition, a Fund may use a combination of swaps on an underlying index and swaps on an ETF that is designed to track the performance of that index. The performance of an ETF may deviate from the performance of its underlying index due to embedded
costs and other factors. Thus, to the extent a Fund invests in swaps that use an ETF as the reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of correlation with its underlying index as it
would if a Fund used only swaps on the underlying index. Rafferty, under the supervision of the Board of Trustees, is responsible for determining and monitoring the liquidity of a Fund’s transactions in swaps.
Common
Types of Swaps
A Fund may
enter into any of several types of swaps, including:
Total Return Swaps.
Total return swaps may be used either as economically similar substitutes for owning the reference asset specified in the swap, such as the securities that comprise a given market index,
particular securities or commodities, or other assets or indicators. They
also may be used as a means of obtaining exposure in markets
where
the reference asset is unavailable or it may otherwise be impossible or impracticable for a Fund to own that asset.
“Total return”
refers to the
payment
(or receipt)
of the total return on the underlying reference asset, which is then exchanged for the receipt
(or
payment)
of an interest rate.
Total return swaps provide a Fund with the additional flexibility of gaining exposure to a market or sector index by
using the most cost-effective vehicle available.
Interest Rate Swaps.
Interest rate swaps, in their most basic form, involve the exchange by a Fund with another party of their respective commitments to pay or receive interest. For example, a Fund might exchange its right to receive certain
floating rate payments in exchange for another party’s right to receive fixed rate payments. Interest rate swaps can take a variety of other forms, such as agreements to pay the net differences between two different interest indexes or rates.
Despite their differences in form, the function of interest rate swaps is generally the same: to increase or decrease a Fund’s exposure to long- or short-term interest rates. For example, a Fund may enter into an interest rate swap to preserve
a return or spread on a particular investment or a portion of its portfolio or to protect against any increase in the price of securities a Fund anticipates purchasing at a later date.
Other Financial Instruments
. Other forms of swaps that a Fund may enter into include: interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified
rate, or “cap”; interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified level, or “floor,” and interest rate collars,
under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels.
Mechanics
of Swaps
Payments
. Most swaps entered into by a Fund calculate and settle the obligations of the parties to the agreement on a “net basis” with a single payment. Consequently, a Fund’s current obligations (or rights)
under a swap will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the “net amount”). Other swaps may require initial
premium (discount) payments as well as periodic payments (receipts) related to the interest leg of the swap or to the default of the reference entity. A Fund’s current obligations under most swaps (
e.g.
,
total return swaps, equity/index swaps, interest rate swaps) will be accrued daily (offset against any amounts owed to a Fund by the counterparty to the swap) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by
segregating or earmarking cash or other assets determined to be liquid. However, typically no payments will be made until the settlement date. The net amount of the excess, if any, of a Fund’s obligations over its entitlements with respect to
a swap agreement entered into on a net basis will be accrued daily and an amount of cash or liquid asset having an aggregate NAV at least equal to the accrued excess will be maintained in an account with the Custodian that satisfies the 1940 Act. A
Fund also will establish and maintain such accounts with respect to its total obligations under any swaps that are not entered into on a net basis. Obligations under swap agreements so covered will not be construed to be “senior
securities” for purposes of a Fund’s investment restriction concerning senior securities.
Counterparty Credit Risk
. A Fund will not enter into any uncleared swap (
i.e.
, not cleared by a central counterparty) unless Rafferty believes that the other party to the transaction is creditworthy. The
counterparty to an uncleared swap will typically be a major global financial institution. A Fund bears the risk of loss of the amount expected to be received under a swap in the event of the default or bankruptcy of a swap counterparty. If such a
default occurs, a Fund will have contractual remedies pursuant to the swaps, but such remedies may be subject to bankruptcy and insolvency laws that could affect the Fund’s rights as a creditor. The counterparty risk for cleared swaps is
generally lower than for uncleared over-the-counter swaps because, in a cleared swap, a clearing organization becomes substituted for each counterparty to a cleared swap. The clearing organization takes on the obligations of each side of the swap
and a Fund would only to the clearing organization for performance of financial obligations. However, there can be no assurance that the clearing organization, or its members, will satisfy its obligations to a Fund. Upon entering into a cleared
swap, a Fund may be required to deposit with its futures
commission merchant an amount of cash or cash
equivalents equal to a small percentage of the notional amount (this amount is subject to change by the clearing organization that clears the trade). This amount, known as “initial margin,” is in the nature of a performance bond or good
faith deposit on the cleared swap and is returned to a Fund upon termination of the swap, assuming all contractual obligations have been satisfied. Subsequent payments, known as “variation margin” to and from the broker will be made
daily as the price of the swap fluctuates, making the long and short position in the swap contract more or less valuable, a process known as “marking-to-market.” The premium (discount) payments are built into the daily price of the swap
and thus are amortized through the variation margin. The variation margin payment also includes the daily portion of the periodic payment stream.
Termination and Default Risk
. Swap agreements do not involve the delivery of securities or other underlying assets. Accordingly, if a swap is entered into on a net basis, if the other party to a swap agreement defaults, a Fund’s risk of loss
consists of the net amount of payments that the Fund is contractually entitled to receive, if any.
Regulatory
Margin
In recent years,
regulators across the globe, including the CFTC and the U.S. banking regulators, have adopted margin requirements applicable to uncleared swaps. While a Fund is not directly subject to these requirements, where a Fund’s counterparty is subject
to the requirements, uncleared swaps between a Fund and that counterparty are required to be marked-to-market on a daily basis, and collateral is required to be exchanged to account for any changes in the value of such swaps. The rules impose a
number of requirements as to these exchanges of margin, including as to the timing of transfers, the type of collateral (and valuations for such collateral) and other matters that may be different than what a Fund would agree with its counterparty
in the absence of such regulation. In all events, where a Fund is required to post collateral to its swap counterparty, such collateral will be posted to an independent bank custodian, where access to the collateral by the swap counterparty will
generally not be permitted unless a Fund is in default on its obligations to the swap counterparty.
In addition to the variation margin
requirements, regulators have adopted “initial” margin requirements applicable to uncleared swaps. Where applicable, these rules require parties to an uncleared swap to post, to a custodian that is independent from the parties to the
swap, collateral (in addition to any “variation margin” collateral noted above) in an amount that is either (i) specified in a schedule in the rules or (ii) calculated by the regulated party in accordance with a model that has been
approved by that party’s regulator(s). At this time, the initial margin rules do not apply to a Fund’s swap trading relationships. However, the rules are being implemented on a phased basis, and it is possible that in the future, the
rules could apply to the Funds. In the event that the rules apply, they would impose significant costs on a Fund’s ability to engage in uncleared swaps and, as such, could adversely affect Rafferty’s ability to manage a Fund, may impair
a Fund’s ability to achieve its investment objective and/or may result in reduced returns to a Fund’s investors.
Comprehensive swaps regulation.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and related regulatory developments have imposed comprehensive new regulatory requirements on swaps and swap market
participants. The regulatory framework includes: (1) registration and regulation of swap dealers and major swap participants; (2) requiring central clearing and execution of standardized swaps; (3) imposing margin requirements on swap transactions;
(4) regulating and monitoring swap transactions through position limits and large trader reporting requirements; and (5) imposing record keeping and centralized and public reporting requirements, on an anonymous basis, for most swaps. The CFTC is
responsible for the regulation of most swaps. The SEC has jurisdiction over a small segment of the market referred to as “security-based swaps,” which includes swaps on single securities or credits, or narrow-based indices of securities
or credits.
Uncleared
swaps.
In an
uncleared swap,
the swap counterparty is typically a brokerage firm, bank or other financial institution. A Fund
customarily enters into uncleared swaps based on the standard terms and conditions of an International Swaps and Derivatives Association (“ISDA”) Master Agreement.
ISDA is a voluntary industry
association of participants in the OTC derivatives markets that has developed standardized contracts used by such participants that have agreed to be bound by such standardized contracts. In the event that one party to a swap transaction defaults
and the transaction is terminated prior to its scheduled termination date, one of the parties may be required to make an early termination payment to the other. An early termination payment may be payable by either the defaulting or non-defaulting
party, depending upon which of them is
“in-the-money” with respect to the swap at the time of its termination. Early termination payments may be calculated in various ways, but are intended to
approximate the amount the “in-the-money” party would have to pay to replace the swap as of the date of its termination. During the term of an uncleared swap, a Fund will be required to pledge to the swap counterparty, from time to time,
an amount of cash and/or other assets equal to the total net amount (if any) that would be payable by a Fund to the counterparty if all outstanding swaps between the parties were terminated on the date in question, including any early termination
payments (variation margin). Periodically, changes in the amount pledged are made to recognize changes in value of the contract resulting from, among other things, interest on the notional value of the contract, market value changes in the
underlying investment, and/or dividends paid by the issuer of the underlying instrument. Likewise,
the counterparty will be required to pledge cash or other assets to cover its obligations to a Fund.
However,
the amount pledged may not always be equal to or more than the amount due to the other party. Therefore,
if a counterparty defaults in its obligations to a
Fund, the amount pledged by the counterparty and available to a Fund may not be sufficient to cover all the amounts due to a Fund and the Fund may sustain a loss. Currently, a Fund does not
typically provide initial margin in connection with
uncleared swaps. However, rules requiring initial margin to be posted by certain market participants for uncleared swaps have been adopted and are being phased in over time. When these rules take effect with respect to the Funds, if a Fund is deemed
to have material swaps exposure under applicable swap regulations, it will be required to post initial margin in addition to variation margin.
Cleared swaps.
Certain standardized swaps are subject to mandatory central clearing and exchange-trading. The Dodd-Frank Act and implementing rules will ultimately require the clearing and exchange-trading of many swaps. Mandatory
exchange-trading and clearing will occur on a phased-in basis based on the type of market participant, CFTC approval of contracts for central clearing and public trading facilities making such cleared swaps available to trade. To date, the CFTC has
designated only certain of the most common types of credit default index swaps and interest rate swaps as subject to mandatory clearing and certain public trading facilities have made certain of those cleared swaps available to trade, but it is
expected that additional categories of swaps will in the future be designated as subject to mandatory clearing and trade execution requirements. Central clearing is intended to reduce counterparty credit risk and increase liquidity, but central
clearing does not eliminate these risks and may involve additional costs and risks not involved with uncleared swaps. For more information, see “Risks of cleared swaps” below.
In a cleared swap, a Fund’s
ultimate counterparty is a central clearinghouse rather than a brokerage firm, bank or other financial institution. Cleared swaps are submitted for clearing through each party’s FCM, which must be a member of the clearinghouse that serves as
the central counterparty. Transactions executed on a swap execution facility may increase market transparency and liquidity but may require a Fund to incur increased expenses to access the same types of swaps that it has used in the past. When a
Fund enters into a cleared swap, it must deliver to the central counterparty (via the FCM) an amount referred to as “initial margin.” Initial margin requirements are determined by the central counterparty, and are typically calculated as
an amount equal to the volatility in market value of the cleared swap over a fixed period, but an FCM may require additional initial margin above the amount required by the central counterparty. During the term of the swap agreement, a
“variation margin” amount may also be required to be paid by a Fund or may be received by a Fund in accordance with margin controls set for such accounts. If the value of the Fund’s cleared swap declines, the Fund will be required
to make additional “variation margin” payments to the FCM to settle the change in value. Conversely, if the market value of a Fund’s position increases, the FCM will post additional “variation margin” to the
Fund’s account. At the conclusion of the term of the swap agreement, if a Fund has a loss equal to or greater than the margin amount, the margin amount is paid to the FCM along with any loss in excess of the margin amount. If a Fund has a loss
of less than the margin amount, the excess margin is returned to a Fund. If a Fund has a gain, the full margin amount and the amount of the gain is paid to a Fund.
Risks of swaps generally.
The use of swap transactions is a highly specialized activity, which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. Whether a Fund will be
successful in using swap agreements to achieve its investment goal depends on the ability of the Adviser to correctly predict which types of investments are likely to produce greater returns. If the Adviser, in using swap agreements, is incorrect in
its forecasts of market values, interest rates, inflation, currency exchange rates or other applicable factors, the investment performance of a Fund will be less than its performance would have been if it had not used the swap agreements. The risk
of loss to a Fund for swap transactions that are entered into on a net basis depends on which party is obligated to pay the net amount to the other party. If the counterparty is obligated to pay the net amount to a Fund, the risk of loss to the Fund
is loss of the entire amount that the Fund is entitled to receive. If a Fund is obligated to pay the net amount, the Fund’s risk of loss is generally limited to that net amount. If the swap agreement involves the exchange of the entire
principal value of a security, the entire principal value of that security is subject to the risk that the other party to the swap will default on its contractual delivery obligations. In addition, a Fund’s risk of loss also includes any
margin at risk in the event of default by the counterparty (in an uncleared swap) or the central counterparty or FCM (in a cleared swap), plus any transaction costs.
Because bilateral swap agreements are
structured as two-party contracts and may have terms of greater than seven days, these swaps may be considered to be illiquid and, therefore, subject to a Fund’s limitation on investments in illiquid securities. If a swap transaction is
particularly large or if the relevant market is illiquid, a Fund may not be able to establish or liquidate a position at an advantageous time or price, which may result in significant losses. Participants in the swap markets are not required to make
continuous markets in the swap contracts they trade. Participants could refuse to quote prices for swap contracts or quote prices with an unusually wide spread between the price at which they are prepared to buy and the price at which they are
prepared to sell. Some swap agreements entail complex terms and may require a greater degree of subjectivity in their valuation. However, the swap markets have grown substantially in recent years, with a large number of financial institutions acting
both as principals and agents, utilizing standardized swap documentation. As a result, the swap markets have become increasingly liquid. In addition, central clearing and the trading of cleared swaps on public facilities are intended to increase
liquidity.
Rafferty, under the
supervision of the Board of Trustees, is responsible for determining and monitoring the liquidity of a Fund’s swap transactions. Rules adopted under the Dodd-Frank Act require centralized reporting of detailed information about many swaps,
whether cleared or uncleared. This information is available to regulators and also, to a more limited extent and on an anonymous basis, to the public. Reporting of swap data is intended to result in greater market transparency.
This may be beneficial to funds that use swaps in
their trading strategies. However, public reporting imposes additional recordkeeping burdens on these funds, and the safeguards established to protect anonymity are not yet tested and may not provide protection of a Fund’s identity as
intended. Certain IRS positions may limit a Fund’s ability to use swap agreements in a desired tax strategy. It is possible that developments in the swap markets and/or the laws relating to swap agreements, including potential government
regulation, could adversely affect the Fund’s ability to benefit from using swap agreements, or could have adverse tax consequences. For more information about potentially changing regulation, see “Developing government regulation of
derivatives” below.
Risks
of uncleared swaps.
Uncleared swaps are typically executed bilaterally with a swap dealer rather than traded on exchanges. As a result, swap participants may not be as protected as participants on organized
exchanges. Performance of a swap agreement is the responsibility only of the swap counterparty and not of any exchange or clearinghouse. As a result, a Fund is subject to the risk that a counterparty will be unable or will refuse to perform under
such agreement, including because of the counterparty’s bankruptcy or insolvency. A Fund risks the loss of the accrued but unpaid amounts under a swap agreement, which could be substantial, in the event of a default, insolvency or bankruptcy
by a swap counterparty. In such an event, a Fund will have contractual remedies pursuant to the swap agreements, but bankruptcy and insolvency laws could affect the Fund’s rights as a creditor. If the counterparty’s creditworthiness
declines, the value of a swap agreement would likely decline, potentially resulting in losses. The Adviser will only approve a swap agreement counterparty for a Fund if the Adviser deems the counterparty to be creditworthy. However, in unusual or
extreme market conditions, a counterparty’s creditworthiness and ability to perform may deteriorate rapidly, and the availability of suitable replacement counterparties may become limited.
Risks of cleared swaps.
As noted above, under recent financial reforms, certain types of swaps are, and others eventually are expected to be, required to be cleared through a central counterparty, which may affect counterparty risk and other
risks faced by a Fund.
Central clearing is designed to
reduce counterparty credit risk and increase liquidity compared to uncleared swaps because central clearing interposes the central clearinghouse as the counterparty to each participant’s swap, but it does not eliminate those risks completely
and may involve additional costs and risks not involved with uncleared swaps. There is also a risk of loss by a Fund of the initial and variation margin deposits in the event of bankruptcy of the FCM with which a Fund has an open position, or the
central counterparty in a swap contract. The assets of a Fund may not be fully protected in the event of the bankruptcy of the FCM or central counterparty because a Fund might be limited to recovering only a pro rata share of all available funds and
margin segregated on behalf of an FCM’s customers. If the FCM does not provide accurate reporting, a Fund is also subject to the risk that the FCM could use the Fund’s assets, which are held in an omnibus account with assets belonging to
the FCM’s other customers, to satisfy its own financial obligations or the payment obligations of another customer to the central counterparty. Credit risk of cleared swap participants is concentrated in a few clearinghouses, and the
consequences of insolvency of a clearinghouse are not clear.
With cleared swaps, a Fund may not be
able to obtain terms as favorable as it would be able to negotiate for a bilateral, uncleared swap. In addition, an FCM may unilaterally amend the terms of its agreement with the Fund, which may include the imposition of position limits or
additional margin requirements with respect to a Fund’s investment in certain types of swaps. Central counterparties and FCMs can require termination of existing cleared swap transactions upon the occurrence of certain events, and can also
require increases in margin above the margin that is required at the initiation of the swap agreement. Currently, depending on a number of factors, the margin required under the rules of the clearinghouse and FCM may be in excess of the collateral
required to be posted by a Fund to support its obligations under a similar uncleared swap. However, regulators have proposed and are expected to adopt rules imposing certain margin requirements on uncleared swaps in the near future, which are likely
to impose higher margin requirements on uncleared swaps.
Finally, a Fund is subject to the
risk that, after entering into a cleared swap with an executing broker, no FCM or central counterparty is willing or able to clear the transaction. In such an event, a Fund may be required to break the trade and make an early termination payment to
the executing broker.
Developing government regulation of
derivatives.
The regulation of cleared and uncleared swaps, as well as other derivatives, is a rapidly changing area of law and is subject to modification by government and judicial action. In addition, the
SEC,
CFTC and the exchanges are authorized to take extraordinary actions in the event of a market emergency, including, for example, the implementation or reduction of speculative position limits, the
implementation of higher margin requirements, the establishment of daily price limits and the suspension of trading. It is not possible to predict fully the effects of current or future regulation. However, it is possible that developments in
government regulation of various types of derivative instruments, such as speculative position limits on certain types of derivatives, or limits or restrictions on the counterparties with which a Fund engages in derivative transactions, may limit or
prevent the Fund from using or limit the Fund’s use of these instruments effectively as a part of its investment strategy, and could adversely affect the Fund’s ability to achieve its investment goal(s). The Adviser will continue to
monitor developments in the area, particularly to the extent regulatory changes affect a Fund’s ability to enter into desired swap agreements. New requirements, even if not directly applicable to a Fund, may increase the cost of a Fund’s
investments and cost of doing business.
Other Investment Companies
Each Fund may invest in the securities of other
investment companies, including open- and closed-end funds and ETFs. Investments in the securities of other investment companies may involve duplication of advisory fees and certain other expenses. By investing in another investment company, a Fund
becomes a shareholder of that investment company. As a result, Fund shareholders indirectly will bear a Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses Fund shareholders
bear in connection with a Fund’s own operations.
Each Fund intends
to limit its investments in securities issued by other investment companies in accordance with the 1940 Act. Section 12(d)(1) of the 1940 Act precludes a Fund from acquiring (i) more than 3% of the total outstanding shares of another investment
company; (ii) shares of another investment company having an aggregate value in excess of 5% of the value of the total assets of the Fund; or (iii) shares of another registered investment company and all other investment companies having an
aggregate value in excess of 10% of the value of the total assets of the Fund. In addition, the Fund is subject to Section 12(d)(1)(C), which provides that the Fund may not acquire shares of a closed-end fund if, immediately after such acquisition,
the Fund and other investment companies having the same adviser as the Fund would hold more than 10% of the closed-end fund’s total outstanding voting stock.
Section 12(d)(1)(F) of the 1940 Act
provides that the provisions of paragraph 12(d)(1)(A) and (B) shall not apply to securities purchased or otherwise acquired by a Fund if (i) immediately after such purchase or acquisition not more than 3% of the total outstanding shares of such
investment company is owned by the Fund and all affiliated persons of the Fund; and (ii) the Fund has not offered or sold, and is not proposing to offer or sell its shares through a principal underwriter or otherwise at a public or offering price
that includes a sales load of more than 1 1/2%. If a Fund invests in investment companies pursuant to Section 12(d)(1)(F), it must comply with the following voting restrictions: when the Fund exercises voting rights, by proxy or otherwise, with
respect to investment companies owned by the Fund, the Fund will either seek instruction from the Funds' shareholders with regard to the voting of all proxies and vote in accordance with such instructions, or vote the shares held by a Fund in the
same proportion as the vote of all other holders of such security. In addition, an investment company purchased by a Fund pursuant to Section 12(d)(1)(F) shall not be required to redeem its shares in an amount exceeding 1% of such investment
company’s total outstanding shares in any period of less than thirty days. Also, to the extent that an ETF has exemptive relief under Section 12(d)(1)(J), a Fund may rely on that exemptive relief to exceed the limits imposed by Section
12(d)(1)(A).
Shares of
another investment company or ETF that has received exemptive relief from the SEC to permit other funds to invest in its shares without these limitations are excluded from such restrictions to the extent that a Fund has complied with the
requirements of such orders. To the extent that a Fund invests in open-end or closed-end investment companies that invest primarily in the securities of companies located outside the United States, see the risks related to foreign securities set
forth above.
Exchange-Traded Products
. Each Fund may invest in Exchange Traded Products (“ETPs”), which include ETFs, partnerships, commodity pools or trusts that are bought
and sold on a securities exchange. A Fund may also invest in exchange-traded notes (“ETNs”), which are structured debt securities, whereby the issuer of the ETN promises to pay ETN holders the return on an index or market segment over a
certain period of time and then return the principal of the investment at maturity. Whereas ETPs’ liabilities are secured by their portfolio securities, ETNs’ liabilities are unsecured general obligations of the issuer. Therefore, ETNs
are subject to the credit risk of the issuer of the ETN, which is different than other ETPs. The value of an ETN security should also be expected to fluctuate with the credit rating of the issuer. Most ETPs and ETNs are designed to track a
particular market segment or index, although an ETP or ETN may be actively managed. ETPs and ETNs share expenses associated with their operation, typically including advisory fees and other management expenses. When a Fund invests in an ETP or ETN,
in addition to directly bearing expenses associated with its own operations, it will bear its pro rata portion of the ETP’s or ETN’s expenses. ETPs and ETNs trade like stocks on a securities exchange at market prices rather than NAV and
as a result ETP or ETN shares may trade at a price greater than NAV (premium) or less than NAV (discount). The risks of owning an ETP or ETN generally reflect the risks of owning the underlying securities the ETP or ETN is designed to track,
although lack of liquidity in an ETP or ETN could result in it being more volatile than the underlying portfolio of securities. In addition, because of ETP or ETN expenses, compared to owning the underlying securities directly, it may be more costly
to own an ETP or ETN.
Additionally, a Fund may invest in swap
agreements referencing ETFs. If a Fund invests in ETFs or swap agreements referencing ETFs, the underlying ETFs may not necessarily track the same index as a Fund.
Money Market Funds
. Money market funds are open-end registered investment companies which have historically traded at a stable $1.00 per share price. In October 2016, the
SEC implemented amendments to money market fund regulations (“Amendments”) intended to address perceived systemic risks associated with money market funds and to improve transparency for money market fund investors. In general, the
Amendments require money market funds that do not meet the definitions of a retail money market fund or government money market fund to transact at a floating NAV per share (similar to all other non-money market mutual funds), instead of at a $1
stable share price, as has traditionally been the case. The Amendments also permit all money market funds to impose liquidity fees and redemption gates for use in times of market stress. The
SEC also implemented additional diversification,
stress testing, and disclosure measures. The Amendments represented significant departures from the traditional operation of money market funds. Any impact on the trading and value of money market instruments may negatively affect a Fund’s
yield and return potential.
A Fund may make investments in
the securities of real estate companies, which are regarded as those which derive at least 50% of their respective revenues from the ownership, construction, financing, management or sale of commercial, industrial, or residential real estate, or
have at least 50% of their respective assets in such real estate. Such investments include common stocks (including real estate investment trust shares, see “Real Estate Investment Trusts” below), rights or warrants to purchase common
stocks, securities convertible into common stocks where the conversion feature represents, in Rafferty’s view, a significant element of the securities’ value, and preferred stocks.
Real Estate Investment Trusts
(“REITs”)
A Fund may make investments in
REITs. REITs include equity, mortgage and hybrid REITs. Equity REITs own real estate properties, and their revenue comes principally from rent. Mortgage REITs loan money to real estate owners, and their revenue comes principally from interest earned
on their mortgage loans. Hybrid REITs combine characteristics of both equity and mortgage REITs. The value of an equity REIT may be affected by changes in the value of the underlying property, while a mortgage REIT may be affected by the quality of
the credit extended. The performance of both types of REITs depends upon conditions in the real estate industry, management skills and the amount of cash flow. The risks associated with REITs include defaults by borrowers, self-liquidation, failure
to qualify as a pass-through entity under the federal tax law, failure to qualify as an exempt entity under the 1940 Act and the fact that REITs are not diversified.
A Fund may enter into repurchase
agreements with banks that are members of the Federal Reserve System or securities dealers who are members of a national securities exchange or are primary dealers in U.S. government securities. Repurchase agreements generally are for a short period
of time, usually less than a week. Under a repurchase agreement, a Fund purchases a U.S. government security and simultaneously agrees to sell the security back to the seller at a mutually agreed-upon future price and date, normally one day or a few
days later. The resale price is greater than the purchase price, reflecting an agreed-upon market interest rate during a Fund’s holding period. While the maturities of the underlying securities in repurchase agreement transactions may be more
than one year, the term of each repurchase agreement always will be less than one year. Repurchase agreements with a maturity of more than seven days are considered to be illiquid investments. A Fund may not enter into such a repurchase agreement
if, as a result, more than 15% of the value of its net assets would then be invested in such repurchase agreements and other illiquid investments. See “Illiquid Investments and Restricted Securities” above.
A Fund will always receive, as
collateral, securities whose market value, including accrued interest, at all times will be at least equal to 100% of the dollar amount invested by a Fund in each repurchase agreement. In the event of default or bankruptcy by the seller, a Fund will
liquidate those securities (whose market value, including accrued interest, must be at least 100% of the amount invested by a Fund) held under the applicable repurchase agreement, which securities constitute collateral for the seller’s
obligation to repurchase the security. If the seller defaults, a Fund might incur a loss if the value of the collateral securing the repurchase agreement declines and might incur disposition costs in connection with liquidating the collateral. In
addition, if bankruptcy or similar proceedings are commenced with respect to the seller of the security, realization upon the collateral by a Fund may be delayed or limited.
Reverse Repurchase Agreements
A Fund may borrow by entering
into reverse repurchase agreements with the same parties with whom it may enter into repurchase agreements. Under a reverse repurchase agreement, a Fund sells securities and agrees to repurchase them at a mutually agreed to price. At the time a Fund
enters into a reverse repurchase agreement, it will establish and maintain a segregated account with an approved custodian containing liquid high-grade securities, marked-to-market daily, having a value not less than the repurchase price (including
accrued interest). Reverse repurchase agreements involve the risk that the market value of securities retained in lieu of sale by a Fund may decline below the price of the securities a Fund has sold but is obliged to repurchase. If the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce a Fund’s obligation to repurchase the securities.
During that time, a Fund’s use of the proceeds of the reverse repurchase agreement effectively may be restricted. Reverse repurchase agreements create leverage, a speculative factor, and are considered borrowings for the purpose of a
Fund’s limitation on borrowing.
Each Fund may lend portfolio
securities to certain borrowers that Rafferty determines to be creditworthy. The borrowers provide collateral that is maintained in an amount at least equal to the current market value of the securities loaned, marked to market daily. Borrowers
continuously secure their obligations to return securities on loan from a Fund by depositing any combination of short-term U.S. government securities and cash as collateral with a Fund. No securities loan will be made on behalf of a Fund if, as a
result, the aggregate value of all securities loaned by a Fund exceeds one-third of the value of the Fund's total assets (including the value of the collateral received) or such lower limit as set by Rafferty or the Board. A Fund may terminate a
loan at any time and obtain the return of the securities loaned. Each Fund receives, by way of substitute payment, the value of any interest or cash or non-cash distributions paid on the loaned securities that it would have received if the
securities were not on loan. Any gain or loss in the market price of the borrowed securities that occurs during the term of the loan inures to the lending Fund and that Fund’s shareholders.
With respect to loans that are
collateralized by cash, the borrower may be entitled to receive a fee based on the amount of cash collateral. The Funds are typically compensated by the difference between the amount earned on the reinvestment of cash collateral and the fee paid to
the borrower. In the case of collateral other than cash, a Fund is typically compensated by a fee paid by the borrower equal to a percentage of the market value of the loaned securities. A Fund may also receive such fees on “special”
loans that are cash-collateralized. Any cash collateral may be reinvested in money market funds. Such money market fund shares will not be subject to a sales load, redemption fee, distribution fee or service fee. However, such investments are
subject to investment risk.
Securities lending involves exposure
to certain risks, including operational risk (
i.e.
, the risk of losses resulting from problems in the settlement and accounting process), “gap” risk (
i.e.
,
the risk of a mismatch between the return of cash collateral reinvestments and the fees a Fund has agreed to pay a borrower), and credit, legal, counterparty and market risk. If a securities lending counterparty were to default, a Fund would be
subject to the risk of a possible delay in receiving collateral or in recovering the loaned securities, or to a possible loss of rights in the collateral. In the event a borrower does not return a Fund’s securities as agreed, the Fund could
experience losses if the proceeds received from liquidating the collateral do not at least equal the value of the loaned security at the time the collateral is liquidated, plus the transaction costs incurred in purchasing replacement securities.
This event could trigger adverse tax consequences for a Fund. A Fund could lose money if its investment of cash collateral declines in value over the period of the loan. Substitute payments for dividends received by a Fund while its securities are
loaned out will not be considered qualified dividend income.
A Fund may engage
in short sale transactions under which a Fund sells a security it does not own. To complete such a transaction, a Fund must borrow the security to make delivery to the buyer. A Fund then is obligated to replace the security borrowed by purchasing
the security at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by a Fund. Until the security is replaced, a Fund is required to pay to the lender amounts equal to
any dividends that accrue during the period of the loan. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet the margin requirements, until the short position is closed out. A Fund will also incur
transactions costs when conducting short sales.
Until a Fund closes its short
position or replaces the borrowed stock, a Fund will: (1) maintain an account containing cash or liquid assets at such a level that (a) the amount deposited in the account plus the amount deposited with the broker as collateral will equal the
current value of the stock sold short and (b) the amount deposited in the account plus the amount deposited with the broker as collateral will not be less than the market value of the stock at the time the stock was sold short; or (2) otherwise
cover a Fund’s short position.
A Fund will incur a loss as a result
of a short sales or short exposure to reference assets utilizing derivatives if the price of the security or reference asset increases between the date of the short sale or exposure and the date on which a Fund replaces the borrowed security or
terminates the derivatives providing short exposure. A Fund will realize a gain if the price of a security or reference asset declines in price between those dates. The amount of any gain will be decreased, and the amount of any loss will be
increased, by the amount of the premium, dividends or interest a Fund may be required to pay, if any, in connection with a short sale or derivatives that provide short exposure.
A Fund may also invest in unrated
debt securities. Unrated debt, while not necessarily lower in quality than rated securities, may not have as broad a market. Because of the size and perceived demand for the issue, among other factors, certain issuers may decide not to pay the cost
of getting a rating for their bonds. The creditworthiness of the issuer, as well as any financial institution or other party responsible for payments on the security, will be analyzed to determine whether to purchase unrated bonds.
U.S. Government Securities
A Fund may invest in securities
issued or guaranteed by the U.S. government or its agencies or instrumentalities (“U.S. government securities”) in pursuit of its investment objective, in order to deposit such securities as initial or variation margin, as
“cover” for the investment techniques it employs, as part of a cash reserve or for liquidity purposes.
U.S. government securities are
high-quality instruments issued or guaranteed as to principal or interest by the U.S. Treasury Department (“U.S. Treasury”) or by an agency or instrumentality of the U.S. government. Not all U.S. government securities are backed by the
full faith and credit of the United States. Some are backed by the right of the issuer to borrow from the U.S. Treasury; others are backed by discretionary authority of the U.S. government to purchase the agencies’ obligations; while others
are supported only by the credit of the instrumentality. In the case of securities not backed by the full faith and credit of the United States, the investor must look principally to the agency issuing or guaranteeing the obligation for ultimate
repayment.
Yields on short-,
intermediate- and long-term U.S. government securities are dependent on a variety of factors, including the general conditions of the money and bond markets, the size of a particular offering and the maturity of the obligation. Debt securities with
longer maturities tend to produce higher capital appreciation and depreciation than obligations with shorter maturities and lower yields. The market value of U.S. government securities generally varies inversely with changes in the market interest
rates. An increase in interest rates, therefore, generally would reduce the market value of a Fund’s portfolio investments in U.S. government securities, while a decline in interest rates generally would increase the market value of a
Fund’s portfolio investments in these securities. U.S. government securities include U.S. Treasury obligations, which includes U.S. Treasury Bills (which mature within one year of the date they are issued), U.S. Treasury Notes (which have
maturities of one to ten years) and U.S. Treasury Bonds (which generally have maturities of more than 10 years). All such U.S. Treasury obligations are backed by the full faith and credit of the United States.
U.S. government securities also
include obligations issued by U.S. government agencies and instrumentalities (“GSEs”) that are backed by the full faith and credit of the U.S. government (such as securities issued or guaranteed by the Federal Housing Administration,
Ginnie Mae
®
, the Export-Import Bank of the United States, the General Services Administration and the Maritime Administration and certain securities
issued by the Small Business Administration).
Also, U.S.
government securities include securities that are guaranteed by U.S. government-sponsored entities that are not backed by the full faith and credit of the U.S. government (such as Fannie Mae
®
, Freddie Mac
®
, or the Federal Home Loan Banks).
These U.S. government-sponsored entities, although chartered and sponsored by the U.S. Congress, are not guaranteed, nor insured, by the U.S. government. They are supported only by the credit of the issuing agency, instrumentality or
corporation.
Since 2008, Fannie
Mae
®
and Freddie Mac
®
have been in
conservatorship and have received significant capital support through U.S. Treasury preferred stock purchases, as well as U.S. Treasury and Federal Reserve purchases of their mortgage backed securities (“MBS”). The FHFA and the U.S.
Treasury (through its agreement to purchase Fannie Mae
®
and Freddie Mac
®
preferred stock) have imposed strict limits on the size of their mortgage portfolios. The MBS purchase programs technically ended in 2010 but the U.S.
Treasury has continued its support for the entities’ capital as necessary to prevent a negative net worth through at least 2012 and other governmental entities have provided significant support to Fannie Mae
®
and Freddie Mac
®
. There is no guarantee, however,
that they will continue to do so. An FHFA stress test suggested that in a “severely adverse scenario” additional Treasury support of between $42.1 billion and $77.6 billion (depending on the treatment of deferred tax assets) might be
required. Since then Congress has permanently reduced the corporate income tax rate from 35% to 21% starting January 1, 2018. This reduction could cause a substantial net loss and net worth deficit for the year in which the legislation is enacted.
Should they experience such a net worth deficit, they could be required to draw additional funds from the U.S. Treasury to avoid being placed in receivership. Accordingly, no assurance can be given that Fannie Mae
®
and Freddie Mac
®
will remain successful in
meeting their obligations with respect to the debt and MBSs that they issue.
In addition, the problems faced by
Fannie Mae
®
and Freddie Mac
®
, resulting in
their being placed into federal conservatorship and receiving significant U.S. government support, have sparked serious debate among federal policy makers regarding the continued role of the U.S. government in providing liquidity for mortgage loans.
In December 2011, Congress enacted the Temporary Payroll Tax Cut Continuation Act (“TCCA”) of 2011 which, among other provisions, requires that Fannie Mae
®
and Freddie Mac
®
increase their single-family
guaranty fees by at least 10 basis points and remit this increase to Treasury with respect to all loans acquired by Fannie Mae
®
or Freddie Mac
®
on or after April 1, 2012 and before January 1, 2022. Nevertheless, discussions among policymakers have continued as to whether Fannie Mae
®
and Freddie Mac
®
should be nationalized,
privatized, restructured, or eliminated altogether. Fannie Mae reported in the third quarter of 2018 that there was “significant uncertainty regarding the future of our company.” Freddie Mac faces similar uncertainty about its future
role. Fannie Mae
®
and Freddie Mac
®
also are the
subject of several continuing legal actions and investigations related to certain accounting, disclosure, or corporate governance matters, which (along with any resulting financial restatements) may continue to have an adverse effect on the
guaranteeing entities. Congress is currently considering several pieces of legislation that would reform GSEs, proposing to address their structure, mission, portfolio limits, and guarantee fees, among other issues.
U.S. Government Sponsored Enterprises
(“GSEs”)
GSE securities are securities
issued by the U.S. government or its agencies or instrumentalities. Some obligations issued by GSEs are supported by the discretionary authority of the U.S. government to purchase certain obligations of the agency or instrumentality and others only
by the credit of the agency or instrumentality. Those securities bear fixed, floating or variable rates of interest. Interest may fluctuate based on generally recognized reference rates or the relationship of rates. While the U.S. government
currently provides financial support to such GSEs or instrumentalities, no assurance can be given that it will always do so, since it is not so obligated by law.
Certain U.S. government debt
securities, such as securities of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury. Others, such as securities issued by Fannie Mae
®
and Freddie Mac
®
, are supported only by the
credit of the corporation. In the case of securities not backed by the full faith and credit of the United States, a fund must look principally to the agency issuing or guaranteeing the obligation in the event the agency or instrumentality does not
meet its commitments. The U.S. government may choose not to provide financial support to GSEs or instrumentalities if it is not legally obligated to do so. A fund will invest in securities of such instrumentalities only when Rafferty is satisfied
that the credit risk with respect to any such instrumentality is comparatively minimal.
A Fund may enter into firm
commitment agreements for the purchase of securities on a specified future date. A Fund may purchase, for example, new issues of fixed-income instruments on a when-issued basis, whereby the payment obligation, or yield to maturity, or coupon rate on
the instruments may not be fixed at the time of transaction. A Fund will not purchase securities on a when-issued basis if, as a result, more than 15% of its net assets would be so invested. If a Fund enters into a firm commitment agreement,
liability for the purchase price and the rights and risks of ownership of the security accrue to a Fund at the time it becomes obligated to purchase such security, although delivery and payment occur at a later date. Accordingly, if the market price
of the security should decline, the effect of such an agreement would be to obligate a Fund to purchase the security at a price above the current market price on the date of delivery and payment. During the time a Fund is obligated to purchase such
a security, it will be required to segregate assets with an approved custodian in an amount sufficient to settle the transaction.
Zero-Coupon, Payment-In-Kind and Strip
Securities
A Fund
may invest in zero-coupon, payment-in-kind and strip securities of any rating or maturity. Zero-coupon securities make no periodic interest payment but are sold at a deep discount from their face value, otherwise known as “original issue
discount” or “OID.” The buyer earns a rate of return determined by the gradual appreciation of the security, which is redeemed at face value on a specified maturity date. The OID varies depending on the time remaining until
maturity, as well as market interest rates, liquidity of the security, and the issuer’s perceived credit quality. If the issuer defaults, a Fund may not receive any return on its investment. Because zero-coupon securities bear no interest and
compound semi-annually at the rate fixed at the time of issuance, their value generally is more volatile than the value of other fixed-income securities. Since zero-coupon security holders do not receive interest payments, when interest rates rise,
zero-coupon securities fall more dramatically in value than securities paying interest on a current basis. When interest rates fall, zero-coupon securities rise more rapidly in value because the securities reflect a fixed rate of return.
Payment-in-kind securities allow the issuer, at its option, to make current interest payments either in cash or in additional debt obligations of the issuer. Both zero-coupon securities and payment-in-kind securities allow an issuer to avoid the
need to generate cash to meet current interest payments.
An investment in zero-coupon
securities and delayed interest securities (which do not make interest payments until after a specified time) may cause a Fund to recognize income and be required to make distributions thereof to shareholders before it receives any cash payments on
its investment. Moreover, even though payment-in-kind securities do not pay current interest in cash, a Fund nonetheless is required to accrue interest income on these investments and to distribute the interest income at least annually to
shareholders. See “Dividends, Other Distributions and Taxes
–
Income from Zero Coupon and Payment-in-Kind Securities.” Thus, a Fund could be required at
times to liquidate other investments to satisfy distribution requirements.
A Fund may also invest in strips,
which are debt securities whose interest coupons are taken out and traded separately after the securities are issued but otherwise are comparable to zero-coupon securities. Like zero-coupon securities and payment-in-kind securities, strips are
generally more sensitive to interest rate fluctuations than interest paying securities of comparable term and quality.
Other Investment Risks and Practices
Borrowing
. A Fund may borrow money for investment purposes, which is a form of leveraging. Leveraging investments, by purchasing securities with borrowed money, is a
speculative technique that increases investment risk while increasing
investment opportunity. Leverage will magnify
changes in a Fund’s NAV and on a Fund’s investments. Although the principal of such borrowings will be fixed, a Fund’s assets may change in value during the time the borrowing is outstanding. Leverage also creates interest expenses
for a Fund. To the extent the income derived from securities purchased with borrowed funds exceeds the interest a Fund will have to pay, that Fund’s net income will be greater than it would be if leverage were not used. Conversely, if the
income from the assets obtained with borrowed funds is not sufficient to cover the cost of leveraging, the net income of a Fund will be less than it would be if leverage were not used, and therefore the amount available for shareholders will be
reduced.
A Fund may borrow
money to facilitate management of a Fund’s portfolio by enabling a Fund to meet redemption requests when the liquidation of portfolio instruments would be inconvenient or disadvantageous. Such borrowing is not for investment purposes and will
be repaid by the borrowing Fund promptly.
As required by the 1940 Act, a Fund
must maintain continuous asset coverage (total assets, including assets acquired with borrowed funds, less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If at any time the value of the required asset coverage declines as a
result of market fluctuations or other reasons, a Fund may be required to sell some of its portfolio investments within three days to reduce the amount of its borrowings and restore the 300% asset coverage, even though it may be disadvantageous from
an investment standpoint to sell portfolio instruments at that time.
Under current pronouncements, certain
obligations under futures contracts, forward contracts and swap agreements to the extent that a “covers” its obligations as discussed in the “Futures Contracts, Options, and Other Derivatives Strategies” section will not be
considered a “senior security” and, therefore, will not be subject to the 300% asset coverage requirements otherwise applicable to borrowings.
Portfolio Turnover
. The Trust anticipates that each Fund’s annual portfolio turnover will vary. A Fund’s portfolio turnover rate is calculated by the value of
the securities purchased or securities sold, excluding all securities whose terms-to-maturity at the time of acquisition were less than 397 days, divided by the average monthly value of such securities owned during the year. Based on this
calculation, instruments with remaining terms-to-maturity of less than 397 days are excluded from the portfolio turnover rate. Such instruments generally would include futures contracts and options, since such contracts generally have remaining
terms-to-maturity of less than 397 days. In any given period, all of a Fund’s investments may have remaining terms-to-maturity of less than 397 days; in that case, the portfolio turnover rate for that period would be equal to zero. However,
each Fund’s portfolio turnover rate calculated with all securities whose terms-to-maturity were less than 397 days is anticipated to be unusually high.
High portfolio turnover involves
correspondingly greater expenses to a Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities. Such sales also may result in adverse tax consequences to a
Fund’s shareholders resulting from its distributions of increased net capital gains, if any, recognized as a result of the sales. The trading costs and tax effects associated with portfolio turnover may adversely affect a Fund’s
performance.
For the fiscal
year ended October 31, 2018, each of the Direxion Daily MSCI Brazil Bull 3X Shares, Direxion Daily MSCI Emerging Markets Bull 3X Shares, Direxion Daily FTSE Europe Bull 3X Shares, Direxion Daily Financial Bull 3X Shares, and the Direxion Daily
Semiconductor Bull 3X Shares' portfolio turnover increased significantly from portfolio turnover for the fiscal year ended October 31, 2017 as a result of an increase in net assets and increased volatility in net assets for each Fund.
For the fiscal year ended October 31,
2018, the Direxion Daily MSCI India Bull 3X Shares’ portfolio turnover increased significantly from portfolio turnover for the fiscal year ended October 31, 2017 as a result of an increase in volatility of net assets.
For the fiscal year ended October 31,
2018, each of the Direxion Daily Mid Cap Bull 3X Shares, Direxion Daily Small Cap Bull 3X Shares, Direxion Daily MSCI Developed Markets Bull 3X Shares, Direxion Daily Homebuilders & Supplies Bull 3X Shares, Direxion Daily Regional Banks Bull 3X
Shares, Direxion Daily Retail Bull 3X Shares, Direxion Daily Industrials Bull 3X Shares, and the Direxion Daily MSCI Mexico Bull 3X Shares’ portfolio turnover decreased significantly as a result of decreased purchases and sales of individual
underlying index securities.
For the fiscal year ended October 31,
2018, each of the Direxion Daily Gold Miners Index Bull 3X Shares, Direxion Daily Junior Gold Miners Index Bull 3X Shares, Direxion Daily 7-10 Year Treasury Bull 3X Shares, Direxion Daily 20+ Year Treasury Bull 3X Shares, and the Direxion Daily
S&P Oil & Gas Exp. & Prod. Bull 3X Shares’ portfolio turnover decreased significantly from portfolio turnover for the fiscal year ended October 31, 2017 due to a decrease in net asset volatility over the fiscal year.
Correlation and Tracking Risk
Several factors may affect a
Fund's ability to obtain its daily leveraged investment objective. Among these factors are: (1) Fund expenses, including brokerage expenses and commissions and financing costs related to derivatives (which may be increased by high portfolio
turnover); (2) less than all of the securities in the underlying index being held by a Fund and securities not included in the underlying index being held by a Fund; (3) an imperfect correlation between the performance of instruments held by a Fund,
such as other investment companies, including ETFs, futures contracts and options, and the performance of the underlying securities in the cash market comprising an index; (4) bid-ask spreads; (5) a Fund holding
instruments that are illiquid or the market for
which becomes disrupted; (6) the need to conform a Fund’s portfolio holdings to comply with the Fund’s investment restrictions or policies, or regulatory or tax law requirements; (7) market movements that run counter to a Fund’s
investments (which will cause divergence between a Fund and its underlying index over time due to the mathematical effects of leveraging); and (8) disruptions and illiquidity in the markets for securities or derivatives held by a Fund.
While index futures and options
contracts closely correlate with the applicable indices over long periods, shorter-term deviation, such as on a daily basis, does occur with these instruments. As a result, a Fund’s short-term performance will reflect such deviation from its
underlying index. A Fund may use a combination of swaps on its underlying index and swaps on an ETF whose investment objective is to track the performance of the same, or a substantially similar index to achieve its investment objective. The
reference ETF may not closely track the performance of its underlying index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that a Fund invests in swaps that use an ETF as a reference asset, a Fund may be subject
to greater correlation risk and may not achieve as high a degree of leveraged or inverse leveraged correlation with its underlying index as it would if a Fund used swaps that utilized an underlying index as the reference asset. Any financing,
borrowing or other costs associated with using derivatives may also reduce a Fund’s return.
Even if there is a perfect
correlation between a Fund and the leveraged return of its underlying index on a daily basis, the symmetry between the changes in the underlying index and the changes in a Fund’s NAV can be altered significantly over time by a compounding
effect. For example, if a Bull Fund achieved a perfect leveraged correlation with its underlying index on every trading day over an extended period and the level of returns of that index significantly increased during that period, a compounding
effect for that period would result, causing an increase in a Bull Fund’s NAV by a percentage that is somewhat greater than the percentage that the underlying index’s returns decreased. Conversely, if a Bear Fund maintained a perfect
inverse leveraged correlation with its underlying index over an extended period and if the level of returns of that index significantly increased over that period, a compounding effect would result, causing a decrease of a Bear Fund’s NAV by a
percentage that would be somewhat less than the percentage that the underlying index returns increased.
Each Fund intends
regularly to use leveraged investment techniques in pursuing its investment objectives. Utilization of leverage involves special risks and should be considered to be speculative. Leverage exists when a Fund achieves the right to a return on a
capital base that exceeds the amount of the Fund’s net assets. Leverage creates the potential for greater gains to shareholders of a Fund during favorable market conditions and the risk of magnified losses during adverse market conditions.
Leverage is likely to cause higher volatility of the NAV of each Fund’s Shares. Leverage may involve the creation of a liability that does not entail any interest costs or the creation of a liability that requires a Fund to pay interest which
would decrease the Fund’s total return to shareholders. If each Fund achieves its investment objective, during adverse market conditions, shareholders should experience a loss greater than they would have incurred had a Fund not been
leveraged.
Special Note
Regarding the Correlation Risks of the Funds
. As discussed in the Prospectus, each Fund is “leveraged” in the sense that it has an investment objective to match 300% or -300% of the performance of its
underlying index on a given day. Each Fund is subject to all of the correlation risks described in the Prospectus. In addition, there is a special form of correlation risk that derives from each Fund’s use of leverage, which is that for
periods greater than one day, the use of leverage tends to cause the performance of a Fund to be either greater than, or less than, 300% or -300% of the performance of its underlying index.
A Fund’s return for periods longer
than one day is primarily a function of the following:
a) underlying index performance;
b) underlying index volatility;
c) financing rates associated with
leverage;
d) other fund
expenses;
e) dividends paid by
companies in the underlying index; and
f) period of time.
The fund performance for a Fund can
be estimated given any set of assumptions for the factors described above. Illustrated below is the impact of two factors, underlying index volatility and underlying index performance, on a Fund. Underlying index volatility is a statistical measure
of the magnitude of fluctuations in the returns of an index and is calculated as the standard deviation of the natural logarithms of one plus the index return (calculated daily), multiplied by the square root of the number of trading days per year
(assumed to be 252). The illustration estimates Fund returns for a number of combinations of underlying index performance and underlying index volatility over a one year period and assumes: a) no dividends paid by the companies included in the
underlying index; b) no fund expenses; and c) borrowing/lending rates (to obtain leverage) of zero percent. If fund expenses were included, a Fund’s performance would be lower than shown.
As shown below, a Bull Fund would be
expected to lose 17.1% and a Bear Fund would be expected to lose 31.3% if the underlying index provided no return over a one year period during which the underlying index experienced annualized volatility of 25%. If the underlying index’s
annualized volatility were to rise to 75%, the hypothetical loss for a one year period widens to approximately 81.5% for a Bull Fund and 96.6% for a Bear Fund. At higher ranges of volatility, there is a chance of a near complete loss of value even
if the underlying index is flat. For instance, if the underlying index’s annualized volatility is 100%, it is likely that a Bull Fund would lose 95% of its value, and a Bear Fund would lose approximately 100% of its value, even if the
underlying index’s cumulative return for the year was only 0%. The volatility of ETFs or instruments that reflect the value of the underlying index such as swaps, may differ from the volatility of a Fund's underlying index.
In the tables
below, areas shaded green represent those scenarios where a Fund with the investment objective described will outperform (
i.e.
, return more than) the underlying index’s performance times the stated
multiple in the Fund’s investment objective; conversely areas shaded red represent those scenarios where the Fund will underperform (
i.e.
, return less than) the underlying index’s performance times
the stated multiple in the Fund’s investment objective.
The tables below are intended to
underscore the fact that the Funds are designed as short-term trading vehicles for investors who intend to actively monitor and manage their portfolios. They are not intended to be used by, and are not appropriate for, investors who do not intend to
actively monitor and manage their portfolios. For additional information regarding correlation and volatility risk for the Funds, see “Effects of Compounding and Market Volatility Risk” in the Prospectus.
Bull Fund
One
Year
Index
|
300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-180%
|
-93.8%
|
-94.7%
|
-97.0%
|
-98.8%
|
-99.7%
|
-50%
|
-150%
|
-87.9%
|
-89.6%
|
-94.1%
|
-97.7%
|
-99.4%
|
-40%
|
-120%
|
-79.0%
|
-82.1%
|
-89.8%
|
-96.0%
|
-98.9%
|
-30%
|
-90%
|
-66.7%
|
-71.6%
|
-83.8%
|
-93.7%
|
-98.3%
|
-20%
|
-60%
|
-50.3%
|
-57.6%
|
-75.8%
|
-90.5%
|
-97.5%
|
-10%
|
-30%
|
-29.3%
|
-39.6%
|
-65.6%
|
-86.5%
|
-96.4%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
30%
|
29.2%
|
10.3%
|
-37.1%
|
-75.4%
|
-93.4%
|
20%
|
60%
|
67.7%
|
43.3%
|
-18.4%
|
-68.0%
|
-91.4%
|
30%
|
90%
|
113.2%
|
82.1%
|
3.8%
|
-59.4%
|
-89.1%
|
40%
|
120%
|
166.3%
|
127.5%
|
29.6%
|
-49.2%
|
-86.3%
|
50%
|
150%
|
227.5%
|
179.8%
|
59.4%
|
-37.6%
|
-83.2%
|
60%
|
180%
|
297.5%
|
239.6%
|
93.5%
|
-24.2%
|
-79.6%
|
Bear Fund
One
Year
Index
|
-300%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
180%
|
1371.5%
|
973.9%
|
248.6%
|
-46.5%
|
-96.1%
|
-50%
|
150%
|
653.4%
|
449.8%
|
78.5%
|
-72.6%
|
-98.0%
|
-40%
|
120%
|
336.0%
|
218.2%
|
3.3%
|
-84.2%
|
-98.9%
|
-30%
|
90%
|
174.6%
|
100.4%
|
-34.9%
|
-90.0%
|
-99.3%
|
-20%
|
60%
|
83.9%
|
34.2%
|
-56.4%
|
-93.3%
|
-99.5%
|
-10%
|
30%
|
29.2%
|
-5.7%
|
-69.4%
|
-95.3%
|
-99.7%
|
0%
|
0%
|
-5.8%
|
-31.3%
|
-77.7%
|
-96.6%
|
-99.8%
|
10%
|
-30%
|
-29.2%
|
-48.4%
|
-83.2%
|
-97.4%
|
-99.8%
|
20%
|
-60%
|
-45.5%
|
-60.2%
|
-87.1%
|
-98.0%
|
-99.9%
|
30%
|
-90%
|
-57.1%
|
-68.7%
|
-89.8%
|
-98.4%
|
-99.9%
|
40%
|
-120%
|
-65.7%
|
-75.0%
|
-91.9%
|
-98.8%
|
-99.9%
|
50%
|
-150%
|
-72.1%
|
-79.6%
|
-93.4%
|
-99.0%
|
-99.9%
|
60%
|
-180%
|
-77.0%
|
-83.2%
|
-94.6%
|
-99.2%
|
-99.9%
|
The
foregoing tables are intended to isolate the effect of underlying index volatility and underlying index performance on the return of a Fund. A Fund’s actual returns may be significantly greater or less than the returns shown above as a result
of any of factors discussed above or under “Effects of Compounding and Market Volatility Risk” in the Prospectus.
Since the use of technology has
become more prevalent in the course of business, the Funds may be more susceptible to operational risks through breaches in cybersecurity. A cybersecurity incident may refer to either intentional or unintentional
events that allow an unauthorized party to gain
access to fund assets, customer data, or proprietary information, or cause a Fund or a Fund service provider to suffer data corruption or lose operational functionality. A cybersecurity incident could, among other things, result in the loss or theft
of customer data or funds, customers or employees being unable to access electronic systems (“denial of services”), loss or theft of proprietary information or corporate data, physical damage to a computer or network system, or
remediation costs associated with system repairs. Any of these results could have a substantial impact on the Funds. For example, if a cybersecurity incident results in a denial of service, Fund shareholders could lose access to their electronic
accounts for an unknown period of time, and employees could be unable to access electronic systems to perform critical duties for the Funds, such as trading, NAV calculation, shareholder accounting or fulfillment of Fund share purchases and
redemptions. Cybersecurity incidents could cause a Fund or the Funds' Adviser or distributor to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures, or financial loss of a significant
magnitude. They may also cause a Fund to violate applicable privacy and other laws. The Funds' service providers have established risk management systems that seek to reduce the risks associated with cybersecurity, and business continuity plans in
the event there is a cybersecurity breach. However, there is no guarantee that such efforts will succeed, especially since a Fund does not directly control the cybersecurity systems of the issuers of securities in which each Fund invests or the
Funds' third party service providers (including the Funds' transfer agent and custodian).
The Trust, on behalf of each
Fund, has adopted the following investment policies which are fundamental policies that may not be changed without the affirmative vote of a majority of the outstanding voting securities of the Fund. As defined by the 1940 Act, a “vote of a
majority of the outstanding voting securities of the Fund” means the affirmative vote of the lesser of (1) more than 50% of the outstanding shares of the Fund or (2) 67% or more of the shares present at a shareholders’ meeting, if more
than 50% of the outstanding shares are represented at the meeting in person or by proxy.
For purposes of the following
limitations, all percentage limitations apply immediately after a purchase or initial investment. Except with respect to borrowing money, if a percentage limitation is adhered to at the time of the investment, a later increase or decrease in the
percentage resulting from any change in value or net assets will not result in a violation of such restrictions. If at any time a Fund’s borrowings exceed its limitations due to a decline in net assets, such borrowings will be reduced within
three days (not including Sundays and holidays), or such longer period as may be permitted by the 1940 Act, to the extent necessary to comply with the one-third limitation.
Each Fund may not:
1.
|
Borrow money, except to
the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
2.
|
Issue senior securities,
except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
3.
|
Make loans, except to the
extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
4.
|
Except for any Fund
that is “concentrated” in an industry or group of industries within the meaning of the 1940 Act, purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, 25% or more of a Fund’s total assets would be invested in the securities of companies whose principal business activities are in the same industry. However, each Fund that tracks an underlying index will
only concentrate its investment in a particular industry or group of industries to approximately the same extent as its underlying index is so concentrated.
|
5.
|
Purchase or sell real
estate, except that, to the extent permitted by applicable law, each Fund may (a) invest in securities or other instruments directly secured by real estate, and (b) invest in securities or other instruments issued by issuers that invest in real
estate.
|
6.
|
Purchase or sell
commodities or commodity contracts unless acquired as a result of ownership of securities or other instruments issued by persons that purchase or sell commodities or commodities contracts; but this shall not prevent a Fund from purchasing, selling
and entering into financial futures contracts (including futures contracts on indices of securities, interest rates and currencies), and options on financial futures contracts (including futures contracts on indices of securities, interest rates and
currencies), warrants, swaps, forward contracts, foreign currency spot and forward contracts and other financial instruments.
|
7.
|
Underwrite
securities issued by others, except to the extent that a Fund may be considered an underwriter within the meaning of the 1933 Act in the disposition of restricted securities or other investment company securities.
|
Portfolio Transactions and Brokerage
Subject to the general
supervision by the Trustees, Rafferty is responsible for decisions to buy and sell securities for each Fund, the selection of broker-dealers to effect the transactions, and the negotiation of brokerage commissions, if any. Rafferty expects that a
Fund may execute brokerage or other agency transactions through registered broker-dealers, for a commission, in conformity with the 1940 Act, the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.
When selecting a broker or dealer to
execute portfolio transactions, Rafferty considers many factors, including the rate of commission or the size of the broker-dealer’s “spread,” the size and difficulty of the order, the nature of the market for the security,
operational capabilities of the broker-dealer and the research, statistical and economic data furnished by the broker-dealer to Rafferty.
In effecting portfolio transactions
for a Fund, Rafferty seeks to receive the closing prices of securities that are in line with those of the securities included in a Fund's underlying index and seeks to execute trades of such securities at the lowest commission rate reasonably
available. With respect to agency transactions, Rafferty may execute trades at a higher rate of commission if reasonable in relation to brokerage and research services provided to a Fund or Rafferty. Such services may include the following:
information as to the availability of securities for purchase or sale; statistical or factual information or opinions pertaining to investment; wire services; and appraisals or evaluations of portfolio securities. Each Fund believes that the
requirement to always seek the lowest possible commission cost could impede effective portfolio management and preclude a Fund and Rafferty from obtaining a high quality of brokerage and research services. In seeking to determine the reasonableness
of brokerage commissions paid in any transaction, Rafferty relies upon its experience and knowledge regarding commissions generally charged by various brokers and on its judgment in evaluating the brokerage and research services received from the
broker effecting the transaction.
Rafferty may use research and
services provided to it by brokers in servicing a Fund; however, not all such services may be used by Rafferty in connection with a Fund. While the receipt of such information and services is useful in varying degrees and may reduce the amount of
research or services otherwise provided to a Fund by Rafferty, the receipt of such information and these services does not reduce the investment advisory fee paid by a Fund.
Purchases and sales of U.S.
government securities normally are transacted through issuers, underwriters or major dealers in U.S. government securities acting as principals. Such transactions are made on a net basis and do not involve payment of brokerage commissions. The cost
of securities purchased from an underwriter usually includes a commission paid by the issuer to the underwriters; transactions with dealers normally reflect the spread between bid and asked prices.
Aggregate brokerage commissions paid by
each of the following operational Funds for the fiscal periods shown are set forth in the tables below:
Direxion
Daily Mid Cap Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$213,363
|
Year
Ended October 31, 2017
|
$121,350
|
Year
Ended October 31, 2016
|
$138,506
|
Direxion
Daily Mid Cap Bear 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$15,670
|
Year
Ended October 31, 2017
|
$26,485
|
Year
Ended October 31, 2016
|
$64,612
|
Direxion
Daily S&P 500
®
Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$1,831,126
|
Year
Ended October 31, 2017
|
$1,096,806
|
Year
Ended October 31, 2016
|
$1,456,343
|
Direxion
Daily S&P 500
®
Bear 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$1,072,757
|
Year
Ended October 31, 2017
|
$729,139
|
Year
Ended October 31, 2016
|
$1,379,291
|
Direxion
Daily Small Cap Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$1,392,932
|
Year
Ended October 31, 2017
|
$1,791,399
|
Year
Ended October 31, 2016
|
$2,181,434
|
Direxion
Daily Small Cap Bear 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$1,385,075
|
Year
Ended October 31, 2017
|
$1,963,932
|
Year
Ended October 31, 2016
|
$2,058,146
|
Direxion
Daily MSCI Brazil Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$998,171
|
Year
Ended October 31, 2017
|
$433,212
|
Year
Ended October 31, 2016
|
$320,929
|
Direxion
Daily FTSE China Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$881,328
|
Year
Ended October 31, 2017
|
$350,082
|
Year
Ended October 31, 2016
|
$410,932
|
Direxion
Daily FTSE China Bear 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$296,848
|
Year
Ended October 31, 2017
|
$218,058
|
Year
Ended October 31, 2016
|
$454,636
|
Direxion
Daily MSCI Developed Markets Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$68,925
|
Year
Ended October 31, 2017
|
$39,989
|
Year
Ended October 31, 2016
|
$92,263
|
Direxion
Daily MSCI Developed Markets Bear 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$22,911
|
Year
Ended October 31, 2017
|
$12,289
|
Year
Ended October 31, 2016
|
$50,572
|
Direxion
Daily MSCI Emerging Markets Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$756,072
|
Year
Ended October 31, 2017
|
$430,677
|
Year
Ended October 31, 2016
|
$636,375
|
Direxion
Daily MSCI Emerging Markets Bear 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$462,787
|
Year
Ended October 31, 2017
|
$412,672
|
Year
Ended October 31, 2016
|
$722,054
|
Direxion
Daily FTSE Europe Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$183,701
|
Year
Ended October 31, 2017
|
$62,359
|
Year
Ended October 31, 2016
|
$96,867
|
Direxion
Daily MSCI India Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$314,654
|
Year
Ended October 31, 2017
|
$237,477
|
Year
Ended October 31, 2016
|
$220,072
|
Direxion
Daily MSCI Japan Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$62,354
|
Year
Ended October 31, 2017
|
$14,164
|
Year
Ended October 31, 2016
|
$46,374
|
Direxion
Daily Latin America Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$52,205
|
Year
Ended October 31, 2017
|
$46,279
|
Year
Ended October 31, 2016
|
$57,881
|
Direxion
Daily Russia Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$444,652
|
Year
Ended October 31, 2017
|
$473,471
|
Year
Ended October 31, 2016
|
$797,494
|
Direxion
Daily Russia Bear 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$142,030
|
Year
Ended October 31, 2017
|
$188,187
|
Year
Ended October 31, 2016
|
$406,202
|
Direxion
Daily MSCI South Korea Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$83,296
|
Year
Ended October 31, 2017
|
$21,352
|
Year
Ended October 31, 2016
|
$17,090
|
Direxion
Daily Gold Miners Index Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$5,590,360
|
Year
Ended October 31, 2017
|
$6,159,187
|
Year
Ended October 31, 2016
|
$6,530,360
|
Direxion
Daily Gold Miners Index Bear 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$2,122,468
|
Year
Ended October 31, 2017
|
$2,377,739
|
Year
Ended October 31, 2016
|
$3,532,808
|
Direxion
Daily Healthcare Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$404,011
|
Year
Ended October 31, 2017
|
$318,331
|
Year
Ended October 31, 2016
|
$702,585
|
Direxion
Daily Junior Gold Miners Index Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$3,311,634
|
Year
Ended October 31, 2017
|
$4,046,774
|
Year
Ended October 31, 2016
|
$2,378,327
|
Direxion
Daily Junior Gold Miners Index Bear 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$1,009,087
|
Year
Ended October 31, 2017
|
$1,476,110
|
Year
Ended October 31, 2016
|
$795,181
|
Direxion
Daily Natural Gas Related Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$102,525
|
Year
Ended October 31, 2017
|
$172,581
|
Year
Ended October 31, 2016
|
$336,400
|
Direxion
Daily Natural Gas Related Bear 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$37,373
|
Year
Ended October 31, 2017
|
$42,409
|
December
3, 2015* - October 31, 2016
|
$105,275
|
*
|
Commencement of Operations
|
|
|
Direxion
Daily Regional Banks Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$151,216
|
Year
Ended October 31, 2017
|
$66,474
|
Year
Ended October 31, 2016
|
$7,070
|
Direxion
Daily Regional Banks Bear 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$12,567
|
Year
Ended October 31, 2017
|
$13,428
|
Year
Ended October 31, 2016
|
$12,389
|
Direxion
Daily Retail Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$89,891
|
Year
Ended October 31, 2017
|
$128,545
|
Year
Ended October 31, 2016
|
$123,643
|
Direxion
Daily Semiconductor Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$2,212,003
|
Year
Ended October 31, 2017
|
$837,639
|
Year
Ended October 31, 2016
|
$399,259
|
Direxion
Daily Semiconductor Bear 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$426,459
|
Year
Ended October 31, 2017
|
$164,620
|
Year
Ended October 31, 2016
|
$272,542
|
Direxion
Daily Energy Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$806,997
|
Year
Ended October 31, 2017
|
$834,374
|
Year
Ended October 31, 2016
|
$1,508,811
|
Direxion
Daily Energy Bear 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$215,787
|
Year
Ended October 31, 2017
|
$179,953
|
Year
Ended October 31, 2016
|
$465,266
|
Direxion
Daily Financial Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$3,880,910
|
Year
Ended October 31, 2017
|
$2,145,729
|
Year
Ended October 31, 2016
|
$2,679,919
|
Direxion
Daily Financial Bear 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$579,096
|
Year
Ended October 31, 2017
|
$594,359
|
Year
Ended October 31, 2016
|
$1,401,210
|
Direxion
Daily MSCI Real Estate Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$156,938
|
Year
Ended October 31, 2017
|
$148,444
|
Year
Ended October 31, 2016
|
$279,885
|
Direxion
Daily MSCI Real Estate Bear 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$67,362
|
Year
Ended October 31, 2017
|
$67,535
|
Year
Ended October 31, 2016
|
$74,905
|
Direxion
Daily Technology Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$2,039,220
|
Year
Ended October 31, 2017
|
$591,532
|
Year
Ended October 31, 2016
|
$475,969
|
Direxion
Daily Technology Bear 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$101,043
|
Year
Ended October 31, 2017
|
$50,797
|
Year
Ended October 31, 2016
|
$78,608
|
Direxion
Daily 7-10 Year Treasury Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$3,786
|
Year
Ended October 31, 2017
|
$7,715
|
Year
Ended October 31, 2016
|
$5,721
|
Direxion
Daily 7-10 Year Treasury Bear 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$24,743
|
Year
Ended October 31, 2017
|
$55,681
|
Year
Ended October 31, 2016
|
$42,995
|
Direxion
Daily 20+ Year Treasury Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$125,530
|
Year
Ended October 31, 2017
|
$194,607
|
Year
Ended October 31, 2016
|
$303,843
|
Direxion
Daily 20+ Year Treasury Bear 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$796,139
|
Year
Ended October 31, 2017
|
$1,166,382
|
Year
Ended October 31, 2016
|
$1,258,161
|
Direxion
Daily S&P Biotech Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$1,211,846
|
Year
Ended October 31, 2017
|
$1,109,546
|
Year
Ended October 31, 2016
|
$1,095,190
|
Direxion
Daily S&P Biotech Bear 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$480,801
|
Year
Ended October 31, 2017
|
$572,716
|
Year
Ended October 31, 2016
|
$480,298
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$337,363
|
Year
Ended October 31, 2017
|
$392,758
|
Year
Ended October 31, 2016
|
$276,613
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$368,696
|
Year
Ended October 31, 2017
|
$159,970
|
Year
Ended October 31, 2016
|
$228,054
|
Direxion
Daily Pharmaceutical & Medical Bull 3X Shares
|
Brokerage
Fees Paid
|
November
15, 2017* - October 31, 2018
|
$13,493
|
*
|
Commencement of Operations
|
|
|
Direxion
Daily Homebuilders & Supplies Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$158,091
|
Year
Ended October 31, 2017
|
$21,141
|
Year
Ended October 31, 2016
|
$7,429
|
Direxion
Daily Utilities Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$22,132
|
May
3, 2017* - October 31, 2017
|
$3,698
|
*
|
Commencement of Operations
|
|
|
Direxion
Daily MSCI Mexico Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$50,301
|
May
3, 2017* - October 31, 2017
|
$6,481
|
*
|
Commencement of Operations
|
|
|
Direxion
Daily Aerospace & Defense Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$232,721
|
May
3, 2017* - October 31, 2017
|
$23,378
|
*
|
Commencement of Operations
|
|
|
Direxion
Daily Transportation Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$27,760
|
May
3, 2017* - October 31, 2017
|
$3,897
|
*
|
Commencement of Operations
|
|
|
Direxion
Daily Industrials Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$15,920
|
May
3, 2017* - October 31, 2017
|
$5,937
|
*
|
Commencement of Operations
|
|
|
Direxion
Daily EURO STOXX 50
®
Bull 3X Shares
|
Brokerage
Fees Paid
|
Year
Ended October 31, 2018
|
$8,786
|
July
12, 2017* - October 31, 2017
|
$2,978
|
*
|
Commencement of Operations
|
|
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
|
Brokerage
Fees Paid
|
April
19, 2018* - October 31, 2018
|
$10,107
|
*
|
Commencement of Operations
|
For the
fiscal year ended October 31, 2018, the Direxion Daily 7-10 Year Treasury Bear 3X Shares’ brokerage commissions increased significantly from the brokerage commissions for the fiscal year ended October 31, 2017 as the result of decreased assets
and decreased volatility in net assets.
For the fiscal year ended October
31, 2018, each of the Direxion Daily MSCI Brazil Bull 3X Shares, Direxion Daily FTSE China Bull 3X Shares, Direxion Daily FTSE Europe Bull 3X Shares, Direxion Daily MSCI Japan Bull 3X Shares, Direxion Daily MSCI South Korea Bull 3X Shares, Direxion
Daily Homebuilders & Supplies Bull 3X Shares, Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares, Direxion Daily Regional Banks Bull 3X Shares, Direxion Daily Semiconductor Bull 3X Shares, Direxion Daily Semiconductor Bear 3X
Shares, Direxion Daily Technology Bull 3X Shares, and the Direxion Daily Technology Bear 3X Shares’ brokerage commissions increased significantly from the brokerage commissions for the fiscal year ended October 31, 2017 as a result of
increased asset and increased volatility in net assets.
Portfolio Holdings Information
A Fund’s
portfolio holdings are, or will be upon commencement of operations, disclosed on the Funds' website at www.direxioninvestments.com each day the Funds are open for business. In addition, disclosure of a Fund’s complete holdings is required to
be made quarterly within 60 days of the end of each fiscal quarter in the Annual Report and Semi-Annual Report to Fund shareholders and in the quarterly holdings report on Form N-Q. These reports are available, free of charge, on the EDGAR database
on the SEC’s website at www.sec.gov.
The portfolio composition file
(“PCF”), which contains portfolio holdings information and the IOPV, which contains certain pricing information related to a Fund’s portfolio holdings, are also made available daily, including to the Funds' service providers to
facilitate the provision of services to the Funds and to certain other entities as necessary for transactions in Creation Units. Such entities include: (i) National Securities Clearing Corporation (“NSCC”) members; (ii) subscribers to
various fee-based services, including entities that publish and/or analyze such information in connection with the process of purchasing or redeeming Creation Units or trading shares of Funds in the secondary market; (iii) investors that have
entered into an “Authorized Participant Agreement” with the Distributor and the transfer agent or purchase Creation Units through a dealer that has entered into such an agreement (“Authorized Participants”); and (iv) certain
personnel of service providers that are involved in portfolio management and providing administrative, operational, or other support to portfolio management including personnel of the Adviser and the Funds' distributor, administrator, custodian and
fund accountant who are involved in functions which may require such information to conduct business in the ordinary course.
In addition, the Funds' Chief
Compliance Officer (“CCO”) may grant exceptions to permit additional disclosure of the complete portfolio holdings information at differing times and with differing lag times to rating agencies and to the parties noted above, provided
that (1) a Fund has a legitimate business purpose for doing so; (2) it is in the best interests of shareholders; (3) the recipient is subject to a confidentiality agreement; and (4) the recipient is subject to a duty not to trade on the nonpublic
information. In this regard, from time to time, rating and ranking organizations such as Standard & Poor’s
®
and Morningstar
®
, Inc. may request such information. The CCO shall report any disclosures made pursuant to this exception to the Board.
The Board of Trustees
The Trust is governed by its Board
of Trustees (the “Board”). The Board is responsible for and oversees the overall management and operations of the Trust and the Funds, which includes the general oversight and review of the Funds' investment activities, in accordance
with federal law and the law of the State of Delaware, as well as the stated policies of the Funds. The Board oversees the Trust’s officers and service providers, including Rafferty, which is responsible for the management of the day-to-day
operations of the Funds based on policies and agreements reviewed and approved by the Board. In carrying out these responsibilities, the Board regularly interacts with and receives reports from senior personnel of service providers, including
personnel from Rafferty and U.S. Bancorp Fund Services, LLC (“USBFS”). The Board also is assisted by the Trust’s independent auditor (who reports directly to the Trust’s Audit Committee), independent counsel and other
professionals as appropriate.
Risk
Oversight
Consistent with
its responsibility for oversight of the Trust and the Funds, the Board oversees the management of risks relating to the administration and operation of the Trust and the Funds. Rafferty, as part of its responsibilities for the day-to-day operations
of the Funds, is responsible for day-to-day risk management for the Funds. The Board, in the exercise of its reasonable business judgment performs its risk management oversight directly and, as to certain matters, through its committees (described
below) and through the Board members who are not “interested persons” of the Funds as defined in Section 2(a)(19) of the 1940 Act (“Independent Trustees.”) The following provides an overview of the principal, but not all,
aspects of the Board’s oversight of risk management for the Trust and the Funds.
The Board has adopted, and
periodically reviews, policies and procedures designed to address risks to the Trust and the Funds. In addition, under the general oversight of the Board, Rafferty and other service providers to the Funds have themselves adopted a variety of
policies, procedures and controls designed to address particular risks to the Funds. Different processes, procedures and controls are employed with respect to different types of risks.
The Board also oversees risk
management for the Trust and the Funds through review of regular reports, presentations and other information from officers of the Trust and other persons. The Trust’s CCO and senior officers of Rafferty regularly report to the Board on a
range of matters, including those relating to risk management. The Board also regularly receives reports from Rafferty and USBFS with respect to the Funds' investments. In addition to regular reports from these parties, the Board also receives
reports regarding other service providers to the Trust, either directly or through Rafferty, USBFS or the CCO, on a periodic or regular basis. At least annually, the Board receives a report from the CCO regarding the effectiveness of the Funds'
compliance program. Also, on an annual basis, the Board receives reports, presentations and other information
from Rafferty in connection with the Board’s
consideration of the renewal of each of the Trust’s agreements with Rafferty and the Trust’s distribution plan under Rule 12b-1 under the 1940 Act.
The CCO reports regularly to the
Board on Fund valuation matters. The Audit Committee receives regular reports from the Trust’s independent registered public accounting firm on internal control and financial reporting matters. On at least a quarterly basis, the Independent
Trustees meet with the CCO to discuss matters relating to the Funds' compliance program.
Board Structure and Related Matters
Independent Trustees constitute
two-thirds of the Board. The Trustees discharge their responsibilities collectively as a Board, as well as through Board committees, each of which operates pursuant to a charter approved by the Board that delineates the specific responsibilities of
that committee. The Board has established three standing committees: the Audit Committee, the Nominating and Governance Committee and the Qualified Legal Compliance Committee. For example, the Audit Committee is responsible for specific matters
related to oversight of the Funds' independent auditors, subject to approval of the Audit Committee’s recommendations by the Board. The members and responsibilities of each Board committee are summarized below.
The Board
periodically evaluates its structure and composition as well as various aspects of its operations. The Chairman of the Board is not an Independent Trustee and the Board has chosen not to have a lead Independent Trustee. However, the Board believes
that its leadership structure, including its Independent Trustees and Board committees, is appropriate for the Trust in light of, among other factors, the asset size and nature of the Funds, the number of series overseen by the Board, the
arrangements for the conduct of the Funds' operations, the number of Trustees, and the Board’s responsibilities. On an annual basis, the Board conducts a self-evaluation that considers, among other matters, whether the Board and its committees
are functioning effectively and whether, given the size and composition of the Board and each of its committees, the Trustees are able to oversee effectively the number of series in the complex.
The Trust is part of the Direxion
Family of Investment Companies, which is comprised of the 120 portfolios within the Trust, 15 portfolios within the Direxion Funds and no portfolios within the Direxion Insurance Trust. The same persons who constitute the Board also constitute the
Board of Trustees of the Direxion Funds and the Direxion Insurance Trust.
The Board holds four regularly
scheduled in-person meetings each year. The Board may hold special meetings, as needed, either in person or by telephone, to address matters arising between regular meetings. During a portion of each in-person meeting, the Independent Trustees meet
outside of management’s presence. The Independent Trustees may hold special meetings, as needed, either in person or by telephone.
The Trustees of
the Trust are identified in the tables below, which provide information regarding their age, business address and principal occupation during the past five years including any affiliation with Rafferty, the length of service to the Trust, and the
position, if any, that they hold on the board of directors of companies other than the Trust as of the date of this SAI. Each of the Trustees of the Trust also serve on the Board of the Direxion Funds and Direxion Insurance Trust, the other
registered investment companies in the Direxion mutual fund complex. Rafferty is also the sole owner of Direxion Advisors, LLC ("Direxion"), investment adviser to certain series of the Trust. Unless otherwise noted, an individual’s business
address is 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019.
Interested Trustee
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(2)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
Daniel
D. O’Neill
(1)
Age: 50
|
Chairman
of the Board of Trustees
|
Lifetime
of Trust until removal or resignation;
Since 2008
|
Managing
Director of Rafferty Asset Management, LLC, January 1999 –
January 2019 and Direxion Advisors, LLC, November 2017
–
January 2019.
|
135
|
None.
|
Independent Trustees
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(3)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
Gerald
E. Shanley III
Age: 75
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2008
|
Retired,
since 2002; Business Consultant, 1985-present; Trustee of Trust Under Will of Charles S. Payson, 1987-present; C.P.A., 1979-present.
|
135
|
None.
|
John
A. Weisser
Age: 77
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2008
|
Retired,
since 1995; Salomon Brothers, Inc., 1971-1995, most recently as Managing Director.
|
135
|
Director
until December 2016: The MainStay Funds Trust, The MainStay Funds, MainStay VP Fund Series, Mainstay Defined Term Municipal Opportunities Fund; Private Advisors Alternative Strategy Fund; Private Advisors Alternative Strategies Master Fund.
|
David
L. Driscoll
Age: 49
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2014
|
Partner,
King Associates, LLP, since 2004; Board Advisor, University Common Real Estate, since 2012; Principal, Grey Oaks LLP since 2003; Member, Kendrick LLC, since 2006.
|
135
|
None.
|
Jacob
C. Gaffey
Age: 71
|
Trustee
|
Lifetime
of Trust until removal or resignation;
Since 2014
|
Managing
Director of Loomis & Co. since 2012; Partner, Bay Capital Advisors, LLC
2008
–
2012.
|
135
|
None.
|
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(3)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
Henry
W. Mulholland
Age: 55
|
Trustee
|
Lifetime
of Trust until removal or resignation; Since 2017
|
Grove
Hill Partners LLC, since 2016 as Managing Partner; Bank of America Merrill Lynch, 1990-2015, most recently as Managing Director and Head of Equities for Americas.
|
135
|
None.
|
(1)
|
Mr. O’Neill is
affiliated with Rafferty and Direxion. Mr. O’Neill owns a beneficial interest in Rafferty.
|
(2)
|
The Direxion Family of
Investment Companies consists of the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 93 of the 120 funds registered with the SEC, the Direxion Funds which, as of the date of this SAI, offers for sale to the
public 15 funds registered with the SEC and the Direxion Insurance Trust which, as of the date of this SAI, does not have any funds registered with the SEC.
|
In addition to the information set
forth in the tables above and other relevant qualifications, experience, attributes or skills applicable to a particular Trustee, the following provides further information about the qualifications and experience of each Trustee.
Daniel D.
O’Neill: Mr. O’Neill has extensive experience in the investment management business, including as managing director of Rafferty and Direxion. Mr. O’Neill was the Managing Director of Rafferty from 1999 through January 2019 and
Managing Director of Direxion from its inception in November 2017 through January 2019.
Gerald E. Shanley III: Mr. Shanley
has extensive audit experience and spent ten years in the tax practice of an international public accounting firm. He is a certified public accountant and has a JD degree. He has extensive business experience as the president of a closely held
manufacturing company, a director of several closely held companies, a business and tax consultant and a trustee of a private investment trust. He has served on the boards of several charitable and not for profit organizations. He also has multiple
years of service as a Trustee.
John A. Weisser: Mr. Weisser has
extensive experience in the investment management business, including as managing director of an investment bank and a director of other registered investment companies. He also has multiple years of service as a Trustee.
David L. Driscoll: Mr. Driscoll has
extensive experience with risk assessment and strategic planning as a partner and manager of various real estate partnerships and companies.
Jacob C. Gaffey: Mr. Gaffey has
extensive experience with providing investment banking and valuation services to various companies. Mr. Gaffey has been a director and a member of an audit committee of a public company since 2011.
Henry W. Mulholland: Mr. Mulholland has
extensive experience with equity trading, risk management, equity market structure as well as managing regulatory and compliance matters.
Board Committees
The Trust has an
Audit Committee, consisting of Messrs. Weisser, Shanley, Driscoll, Gaffey and Mulholland. The members of the Audit Committee are Independent Trustees. The primary responsibilities of the Trust’s Audit Committee are, as set forth in its
charter, to make recommendations to the Board Members as to: the engagement or discharge of the Trust’s independent registered public accounting firm (including the audit fees charged by the auditors); the supervision of investigations into
matters relating to audit matters; the review with the independent registered public accounting firm of the results of audits; and addressing any other matters regarding audits. The Audit Committee met three times during the Trust’s most
recent fiscal year.
The Trust also has a Nominating and
Governance Committee, consisting of Messrs. Weisser, Shanley, Driscoll, Gaffey and Mulholland each of whom is an Independent Trustee. The primary responsibilities of the Nominating and Governance Committee are to make recommendations to the Board on
issues related to the composition and operation of the Board, and communicate with management on those issues. The Nominating and Governance Committee also evaluates and nominates Board member candidates. The Nominating and Governance Committee will
consider nominees recommended by shareholders. Such recommendations should be in writing and addressed to a Fund with attention to the Nominating and Governance Committee Chair. The recommendations must include the following Preliminary Information
regarding the nominee: (1) name; (2) date of birth; (3) education; (4) business professional or other relevant experience and areas of expertise; (5) current business and home addresses and contact information; (6) other board positions or prior
experience; and (7) any knowledge and
experience relating to investment companies and
investment company governance. The Nominating and Governance Committee met three times during the Trust’s most recent fiscal year.
The Trust has a Qualified Legal
Compliance Committee, consisting of Messrs. Weisser, Shanley, Driscoll, Gaffey and Mulholland. The members of the Qualified Legal Compliance Committee are Independent Trustees of the Trust. The primary responsibility of the Trust’s Qualified
Legal Compliance Committee is to receive, review and take appropriate action with respect to any report (“Report”) made or referred to the Committee by an attorney of evidence of a material violation of applicable U.S. federal or state
securities law, material breach of a fiduciary duty under U.S. federal or state law or a similar material violation by the Trust or by any officer, director, employee or agent of the Trust. The Qualified Legal Compliance Committee did not meet
during the Trust’s most recent fiscal year.
Principal Officers of the Trust
The officers of the Trust conduct
and supervise its daily business. Unless otherwise noted, an individual’s business address is 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019. As of the date of this SAI, the officers of the Trust, their ages,
their business address and their principal occupations during the past five years are as follows:
Name,
Address
and Age
|
Position(s)
Held with
Fund
|
Term
of
Office and
Length of
Time Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in the
Direxion
Family of
Investment
Companies
Overseen
by Trustee
(1)
|
Other
Trusteeships/
Directorships Held
by Trustee During
Past Five Years
|
Robert
D. Nestor
Age: 50
|
President
|
One
Year;
Since 2018
|
President,
Rafferty Asset Management, LLC and Direxion Advisors, LLC, since April 2018; Blackrock, Inc. (May 2007-April 2018), most recently as Managing Director.
|
N/A
|
N/A
|
Patrick
J. Rudnick
Age: 45
|
Principal
Executive
Officer
Principal Financial
Officer
|
One
Year;
Since 2018
One Year;
Since 2010
|
Senior
Vice President, since March 2013, Rafferty Asset Management, LLC; Senior Vice President, since November 2017, Direxion Advisors, LLC.
|
N/A
|
N/A
|
Angela
Brickl
Age: 42
|
Chief
Compliance
Officer
Secretary
|
One
Year;
Since 2018
One Year;
Since 2011
|
General
Counsel, Rafferty Asset Management LLC, since October 2010 and Direxion Advisors, LLC, since November 2017; Chief Compliance Officer, Rafferty Asset Management, LLC, since September 2012 and Direxion Advisors, LLC, since November 2017.
|
N/A
|
N/A
|
(1)
|
The Direxion Family of
Investment Companies consists of the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 93 of the 120 funds registered with the SEC, the Direxion Funds which, as of the date of this SAI, offers for sale to the
public 15 funds registered with the SEC and the Direxion Insurance Trust which, as of the date of this SAI, does not have any funds registered with the SEC.
|
The following table shows the amount of
equity securities owned in each of the following operational Funds and the Direxion Family of Investment Companies by the Trustees as of the calendar year ended December 31, 2018:
Dollar
Range of Equity Securities Owned:
|
Interested
Trustee:
|
Independent
Trustees:
|
|
Daniel
D.
O’Neill
|
Gerald
E.
Shanley III
|
John
Weisser
|
David
L.
Driscoll
|
Jacob
C.
Gaffey
|
Henry
W.
Mulholland
|
Direxion
Daily Mid Cap Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Mid Cap Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily S&P 500
®
Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily S&P 500
®
Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Small Cap Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Small Cap Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily MSCI Brazil Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily FTSE China Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily FTSE China Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily MSCI Developed Markets Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily MSCI Developed Markets Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily MSCI Emerging Markets Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily MSCI Emerging Markets Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily FTSE Europe Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily MSCI India Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily MSCI Japan Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Latin America Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily MSCI Mexico Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Russia Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Russia Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily MSCI South Korea Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily EURO STOXX 50
®
Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Aerospace & Defense Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Dollar
Range of Equity Securities Owned:
|
Interested
Trustee:
|
Independent
Trustees:
|
|
Daniel
D.
O’Neill
|
Gerald
E.
Shanley III
|
John
Weisser
|
David
L.
Driscoll
|
Jacob
C.
Gaffey
|
Henry
W.
Mulholland
|
Direxion
Daily S&P Biotech Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily S&P Biotech Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Consumer Discretionary Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Consumer Discretionary Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Consumer Staples Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Consumer Staples Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Energy Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Energy Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Financial Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Financial Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Gold Miners Index Bull 3X Shares
|
$0
|
$0
|
$1-$10,000
|
$0
|
$0
|
$0
|
Direxion
Daily Gold Miners Index Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Healthcare Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Homebuilders & Supplies Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Industrials Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Junior Gold Miners Index Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Junior Gold Miners Index Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Natural Gas Related Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Natural Gas Related Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Pharmaceutical & Medical Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily MSCI Real Estate Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily MSCI Real Estate Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Dollar
Range of Equity Securities Owned:
|
Interested
Trustee:
|
Independent
Trustees:
|
|
Daniel
D.
O’Neill
|
Gerald
E.
Shanley III
|
John
Weisser
|
David
L.
Driscoll
|
Jacob
C.
Gaffey
|
Henry
W.
Mulholland
|
Direxion
Daily Regional Banks Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Regional Banks Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Retail Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Semiconductor Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Semiconductor Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Technology Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Technology Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Transportation Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily Utilities Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily 7-10 Year Treasury Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily 7-10 Year Treasury Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily 20+ Year Treasury Bull 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Direxion
Daily 20+ Year Treasury Bear 3X Shares
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
Aggregate
Dollar Range of Equity Securities in the Direxion Family of Investment Companies
(1)
|
Over
$100,000
|
$0
|
$1-$10,000
|
$0
|
$0
|
$0
|
(1)
|
The Direxion Family of
Investment Companies consists of the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 93 of the 120 funds registered with the SEC, the Direxion Funds which, as of the date of this SAI, offers for sale to the
public 15 funds registered with the SEC and the Direxion Insurance Trust which, as of the date of this SAI, does not have any funds registered with the SEC.
|
The Trust’s Trust Instrument
provides that the Trustees will not be liable for errors of judgment or mistakes of fact or law. However, they are not protected against any liability to which they would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of their office.
No officer,
director or employee of Rafferty receives any compensation from the Funds for acting as a Trustee or officer of the Trust. The following table shows the compensation earned by each Trustee for the Trust’s fiscal year ended October 31,
2018:
Name
of Person,
Position
|
Aggregate
Compensation
From the
Trust
(1)
|
Pension
or
Retirement Benefits
Accrued As Part of
the Trust’s
Expenses
|
Estimated
Annual Benefits
Upon Retirement
|
Aggregate
Compensation
From the Direxion
Family of
Investment
Companies Paid
to the Trustees
(2)
|
Interested
Trustee
|
Daniel
D. O’Neill
|
$0
|
$0
|
$0
|
$0
|
Independent
Trustees
|
Gerald
E. Shanley III
|
$93,438
|
$0
|
$0
|
$124,583
|
John
A. Weisser
|
$93,438
|
$0
|
$0
|
$124,583
|
David
L. Driscoll
|
$92,188
|
$0
|
$0
|
$122,917
|
Jacob
C. Gaffey
|
$92,188
|
$0
|
$0
|
$122,917
|
Henry
W. Mulholland
(3)
|
$85,938
|
$0
|
$0
|
$114,583
|
(1)
Trustee compensation is
allocated across the operational Funds of the Trust based on the proportion of the Fund’s net assets to the total net assets of the operational Funds of the Trust.
(2)
For the fiscal year ended
October 31, 2018, Trustees’ fees and expenses in the amount of $457,190 were incurred by the Trust.
(3)
Mr. Mulholland was
elected as a Trustee December 1, 2017.
Principal Shareholders, Control Persons and
Management Ownership
A principal shareholder is any
person who owns of record or beneficially 5% or more of the outstanding shares of a Fund. A control person is a shareholder that owns beneficially or through controlled companies more than 25% of the voting securities of a company or acknowledges
the existence of control. Shareholders owning voting securities in excess of 25% may determine the outcome of any matter affecting and voted on by shareholders of a Fund.
As of February 1,
2019, the following shareholders were considered to be either a principal shareholder or control person of the following operational Funds:
Direxion Daily Mid Cap Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
COR
Clearing LLC
9300 Underwood Avenue Suite 400
Omaha, NE 68114
|
COR
Securities Holdings Inc.
|
DE
|
30.77%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
22.04%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
12.52%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
9.26%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
5.52%
|
Record
|
Direxion Daily Mid Cap Bear 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
15.63%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
15.04%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
14.97%
|
Record
|
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Interactive
Brokers
8 Greenwich Office Park 2nd Floor
Greenwich, CT 06831
|
N/A
|
N/A
|
14.52%
|
Record
|
Mizuho
Trust & Banking
111 River Street
Hoboken, NJ 07030
|
N/A
|
N/A
|
9.32%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
9.04%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
5.62%
|
Record
|
Direxion Daily S&P 500
®
Bull 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
23.58%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
16.83%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
15.09%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
8.96%
|
Record
|
Interactive
Brokers
8 Greenwich Office Park 2nd Floor
Greenwich, CT 06831
|
N/A
|
N/A
|
7.25%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
5.09%
|
Record
|
Direxion Daily S&P 500
®
Bear 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
17.18%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
16.33%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
13.35%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
7.74%
|
Record
|
The
Bank of New York Mellon
One Wall Street
New York, NY 10286
|
N/A
|
N/A
|
7.22%
|
Record
|
Interactive
Brokers
8 Greenwich Office Park 2nd Floor
Greenwich, CT 06831
|
N/A
|
N/A
|
5.90%
|
Record
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
5.32%
|
Record
|
Direxion Daily Small Cap Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
Fidelity
Global Brokerage Group, Inc.
|
DE
|
25.95%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
22.94%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
15.31%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
8.26%
|
Record
|
Direxion Daily Small Cap Bear 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
21.67%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
18.97%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
14.67%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
7.66%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
5.84%
|
Record
|
Direxion Daily MSCI Brazil Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
15.29%
|
Record
|
Pershing
LLC
1 Pershing Plaza
Jersey City, NJ 07399
|
N/A
|
N/A
|
14.62%
|
Record
|
Brown
Brothers Harriman & Co.
50 Milk Street
Boston, MA 02109
|
N/A
|
N/A
|
9.51%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
8.28%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
7.44%
|
Record
|
Morgan
Stanley & Co.
Harbourside Financial Center Plaza 3, 1st Floor
Jersey City, NJ 07311
|
N/A
|
N/A
|
7.36%
|
Record
|
Direxion Daily FTSE China Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
20.61%
|
Record
|
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
14.07%
|
Record
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
11.15%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
8.17%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
6.70%
|
Record
|
Direxion Daily FTSE China Bear 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
13.53%
|
Record
|
Interactive
Brokers
8 Greenwich Office Park 2nd Floor
Greenwich, CT 06831
|
N/A
|
N/A
|
12.82%
|
Record
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
8.98%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
6.89%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
5.66%
|
Record
|
J.P.
Morgan Chase Bank
14201 Dallas Parkway
Dallas, TX 75254
|
N/A
|
N/A
|
5.17%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
5.14%
|
Record
|
Direxion Daily MSCI Developed Markets Bull
3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
16.75%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
14.90%
|
Record
|
J.P.
Morgan Chase Bank
14201 Dallas Parkway
Dallas, TX 75254
|
N/A
|
N/A
|
12.12%
|
Record
|
Pershing
LLC
1 Pershing Plaza
Jersey City, NJ 07399
|
N/A
|
N/A
|
9.12%
|
Record
|
Wells
Fargo
420 Montgomery Street
San Francisco, California
|
N/A
|
N/A
|
6.39%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
5.47%
|
Record
|
Goldman
Sachs & Co.
30 Hudson Street
Jersey City, NJ 07302
|
N/A
|
N/A
|
5.07%
|
Record
|
Direxion Daily MSCI Developed Markets Bear
3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
17.84%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
13.33%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
12.41%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
11.59%
|
Record
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
6.97%
|
Record
|
Brown
Brothers Harriman & Co.
50 Milk Street
Boston, MA 02109
|
N/A
|
N/A
|
6.49%
|
Record
|
Direxion Daily MSCI Emerging Markets Bull
3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
18.83%
|
Record
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
14.16%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
13.54%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
12.11%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
6.14%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
5.83%
|
Record
|
Pershing
LLC
1 Pershing Plaza
Jersey City, NJ 07399
|
N/A
|
N/A
|
5.10%
|
Record
|
Direxion Daily MSCI Emerging Markets Bear
3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
Citigroup
Financial Products Inc.
|
DE
|
46.16%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
8.78%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
5.83%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
5.29%
|
Record
|
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
5.05%
|
Record
|
Direxion Daily FTSE Europe Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
COR
Clearing LLC
9300 Underwood Avenue Suite 400
Omaha, NE 68114
|
COR
Securities Holdings Inc.
|
DE
|
43.01%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
16.54%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
10.18%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
9.69%
|
Record
|
Direxion Daily MSCI India Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
19.60%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
17.53%
|
Record
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
15.24%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
7.46%
|
Record
|
Interactive
Brokers
8 Greenwich Office Park 2nd Floor
Greenwich, CT 06831
|
N/A
|
N/A
|
7.18%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
6.92%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
6.06%
|
Record
|
Direxion Daily MSCI Japan Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
20.98%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
12.69%
|
Record
|
The
Bank of New York Mellon
One Wall Street
New York, NY 10286
|
N/A
|
N/A
|
8.70%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
8.03%
|
Record
|
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
National
Bank Financial
130 King Street West Suite 3200
Toronto, Ontario M5X 1J9
|
N/A
|
N/A
|
7.68%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
7.46%
|
Record
|
Direxion Daily Latin America Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
21.75%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
12.00%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
10.80%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
10.10%
|
Record
|
COR
Clearing LLC
9300 Underwood Avenue Suite 400
Omaha, NE 68114
|
N/A
|
N/A
|
6.82%
|
Record
|
Direxion Daily Russia Bull 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
Citigroup
Financial Products Inc.
|
DE
|
38.12%
|
Record
|
Pershing
LLC
1 Pershing Plaza
Jersey City, NJ 07399
|
N/A
|
N/A
|
12.33%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
7.55%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
6.94%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
5.80%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
5.43%
|
Record
|
Direxion Daily Russia Bear 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
13.76%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
12.98%
|
Record
|
Interactive
Brokers
8 Greenwich Office Park 2nd Floor
Greenwich, CT 06831
|
N/A
|
N/A
|
12.59%
|
Record
|
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
10.09%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
7.93%
|
Record
|
Apex
Clearing Corp.
1700 Pacific Avenue Suite 1400
Dallas, TX 75201
|
N/A
|
N/A
|
5.59%
|
Record
|
Brown
Brothers Harriman & Co.
50 Milk Street
Boston, MA 02109
|
N/A
|
N/A
|
5.12%
|
Record
|
Direxion Daily MSCI South Korea Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
18.18%
|
Record
|
Mizuho
Trust & Banking
111 River Street
Hoboken, NJ 07030
|
N/A
|
N/A
|
17.80%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
11.38%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
9.88%
|
Record
|
J.P.
Morgan Chase Bank
14201 Dallas Parkway
Dallas, TX 75254
|
N/A
|
N/A
|
8.96%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
5.42%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
5.41%
|
Record
|
Direxion Daily Gold Miners Index Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
16.59%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
13.20%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
12.96%
|
Record
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
11.41%
|
Record
|
Brown
Brothers Harriman & Co.
50 Milk Street
Boston, MA 02109
|
N/A
|
N/A
|
9.67%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
6.42%
|
Record
|
Direxion Daily Gold
Miners Index Bear 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
TD
Ameritrade Online Holdings Corporation
|
DE
|
28.03%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
12.31%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
9.90%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
8.18%
|
Record
|
Interactive
Brokers
8 Greenwich Office Park 2nd Floor
Greenwich, CT 06831
|
N/A
|
N/A
|
7.07%
|
Record
|
Direxion Daily
Heathcare Bull 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
Fidelity
Global Brokerage Group, Inc.
|
DE
|
31.06%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
14.50%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
12.23%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
7.42%
|
Record
|
Vanguard
Marketing Corp
100 Vanguard Boulevard
Malvern, PA 19355
|
N/A
|
N/A
|
6.78%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
5.96%
|
Record
|
Interactive
Brokers
8 Greenwich Office Park 2nd Floor
Greenwich, CT 06831
|
N/A
|
N/A
|
5.55%
|
Record
|
Direxion Daily
Junior Gold Miners Index Bull 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
22.05%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
16.58%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
10.20%
|
Record
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
6.54%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
6.47%
|
Record
|
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
6.08%
|
Record
|
Direxion Daily Junior Gold Miners Index
Bear 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
TD
Ameritrade Online Holdings Corporation
|
DE
|
26.50%
|
Record
|
Interactive
Brokers
8 Greenwich Office Park 2nd Floor
Greenwich, CT 06831
|
N/A
|
N/A
|
13.02%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
12.16%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
9.25%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
8.89%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
7.31%
|
Record
|
Direxion Daily Natural Gas Related Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
20.04%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
19.19%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
14.64%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
7.71%
|
Record
|
Interactive
Brokers
8 Greenwich Office Park 2nd Floor
Greenwich, CT 06831
|
N/A
|
N/A
|
7.59%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
6.62%
|
Record
|
Direxion Daily Natural Gas Related Bear 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
The
Bank of New York Mellon
One Wall Street
New York, NY 10286
|
BNY
Investment Adviser
|
NY
|
35.35%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
21.67%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
8.86%
|
Record
|
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
6.31%
|
Record
|
Direxion Daily Regional Banks Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
TD
Ameritrade Online Holdings Corporation
|
DE
|
31.52%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
19.65%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
11.53%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
7.19%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
5.86%
|
Record
|
Direxion Daily Regional Banks Bear 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
Merrill
Lynch & Co., Inc.
|
DE
|
58.70%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
13.84%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
5.49%
|
Record
|
Direxion Daily Retail Bull 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
19.85%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
18.37%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
16.09%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
10.44%
|
Record
|
ABN
AMRO Clearing
175 W Jackson Blvd Suite 400
Chicago, IL 60605
|
N/A
|
N/A
|
6.34%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
5.59%
|
Record
|
Direxion Daily Semiconductor Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
Fidelity
Global Brokerage Group, Inc.
|
DE
|
29.72%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
20.33%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
11.01%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
7.26%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
6.15%
|
Record
|
Direxion Daily Semiconductor Bear 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
23.25%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
17.78%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
14.31%
|
Record
|
Interactive
Brokers
8 Greenwich Office Park 2nd Floor
Greenwich, CT 06831
|
N/A
|
N/A
|
7.69%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
6.32%
|
Record
|
Direxion Daily Energy Bull 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
20.31%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
18.37%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
11.36%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
9.00%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
6.96%
|
Record
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
5.22%
|
Record
|
Direxion Daily Energy Bear 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
21.76%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
14.39%
|
Record
|
Morgan
Stanley & Co.
Harbourside Financial Center Plaza 3, 1st Floor
Jersey City, NJ 07311
|
N/A
|
N/A
|
8.90%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
8.04%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
6.28%
|
Record
|
SG
Americas Securities
245 Park Ave
New York, NY 10170
|
N/A
|
N/A
|
5.07%
|
Record
|
ABN
AMRO Clearing
175 W Jackson Blvd Suite 400
Chicago, IL 60605
|
N/A
|
N/A
|
5.06%
|
Record
|
Direxion Daily Financial Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
19.40%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
19.29%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
15.04%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
6.24%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
5.59%
|
Record
|
Direxion Daily Financial Bear 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
24.26%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
13.10%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
10.36%
|
Record
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
6.91%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
6.27%
|
Record
|
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Pershing
LLC
1 Pershing Plaza
Jersey City, NJ 07399
|
N/A
|
N/A
|
6.09%
|
Record
|
Direxion Daily MSCI Real Estate Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
24.40%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
18.11%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
14.81%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
12.82%
|
Record
|
Pershing
LLC
1 Pershing Plaza
Jersey City, NJ 07399
|
N/A
|
N/A
|
6.68%
|
Record
|
Direxion Daily MSCI Real Estate Bear 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
22.40%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
19.49%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
15.54%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
14.72%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
5.90%
|
Record
|
Direxion Daily Technology Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
Fidelity
Global Brokerage Group, Inc.
|
DE
|
27.61%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
20.94%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
12.86%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
9.75%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
5.28%
|
Record
|
Direxion Daily Technology Bear 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
21.46%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
17.34%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
12.41%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
10.74%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
7.00%
|
Record
|
Direxion Daily 7-10 Year Treasury Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
J.P.
Morgan Chase Bank
14201 Dallas Parkway
Dallas, TX 75254
|
N/A
|
N/A
|
18.81%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
17.86%
|
Record
|
Interactive
Brokers
8 Greenwich Office Park 2nd Floor
Greenwich, CT 06831
|
N/A
|
N/A
|
15.92%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
14.74%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
14.74%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
7.82%
|
Record
|
Direxion Daily 7-10 Year Treasury Bear 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
15.35%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
14.78%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
13.47%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
12.36%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
10.67%
|
Record
|
Brown
Brothers Harriman & Co.
50 Milk Street
Boston, MA 02109
|
N/A
|
N/A
|
6.70%
|
Record
|
Direxion Daily 20+ Year Treasury Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
23.98%
|
Record
|
Interactive
Brokers
8 Greenwich Office Park 2nd Floor
Greenwich, CT 06831
|
N/A
|
N/A
|
12.70%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
12.26%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
11.98%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
10.83%
|
Record
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
8.46%
|
Record
|
Direxion Daily 20+ Year Treasury Bear 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
21.76%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
16.99%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
11.22%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
9.19%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
5.35%
|
Record
|
Direxion Daily S&P Biotech Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
Fidelity
Global Brokerage Group, Inc.
|
DE
|
27.54%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
20.42%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
12.72%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
7.65%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
6.80%
|
Record
|
Direxion Daily S&P Biotech Bear 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
21.32%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
18.61%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
9.59%
|
Record
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
6.91%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
6.10%
|
Record
|
Interactive
Brokers
8 Greenwich Office Park 2nd Floor
Greenwich, CT 06831
|
N/A
|
N/A
|
5.41%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
5.17%
|
Record
|
Direxion Daily S&P Oil & Gas Exp.
& Prod. Bull 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
24.01%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
20.34%
|
Record
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
11.28%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
8.80%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
7.65%
|
Record
|
Direxion Daily S&P Oil & Gas Exp.
& Prod. Bear 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
ETCM
Holdings, LLC
|
DE
|
25.53%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
16.96%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
13.11%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
11.62%
|
Record
|
Citigroup
Global Markets, Inc.
700 Red Brook Blvd Suite 300
Owings Mills, MD 21117
|
N/A
|
N/A
|
7.12%
|
Record
|
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
5.68%
|
Record
|
Direxion Daily Pharmaceutical &
Medical Bull 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
Merrill
Lynch & Co., Inc.
|
DE
|
29.61%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
19.39%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
16.87%
|
Record
|
Brown
Brothers Harriman & Co.
50 Milk Street
Boston, MA 02109
|
N/A
|
N/A
|
7.91%
|
Record
|
Vanguard
Marketing Corp
100 Vanguard Boulevard
Malvern, PA 19355
|
N/A
|
N/A
|
5.76%
|
Record
|
Direxion Daily Homebuilders & Supplies
Bull 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
J.P.
Morgan Chase Bank
14201 Dallas Parkway
Dallas, TX 75254
|
N/A
|
N/A
|
23.45%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
18.90%
|
Record
|
COR
Clearing LLC
9300 Underwood Avenue Suite 400
Omaha, NE 68114
|
N/A
|
N/A
|
14.09%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
11.68%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
8.53%
|
Record
|
Direxion Daily
Consumer Discretionary Bull 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
UBS
Securities LLC
480 Washington Blvd
Jersey City, NJ 07310
|
UBS
Americas Inc.
|
DE
|
57.28%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
18.25%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
9.33%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
7.43%
|
Record
|
Direxion Daily Consumer
Discretionary Bear 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
Merrill
Lynch & Co., Inc.
|
DE
|
46.51%
|
Record
|
UBS
Securities LLC
480 Washington Blvd
Jersey City, NJ 07310
|
UBS
Americas Inc.
|
DE
|
26.22%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
15.16%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
6.36%
|
Record
|
Direxion Daily
Consumer Staples Bull 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Vanguard
Marketing Corp
100 Vanguard Boulevard
Malvern, PA 19355
|
The
Vanguard Group, Inc.
|
DE
|
52.55%
|
Record
|
ABN
AMRO Clearing
175 W Jackson Blvd Suite 400
Chicago, IL 60605
|
N/A
|
N/A
|
23.90%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
10.87%
|
Record
|
UBS
Securities LLC
480 Washington Blvd
Jersey City, NJ 07310
|
N/A
|
N/A
|
6.36%
|
Record
|
Direxion Daily
Consumer Staples Bear 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
UBS
Securities LLC
480 Washington Blvd
Jersey City, NJ 07310
|
UBS
Americas Inc.
|
DE
|
79.40%
|
Record
|
ABN
AMRO Clearing
175 W Jackson Blvd Suite 400
Chicago, IL 60605
|
N/A
|
N/A
|
16.57%
|
Record
|
Direxion Daily Utilities Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
22.42%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
17.07%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
16.08%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
11.35%
|
Record
|
ABN
AMRO Clearing
175 W Jackson Blvd Suite 400
Chicago, IL 60605
|
N/A
|
N/A
|
7.31%
|
Record
|
Citadel
Securities
601 Lexington Avenue
New York, NY 10022
|
N/A
|
N/A
|
5.79%
|
Record
|
Direxion Daily MSCI Mexico Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
COR
Clearing LLC
9300 Underwood Avenue Suite 400
Omaha, NE 68114
|
COR
Securities Holdings Inc.
|
DE
|
45.11%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
16.05%
|
Record
|
Direxion Daily Aerospace & Defense
Bull 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
Fidelity
Global Brokerage Group, Inc.
|
DE
|
29.18%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
21.87%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
14.90%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
5.91%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
5.26%
|
Record
|
Direxion Daily Transportation Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
COR
Clearing LLC
9300 Underwood Avenue Suite 400
Omaha, NE 68114
|
COR
Securities Holdings Inc.
|
DE
|
42.49%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
Merrill
Lynch & Co., Inc.
|
DE
|
34.44%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
6.18%
|
Record
|
Direxion Daily Industrials Bull 3X
Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
Merrill
Lynch & Co., Inc.
|
DE
|
26.35%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
18.39%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
13.09%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
12.89%
|
Record
|
E*Trade
Clearing LLC
34 Exchange Place Plaza II
Jersey City, NJ 07311
|
N/A
|
N/A
|
9.04%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
8.88%
|
Record
|
Direxion Daily EURO STOXX 50
®
Bull 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
The
Charles Schwab Corporation
|
DE
|
28.16%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
22.76%
|
Record
|
Deutsche
Bank Securities, Inc.
5022 Gate Parkway Suite 100
Jacksonville, FL 32256
|
N/A
|
N/A
|
10.15%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
8.57%
|
Record
|
COR
Clearing LLC
9300 Underwood Avenue Suite 400
Omaha, NE 68114
|
N/A
|
N/A
|
8.50%
|
Record
|
Direxion Daily
Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
COR
Clearing LLC
9300 Underwood Avenue Suite 400
Omaha, NE 68114
|
COR
Securities Holdings Inc.
|
DE
|
32.03%
|
Record
|
TD
Ameritrade Clearing LLC
1005 N Ameritrade Place
Bellevue, NE 68005
|
N/A
|
N/A
|
20.45%
|
Record
|
National
Financial Services LLC
200 Liberty Street
New York, NY 10281
|
N/A
|
N/A
|
14.07%
|
Record
|
Charles
Schwab & Co.
2423 E Lincoln Drive
Phoenix, AZ 85016
|
N/A
|
N/A
|
6.34%
|
Record
|
Direxion Daily
Communication Services Index Bull 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
UBS
Securities LLC
480 Washington Blvd
Jersey City, NJ 07310
|
UBS
Americas Inc.
|
DE
|
66.40%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
22.55%
|
Record
|
ABN
AMRO Clearing
175 W Jackson Blvd Suite 400
Chicago, IL 60605
|
N/A
|
N/A
|
5.51%
|
Record
|
Direxion Daily
Communication Services Index Bear 3X Shares
Name
and Address
|
Parent
Company
|
Jurisdiction
|
%
Ownership
|
Type
of
Ownership
|
UBS
Securities LLC
480 Washington Blvd
Jersey City, NJ 07310
|
UBS
Americas Inc.
|
DE
|
71.25%
|
Record
|
Merrill
Lynch, Pierce Fenner, Smith
4804 Deer Lake Drive E
Jacksonville, FL 32246
|
N/A
|
N/A
|
21.92%
|
Record
|
ABN
AMRO Clearing
175 W Jackson Blvd Suite 400
Chicago, IL 60605
|
N/A
|
N/A
|
5.34%
|
Record
|
In addition,
as of February 1, 2019, the Trustees and Officers as a group owned less than 1% of the outstanding shares of each operational Fund.
Rafferty, 1301 Avenue of the
Americas (6th Avenue), 28th Floor, New York, New York 10019, provides investment advice to the Funds. Rafferty was organized as a New York limited liability company in June 1997. Lawrence C. Rafferty controls Rafferty through his ownership in
Rafferty Holdings, LLC and Daniel D. O'Neill controls Rafferty through his ownership in Minakian Partners, LLC.
Under an Investment Advisory
Agreement (“Advisory Agreement”) between Rafferty and the Trust, on behalf of each Fund dated August 13, 2008, Rafferty provides a continuous investment program for each Fund’s assets in accordance with its investment objectives,
policies and limitations, and oversees the day-to-day operations of each Fund, subject to the supervision of the Trustees. Rafferty bears all costs associated with providing these advisory services and the expenses of the Trustees who are affiliated
with or interested persons of Rafferty. The Trust bears all other expenses that are not assumed by Rafferty as described in the Prospectus. The Trust also is liable for nonrecurring expenses as may arise, including litigation to which a Fund may be
a party. The Trust also may have an obligation to indemnify its Trustees and officers with respect to any such litigation.
The Advisory
Agreement was initially approved by the Trustees (including all Independent Trustees) and Rafferty, as sole shareholder of each Fund in compliance with the 1940 Act. After an initial approval period of two years, the Advisory Agreement is renewable
at least annually with respect to each Fund, so long as its continuance is approved (1) by the vote, cast in person at a meeting called for that purpose, of a majority of the Independent Trustees of the Trust; and (2) by the majority vote of either
the full Board or the vote of a majority of the outstanding shares of a Fund. The Advisory Agreement automatically terminates on assignment and is terminable upon a 60-day written notice either by the Trust or Rafferty.
Pursuant to the Advisory Agreement, each
Fund pays Rafferty a fee at an annualized rate based on a percentage of its average daily net assets of 0.75%.
The tables below show
the advisory fees incurred by each of the following operational Funds and the amount of fees waived and/or reimbursed by Rafferty for the fiscal years ended October 31.
Direxion
Daily Mid Cap Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$517,607
|
$24,905
|
$492,702
|
Year
Ended October 31, 2017
|
$461,704
|
$30,329
|
$431,375
|
Year
Ended October 31, 2016
|
$371,692
|
$37,975
|
$333,717
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $3,300.
|
Direxion
Daily Mid Cap Bear 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$32,330
|
$23,575
|
$8,755
|
Year
Ended October 31, 2017
|
$68,610
|
$30,506
|
$38,104
|
Year
Ended October 31, 2016
|
$89,635
|
$31,444
|
$58,191
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $2,289.
|
Direxion
Daily S&P 500
®
Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$7,300,309
|
$54,941
|
$7,245,368
|
Year
Ended October 31, 2017
(2)
|
$4,238,314
|
$
7,910
|
$4,230,404
|
Year
Ended October 31, 2016
(3)
|
$4,001,776
|
$25,105
|
$3,976,671
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $37,837.
|
(2)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $75,877.
|
(3)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $8,677.
|
Direxion
Daily S&P 500
®
Bear 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$2,239,627
|
$
40,895
|
$2,198,732
|
Year
Ended October 31, 2017
(2)
|
$3,284,291
|
$113,357
|
$3,170,934
|
Year
Ended October 31, 2016
(3)
|
$3,228,141
|
$
92,977
|
$3,135,164
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $9,835.
|
(2)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $6,671.
|
(3)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $18,899.
|
Direxion
Daily Small Cap Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
|
$5,752,879
|
$170,311
|
$5,582,568
|
Year
Ended October 31, 2017
(1)
|
$4,980,429
|
$
68,394
|
$4,912,035
|
Year
Ended October 31, 2016
|
$5,682,680
|
$139,350
|
$5,543,330
|
(1)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $1,963.
|
Direxion
Daily Small Cap Bear 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$2,980,223
|
$
87,614
|
$2,892,609
|
Year
Ended October 31, 2017
|
$4,681,304
|
$141,273
|
$4,540,031
|
Year
Ended October 31, 2016
(2)
|
$3,867,827
|
$189,079
|
$3,678,748
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $28,121.
|
(2)
For the fiscal year ended October 31, 2016, the Adviser
recouped previously waived expenses in the amount of $4,076.
Direxion
Daily MSCI Brazil Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$1,656,361
|
$14,134
|
$1,642,227
|
Year
Ended October 31, 2017
(2)
|
$730,456
|
$25,319
|
$705,137
|
Year
Ended October 31, 2016
(3)
|
$421,194
|
$41,581
|
$379,613
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $38,373.
|
(2)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $2,803.
|
(3)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $38.
|
Direxion
Daily FTSE China Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
|
$2,252,046
|
$92,090
|
$2,159,956
|
Year
Ended October 31, 2017
|
$1,223,463
|
$73,449
|
$1,150,014
|
Year
Ended October 31, 2016
|
$1,034,891
|
$75,021
|
$959,870
|
Direxion
Daily FTSE China Bear 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$395,572
|
$32,855
|
$362,717
|
Year
Ended October 31, 2017
|
$426,889
|
$52,149
|
$374,740
|
Year
Ended October 31, 2016
|
$540,503
|
$61,794
|
$478,709
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $1,391.
|
Direxion
Daily MSCI Developed Markets Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$214,806
|
$51,385
|
$163,421
|
Year
Ended October 31, 2017
|
$180,269
|
$60,131
|
$120,138
|
Year
Ended October 31, 2016
|
$181,028
|
$62,016
|
$119,012
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $3,629.
|
Direxion
Daily MSCI Developed Markets Bear 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$32,111
|
$69,837
|
$(37,726)
|
Year
Ended October 31, 2017
|
$44,155
|
$77,095
|
$(32,940)
|
Year
Ended October 31, 2016
|
$71,013
|
$75,544
|
$(4,531)
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $2,164.
|
Direxion
Daily MSCI Emerging Markets Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$2,221,323
|
$33,843
|
$2,187,480
|
Year
Ended October 31, 2017
(2)
|
$1,454,322
|
$41,792
|
$1,412,530
|
Year
Ended October 31, 2016
(3)
|
$1,362,902
|
$68,967
|
$1,293,935
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $4,195.
|
(2)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $2,209.
|
(3)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $104.
|
Direxion
Daily MSCI Emerging Markets Bear 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$601,350
|
$35,413
|
$565,937
|
Year
Ended October 31, 2017
|
$828,552
|
$46,805
|
$781,747
|
Year
Ended October 31, 2016
(2)
|
$895,446
|
$57,645
|
$837,801
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $6,967.
|
(2)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $3,334.
|
Direxion
Daily FTSE Europe Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$483,920
|
$
1,361
|
$482,559
|
Year
Ended October 31, 2017
(2)
|
$312,345
|
$10,803
|
$301,542
|
Year
Ended October 31, 2016
|
$252,472
|
$23,550
|
$228,922
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $12,064.
|
(2)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $108.
|
Direxion
Daily MSCI India Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$775,658
|
$
-
|
$775,658
|
Year
Ended October 31, 2017
|
$704,929
|
$29,893
|
$675,036
|
Year
Ended October 31, 2016
|
$588,531
|
$46,522
|
$542,009
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $18,167.
|
Direxion
Daily MSCI Japan Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$177,788
|
$27,603
|
$150,185
|
Year
Ended October 31, 2017
|
$64,176
|
$47,738
|
$16,438
|
Year
Ended October 31, 2016
|
$79,371
|
$47,576
|
$31,795
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $353.
|
Direxion
Daily Latin America Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$120,024
|
$27,046
|
$92,978
|
Year
Ended October 31, 2017
|
$110,799
|
$34,261
|
$76,538
|
Year
Ended October 31, 2016
|
$93,239
|
$37,072
|
$56,167
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $1,159.
|
Direxion
Daily MSCI Mexico Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$74,575
|
$18,115
|
$56,460
|
May
3, 2017
(2)
- October 31, 2017
|
$10,823
|
$25,738
|
$(14,915)
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $1,686.
|
(2)
|
Commencement of Operations
|
Direxion
Daily Russia Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
|
$1,187,506
|
$
-
|
$1,187,506
|
Year
Ended October 31, 2017
(1)
|
$1,249,113
|
$
-
|
$1,249,113
|
Year
Ended October 31, 2016
(2)
|
$1,313,785
|
$29,349
|
$1,284,436
|
(1)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $64,248.
|
(2)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $62,892.
|
Direxion
Daily Russia Bear 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$171,273
|
$15,700
|
$155,573
|
Year
Ended October 31, 2017
(2)
|
$276,189
|
$17,963
|
$258,226
|
Year
Ended October 31, 2016
(3)
|
$363,608
|
$18,693
|
$344,915
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $4,343.
|
(2)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $107.
|
(3)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $1,280.
|
Direxion
Daily MSCI South Korea Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$141,024
|
$24,035
|
$116,989
|
Year
Ended October 31, 2017
|
$57,573
|
$29,004
|
$28,569
|
Year
Ended October 31, 2016
|
$32,714
|
$30,643
|
$2,071
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $439.
|
Direxion
Daily EURO STOXX 50
®
Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$27,824
|
$40,045
|
$(12,221)
|
July
12, 2017
(2)
- October 31, 2017
|
$9,393
|
$27,257
|
$(17,864)
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $2,293.
|
(2)
|
Commencement of Operations
|
Direxion
Daily Aerospace & Defense Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$555,813
|
$16,113
|
$539,700
|
May
3, 2017
(2)
- October 31, 2017
|
$61,745
|
$29,488
|
$32,257
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $335.
|
(2)
|
Commencement of Operations
|
Direxion
Daily S&P Biotech Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$3,255,212
|
$42,279
|
$3,212,933
|
Year
Ended October 31, 2017
(2)
|
$2,234,796
|
$25,050
|
$2,209,746
|
Year
Ended October 31, 2016
(3)
|
$1,546,515
|
$48,721
|
$1,497,794
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $9,523.
|
(2)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $23,515.
|
(3)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $7,336.
|
Direxion
Daily S&P Biotech Bear 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$557,293
|
$27,354
|
$529,939
|
Year
Ended October 31, 2017
|
$775,309
|
$34,217
|
$741,092
|
Year
Ended October 31, 2016
(2)
|
$449,452
|
$42,944
|
$406,508
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $10,678.
|
(2)
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $1,451.
Direxion
Daily Energy Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$3,330,152
|
$11,598
|
$3,318,554
|
Year
Ended October 31, 2017
(2)
|
$4,003,551
|
$23,570
|
$3,979,981
|
Year
Ended October 31, 2016
(3)
|
$3,861,665
|
$42,811
|
$3,818,854
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $11,647.
|
(2)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $47,961.
|
(3)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $9,820.
|
Direxion
Daily Energy Bear 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$305,757
|
$23,235
|
$282,522
|
Year
Ended October 31, 2017
|
$377,575
|
$39,361
|
$338,214
|
Year
Ended October 31, 2016
|
$587,541
|
$43,863
|
$543,678
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $6,386.
|
Direxion
Daily Financial Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$14,092,859
|
$322,582
|
$13,770,277
|
Year
Ended October 31, 2017
(2)
|
$10,456,654
|
$
18,118
|
$10,438,536
|
Year
Ended October 31, 2016
(3)
|
$8,798,822
|
$
88,665
|
$8,710,157
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $115,402.
|
(2)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $206,718.
|
(3)
For the fiscal year ended October 31, 2016, the Adviser
recouped previously waived expenses in the amount of $14,755.
Direxion
Daily Financial Bear 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$1,085,372
|
$
19,261
|
$1,066,111
|
Year
Ended October 31, 2017
(2)
|
$1,743,396
|
$105,295
|
$1,638,101
|
Year
Ended October 31, 2016
(3)
|
$2,525,282
|
$
99,421
|
$2,425,861
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $14,067.
|
(2)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $285.
|
(3)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $1,237.
|
Direxion
Daily Gold Miners Index Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
|
$9,432,961
|
$
-
|
$9,432,961
|
Year
Ended October 31, 2017
(1)
|
$11,345,165
|
$54,967
|
$11,290,198
|
Year
Ended October 31, 2016
(2)
|
$8,837,549
|
$48,924
|
$8,788,625
|
(1)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $14,713.
|
(2)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $8,991.
|
Direxion
Daily Gold Miners Index Bear 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
|
$1,857,652
|
$
-
|
$1,857,652
|
Year
Ended October 31, 2017
(1)
|
$2,243,704
|
$
852
|
$2,242,852
|
Year
Ended October 31, 2016
(2)
|
$2,279,192
|
$76,078
|
$2,203,114
|
(1)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $50,285.
|
(2)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $90,418.
|
|
|
Direxion
Daily Healthcare Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$1,198,220
|
$23,120
|
$1,175,100
|
Year
Ended October 31, 2017
(2)
|
$1,235,997
|
$29,753
|
$1,206,244
|
Year
Ended October 31, 2016
(3)
|
$1,869,294
|
$66,252
|
$1,803,042
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $6,244.
|
(2)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $691.
|
(3)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $6,575.
|
Direxion
Daily Homebuilders & Supplies Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$456,581
|
$22,934
|
$433,647
|
Year
Ended October 31, 2017
|
$53,896
|
$30,435
|
$23,461
|
Year
Ended October 31, 2016
(2)
|
$19,597
|
$34,712
|
$(15,115)
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $16.
|
(2)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $567.
|
Direxion
Daily Industrials Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$49,769
|
$37,228
|
$12,541
|
May
3, 2017
(2)
- October 31, 2017
|
$10,144
|
$34,998
|
$(24,854)
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $2,017.
|
(2)
|
Commencement of Operations
|
Direxion
Daily Junior Gold Miners Index Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
|
$5,942,777
|
$
-
|
$5,942,777
|
Year
Ended October 31, 2017
|
$6,128,970
|
$
-
|
$6,128,970
|
Year
Ended October 31, 2016
(1)
|
$2,577,807
|
$22,583
|
$2,555,224
|
(1)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $90,301.
|
Direxion
Daily Junior Gold Miners Index Bear 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$714,653
|
$
2,228
|
$712,425
|
Year
Ended October 31, 2017
(2)
|
$998,283
|
$
654
|
$997,629
|
Year
Ended October 31, 2016
(3)
|
$416,791
|
$62,477
|
$354,314
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $41,781.
|
(2)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $45,823.
|
(3)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $23,672.
|
Direxion
Daily Natural Gas Related Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$260,068
|
$19,903
|
$240,165
|
Year
Ended October 31, 2017
|
$390,917
|
$41,268
|
$349,649
|
Year
Ended October 31, 2016
|
$393,282
|
$66,435
|
$326,847
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $3,199.
|
Direxion
Daily Natural Gas Related Bear 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$40,736
|
$21,826
|
$18,910
|
Year
Ended October 31, 2017
|
$33,815
|
$33,950
|
$(135)
|
December
3, 2015
(2)
- October 31, 2016
|
$50,920
|
$46,696
|
$4,224
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $2,191.
|
(2)
|
Commencement of Operations
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$967,216
|
$22,234
|
$944,982
|
Year
Ended October 31, 2017
|
$881,993
|
$29,033
|
$852,960
|
Year
Ended October 31, 2016
(2)
|
$347,769
|
$38,994
|
$308,775
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $5,875.
|
(2)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $495.
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$441,678
|
$20,109
|
$421,569
|
Year
Ended October 31, 2017
|
$189,541
|
$34,091
|
$155,450
|
Year
Ended October 31, 2016
(2)
|
$172,890
|
$37,128
|
$135,762
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $463.
|
(2)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $351.
|
Direxion
Daily Pharmaceutical & Medical Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
November
15, 2017 - October 31, 2018
(1,2)
|
$28,312
|
$41,178
|
$(12,866)
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $2,157.
|
(2)
|
Commencement of Operations
|
Direxion
Daily MSCI Real Estate Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$468,404
|
$21,062
|
$447,342
|
Year
Ended October 31, 2017
(2)
|
$551,379
|
$39,820
|
$511,559
|
Year
Ended October 31, 2016
(3)
|
$689,613
|
$48,669
|
$640,944
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $4,258.
|
(2)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $6,588.
|
(3)
For the fiscal year ended October 31, 2016, the Adviser
recouped previously waived expenses in the amount of $7,743.
Direxion
Daily MSCI Real Estate Bear 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$119,704
|
$59,917
|
$59,787
|
Year
Ended October 31, 2017
|
$133,644
|
$70,117
|
$63,527
|
Year
Ended October 31, 2016
|
$119,682
|
$70,252
|
$49,430
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $1,076.
|
Direxion
Daily Regional Banks Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$320,426
|
$12,446
|
$307,980
|
Year
Ended October 31, 2017
(2)
|
$178,547
|
$25,944
|
$152,603
|
Year
Ended October 31, 2016
|
$17,630
|
$40,319
|
$(22,689)
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $2,560.
|
(2)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $32.
|
Direxion
Daily Regional Banks Bear 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$19,576
|
$23,828
|
$(4,252)
|
Year
Ended October 31, 2017
|
$20,377
|
$32,622
|
$(12,245)
|
Year
Ended October 31, 2016
|
$13,262
|
$40,429
|
$(27,167)
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $2,450.
|
Direxion
Daily Retail Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$221,185
|
$20,421
|
$200,764
|
Year
Ended October 31, 2017
(2)
|
$229,965
|
$31,491
|
$198,474
|
Year
Ended October 31, 2016
|
$356,010
|
$39,834
|
$316,176
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $3,721.
|
(2)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $2.
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
April
19, 2018 - October 31, 2018
(1,2)
|
$16,073
|
$30,753
|
$(14,680)
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $989.
|
(2)
|
Commencement of Operations
|
Direxion
Daily Semiconductor Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$5,341,510
|
$45,122
|
$5,296,388
|
Year
Ended October 31, 2017
(2)
|
$1,970,550
|
$
1,672
|
$1,968,878
|
Year
Ended October 31, 2016
(3)
|
$766,198
|
$41,292
|
$724,906
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $128,047.
|
(2)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $64,042.
|
(3)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $1,613.
|
Direxion
Daily Semiconductor Bear 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$426,299
|
$12,266
|
$414,033
|
Year
Ended October 31, 2017
|
$286,519
|
$25,270
|
$261,249
|
Year
Ended October 31, 2016
(2)
|
$337,012
|
$28,749
|
$308,263
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $5,105.
|
(2)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $137.
|
Direxion
Daily Technology Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$4,895,086
|
$42,157
|
$4,852,929
|
Year
Ended October 31, 2017
(2)
|
$1,989,874
|
$14,619
|
$1,975,255
|
Year
Ended October 31, 2016
(3)
|
$1,272,557
|
$38,305
|
$1,234,252
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $35,311.
|
(2)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $19,772.
|
(3)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $1,431.
|
Direxion
Daily Technology Bear 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$185,735
|
$21,855
|
$163,880
|
Year
Ended October 31, 2017
|
$130,224
|
$32,559
|
$97,665
|
Year
Ended October 31, 2016
|
$145,002
|
$37,968
|
$107,034
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $244.
|
Direxion
Daily Transportation Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$59,705
|
$35,473
|
$24,232
|
May
3, 2017
(2)
- October 31, 2017
|
$10,136
|
$36,044
|
$(25,908)
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $1,985.
|
(2)
|
Commencement of Operations
|
Direxion
Daily Utilities Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$53,280
|
$36,930
|
$16,350
|
May
3, 2017
(2)
- October 31, 2017
|
$10,395
|
$34,765
|
$(24,370)
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $1,976.
|
(2)
|
Commencement of Operations
|
Direxion
Daily 7-10 Year Treasury Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$51,282
|
$40,079
|
$11,203
|
Year
Ended October 31, 2017
|
$47,452
|
$46,631
|
$821
|
Year
Ended October 31, 2016
|
$56,866
|
$46,735
|
$10,131
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $2,013.
|
Direxion
Daily 7-10 Year Treasury Bear 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$179,144
|
$27,551
|
$151,593
|
Year
Ended October 31, 2017
|
$218,097
|
$28,082
|
$190,015
|
Year
Ended October 31, 2016
|
$224,071
|
$38,077
|
$185,994
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $4,168.
|
Direxion
Daily 20+ Year Treasury Bull 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
(1)
|
$731,088
|
$
-
|
$731,088
|
Year
Ended October 31, 2017
(2)
|
$629,322
|
$3,858
|
$625,464
|
Year
Ended October 31, 2016
(3)
|
$553,629
|
$9,461
|
$544,168
|
(1)
|
For the fiscal year ended
October 31, 2018, the Adviser recouped previously waived expenses in the amount of $15,780.
|
(2)
|
For the fiscal year ended
October 31, 2017, the Adviser recouped previously waived expenses in the amount of $7,848.
|
(3)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $4,849.
|
Direxion
Daily 20+ Year Treasury Bear 3X Shares
|
Advisory
fee accrued
|
Fees
waived and
expenses absorbed by
Adviser
|
Total
fees paid to
(waived by)
Adviser
|
Year
Ended October 31, 2018
|
$2,864,774
|
$
-
|
$2,864,774
|
Year
Ended October 31, 2017
|
$3,158,048
|
$
-
|
$3,158,048
|
Year
Ended October 31, 2016
(1)
|
$2,879,404
|
$0
|
$2,879,404
|
(1)
|
For the fiscal year ended
October 31, 2016, the Adviser recouped previously waived expenses in the amount of $17,438.
|
Pursuant to a separate Management
Services Agreement, Rafferty performs certain administrative services on behalf of the Funds, such as negotiating, coordinating and implementing the Trust’s contractual obligations with the Funds' service providers; monitoring, overseeing and
reviewing the performance of such service providers to ensure adherence to applicable contractual obligations; and preparing or coordinating reports and presentations to the Board of Trustees with respect to such service providers as requested or as
deemed necessary; and other services that are described in the Management Services Agreement. For these services, the Trust pays to Rafferty a fee at the annual rate of 0.026% on the first $10 billion of the aggregate average daily net assets of the
Funds in the Trust and 0.024% on the aggregate net assets above $10 billion. This Management Services Fee may be waived under the Operating Expense Limitation Agreement that Rafferty has entered into with each Fund. This arrangement may be
terminated at any time by the Board.
Each Fund is responsible for its own
operating expenses. Rafferty has entered into an Operating Expense Limitation Agreement with each Fund. Under this Operating Expense Limitation Agreement, Rafferty has contractually agreed to cap all or a portion of its advisory and management
services fees and/or reimburse each Fund for Other Expenses (excluding, as applicable, among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses,
brokerage commissions and extraordinary expenses) through September 1, 2020 to the extent that each Fund’s Total Annual Fund Operating Expenses exceed 0.95% of each Fund’s average daily net assets. Any expense waiver or reimbursement is
subject to recoupment by the Adviser within the following three years only if Total Annual Fund Operating Expenses fall below the lesser of this percentage limitation and any percentage limitation in place at the time. This agreement may be
terminated or revised at any time at the discretion of the Board upon notice to the Adviser and without the approval of Fund shareholders.
Rafferty shall not be liable to the
Trust or any Fund for anything done or omitted by it, except acts or omissions involving willful misfeasance, bad faith, negligence or reckless disregard of the duties imposed upon it by its agreement with the Trust or for any losses that may be
sustained in the purchase, holding or sale of any security.
Pursuant to Section 17(j) of the 1940
Act and Rule 17j-1 thereunder, the Trust, Rafferty and the Funds' distributor have adopted Codes of Ethics. These codes permit portfolio managers and other access persons of a Fund to invest in securities that may be owned by a Fund, subject to
certain restrictions.
Paul Brigandi and
Tony Ng are jointly and primarily responsible for the day-to-day management of the Funds. An investment trading team of Rafferty employees assists Mr. Brigandi and Mr. Ng in the day-to-day management of the Funds subject to their primary
responsibility and oversight. The Portfolio Managers work with the investment trading team to decide the target allocation of each Fund’s investments and on a day-to-day basis, an individual portfolio trader executes transactions for the Funds
consistent with the target allocation. The members of the investment trading team rotate periodically among the various series of the Trust, including the Funds, so that no single individual is assigned to a specific Fund for extended periods of
time.
In addition to the Funds,
Mr. Brigandi and Mr. Ng manage the following other accounts as of October 31, 2018:
Accounts
|
Total
Number
of Accounts
|
Total
Assets
(In Billions)
|
Total
Number of
Accounts with
Performance
Based Fees
|
Total
Assets
of Accounts
with Performance
Based Fees
|
Registered
Investment Companies
|
34
|
$1.6
|
0
|
$0
|
Other
Pooled Investment Vehicles
|
0
|
$
0
|
0
|
$0
|
Other
Accounts
|
0
|
$
0
|
0
|
$0
|
Rafferty
manages no other accounts with investment objectives similar to those of the Funds. In addition, two or more funds advised by Rafferty may invest in the same securities but the nature of each investment (long or short) may be opposite and in
different proportions. Generally, due to the nature of the various Funds advised by Rafferty, if a Fund with a leveraged investment objective increases in value, the performance of a Fund with an inverse or an inverse leveraged investment objective
will decrease in value and vice versa. Rafferty ordinarily executes transactions for a Fund “market-on-close,” in which funds purchasing or selling the same security receive the same closing price.
Rafferty has not identified any
additional material conflicts between a Fund and other accounts managed by the investment team. However, other actual or apparent conflicts of interest may arise in connection with the day-to-day management of a Fund and other accounts. The
management of a Fund and other accounts may result in unequal time and attention being devoted to a Fund and other accounts. Rafferty’s management fees for the services it provides to other accounts varies and may be higher or lower than the
advisory fees it receives from a Fund. This could create potential conflicts of interest in which the portfolio manager may appear to favor one investment vehicle over another resulting in an account paying higher fees or one investment vehicle out
performing another.
The
investment team’s compensation is paid by Rafferty. Their compensation primarily consists of a fixed base salary and a bonus. The investment team’s salary is reviewed annually and increases are determined by factors such as performance
and seniority. Bonuses are determined by the individual performance of an employee including factors such as attention to detail, process, and efficiency, and are impacted by the overall performance of the firm. The investment team’s salary
and bonus are not based on a Fund’s performance and as a result, no benchmarks are used. Along with all other employees of Rafferty, the investment team may participate in the firm’s 401(k) retirement plan where Rafferty may make
matching contributions up to a defined percentage of their salary.
Mr. Brigandi and Mr.
Ng did not own any shares of the Funds as of October 31, 2018.
Proxy Voting Policies and Procedures
The Board has
adopted policies and procedures with respect to voting proxies (the “Proxy Policy”) related to portfolio securities of the Funds. Pursuant to these policies and procedures the Board of the Trust has delegated responsibility for voting
such proxies to the Adviser, subject to the Board’s continuing oversight.
The Proxy Policy is intended to
protect shareholder interests and comply with applicable state and federal corporate and securities laws. It applies to any voting rights with respect to securities held in accounts of the Funds. To assist the Adviser in its responsibility for
voting proxies and administering the overall proxy voting process, the Adviser has retained Institutional Shareholder Services (“ISS”) as an expert in the proxy voting and corporate governance area. ISS is a subsidiary of Vestar Capital
Partners VI, L.P.; a leading U.S. middle market private equity firm. The services provided by ISS include in-depth research, global issuer analysis, and voting recommendations as well as vote execution, reporting and record keeping. ISS issues
monthly reports which are reviewed by the Adviser to assure proxies are being voted properly. The Adviser and ISS also perform checks on a quarterly basis to match the voting activity with available shareholder meeting information. ISS’
management meets on a regular basis to discuss its approach to new developments and amendments to existing proxy voting guidelines (the “Guidelines”). Information on such developments and amendments are then provided to the
Adviser.
The Guidelines are
maintained and implemented by ISS and are an extensive list of common proxy voting issues with recommended voting actions based on the overall goal of achieving maximum shareholder value and protection of shareholder interests and rights. Generally,
proxies are voted in accordance with the voting recommendations contained in the Guidelines. If necessary, the Adviser will be consulted by ISS on non-routine issues. Proxy issues and factors considered when resolving proxy issues in the Guidelines
include, but are not limited to:
•
|
Election of Directors
–
considering all factors such as director qualifications, term of office and age limits.
|
•
|
Proxy Contests
–
considering factors such as voting nominees in contested elections and reimbursement of expenses.
|
•
|
Election of Auditors
–
considering factors such as independence and reputation of the auditing firm.
|
•
|
Proxy Contest Defenses
–
considering factors such as board structure and cumulative voting.
|
•
|
Tender Offer Defenses
–
considering factors such as poison pills (stock purchase rights plans) and fair price provisions.
|
•
|
Miscellaneous Governance
Issues
–
considering factors such as confidential voting and equal access.
|
•
|
Capital Structure
–
considering factors such as common stock authorization and stock distributions.
|
•
|
Executive and Director
Compensation
–
considering factors such as performance goals and employee stock purchase plans.
|
•
|
State of Incorporation
–
considering factors such as state takeover statutes and voting on reincorporation proposals.
|
•
|
Mergers and Corporate
Restructuring
–
considering factors such as spin-offs and asset sales.
|
•
|
Mutual Fund Proxy Voting
–
considering factors such as election of directors and proxy contests.
|
•
|
Social
and Corporate Responsibility Issues
–
considering factors such as social, environmental, and labor issues.
|
A full description of the Guidelines and
voting policy is maintain by the Adviser, and a complete copy of the Guidelines is available without charge, upon request by calling the Adviser at 866-476-7523.
Conflicts
of Interest
From time
to time, proxy issues may pose a material conflict of interest between the Funds' shareholders and the Adviser, the Distributor or any affiliates thereof. Due to the limited nature of the Adviser’s activities
(
e.g.
, no underwriting business, no publicly-traded affiliates, no investment banking activities, and no research recommendations), conflicts of interest are likely to be infrequent. Nevertheless, it shall be
the duty of the Adviser to monitor potential conflicts of interest. In the event a conflict of interest arises, the Adviser will direct ISS to use its independent judgment to vote affected proxies in accordance with approved guidelines.
Proxy
Voting Recordkeeping
The Adviser, with the assistance of
ISS, maintains for a period of at least five years, a record of each proxy statement received and materials that were considered when the proxy was voted during the calendar year. Information on how the Funds voted proxies relating to portfolio
securities for the 12-month (or shorter) period ended June 30 is available without charge, upon request, by calling the Adviser at 866-476-7523 or on the SEC’s website at
http://www.sec.gov
.
Fund Administrator, Fund Accounting Agent, Transfer
Agent and Custodian
U.S. Bancorp Fund Services, LLC,
615 East Michigan Street, Milwaukee, Wisconsin 53202, serves as the Funds' administrator. The Bank of New York Mellon, 101 Barclay Street, New York, New York 10286, serves as the Funds' transfer agent, and custodian. Rafferty also performs certain
administrative services for the Funds.
Pursuant to a Fund Administration
Servicing Agreement between the Trust and USBFS, USBFS provides the Trust with administrative and management services (other than investment advisory services). As compensation for these services, the Trust pays USBFS a fee based on the
Trust’s total average daily net assets. USBFS also is entitled to certain out-of-pocket expenses. The amount of fees paid by the Trust to USBFS pursuant to the Fund Administration Servicing Agreement for the fiscal years indicated is set forth
in the table below.
|
Fees
paid to the Administrator
|
Year
Ended October 31, 2018
|
$2,046,515
|
Year
Ended October 31, 2017
|
$2,402,024
|
Year
Ended October 31, 2016
|
$2,302,972
|
Pursuant to a Fund Accounting
Agreement between the Trust and BNYM, BNYM provides the Trust with accounting services, including portfolio accounting services, tax accounting services and furnishing financial reports. As compensation for these accounting services, the Trust pays
BNYM a fee based on the Trust’s total average daily net assets and a minimum annual per fund fee, subject to certain negotiated fee waivers. BNYM also is entitled to certain out-of-pocket expenses for the services mentioned above, including
pricing expenses. The amount of fees paid by the Trust pursuant to the Fund Accounting Agreement for the fiscal years indicated is set forth in the table below.
|
Fees
paid to the Fund Accounting Agent
|
Year
Ended October 31, 2018
|
$1,876,840
|
Year
Ended October 31, 2017
|
$1,629,992
|
Year
Ended October 31, 2016
|
$1,651,529
|
Pursuant to a Custody Agreement, BNYM
serves as the custodian of a Fund’s assets. The custodian holds and administers the assets in a Fund’s portfolios. Pursuant to the Custody Agreement, the custodian receives an annual fee based on the Trust’s total average daily net
assets and certain settlement charges. The custodian also is entitled to certain out-of-pocket expenses. The amount of fees paid by the Trust pursuant to the Custody Agreement for the fiscal years indicated is set forth in the table below.
|
Fees
paid to the Custodian
|
Year
Ended October 31, 2018
|
$1,132,612
|
Year
Ended October 31, 2017
|
$1,016,661
|
Year
Ended October 31, 2016
|
$1,057,934
|
Pursuant to a Transfer Agency and
Service Agreement between the Trust and BNYM, BNYM provides the Trust with transfer agency services, which includes Creation and Redemption Unit order processing. As compensation for these transfer agency services, the Trust pays BNYM a fee based on
the Trust’s total average daily net assets and a minimum annual complex fee. BNYM also is entitled to certain out-of-pocket expenses for the services mentioned above. The amount of fees paid by the Trust pursuant to the Transfer Agency and
Service Agreement for the fiscal years indicated is set forth in the table below.
|
Fees
paid to the Transfer Agent
|
Year
Ended October 31, 2018
|
$1,171,567
|
Year
Ended October 31, 2017
|
$1,116,750
|
Year
Ended October 31, 2016
|
$1,136,219
|
Effective August 25, 2017, each Fund
has entered into a Securities Lending Authorization Agreement with BNYM (the “Securities Lending Agreement”) whereby BNYM will be the Lending Agent for each Fund. Each Fund retains a portion of the securities lending income and remits
the remaining portion to BNYM as compensation for its services as securities lending agent. Securities lending income is generally equal to the net income earned from the reinvestment of cash collateral after payment of cash collateral fees, and any
fees or other payments from borrowers of securities.
BNYM acts as agent to the Trust to
lend available securities with any person on its list of approved borrowers. BNYM determines whether a loan shall be made and negotiates and establishes the terms and conditions of the loan with the borrower. BNYM ensures that all substitute
interest, dividends, and other distributions paid with respect to loan securities is credited to a Fund’s relevant account on the date such amounts are delivered by the borrower to BNYM. BNYM receives and holds, on a Fund’s behalf,
collateral from borrowers to secure obligations of borrowers with respect to any loan of available securities. BNYM marks loaned securities and collateral to their market value each business day based upon the market value of the collateral and
loaned securities at the close of business employing the most recently available pricing information and receives and delivers collateral in order to maintain the value of the collateral at no less than 102% of the market value of the loaned
securities. At the termination of the loan, BNYM returns the collateral to the borrower upon the return of the loaned securities to BNYM. BNYM invests cash collateral in accordance with the Securities Lending Agreement. BNYM maintains such records
as are reasonably necessary to account for loans that are made and the income derived therefrom and makes available to a Fund a monthly statement describing the loans made, and the income derived from the loans, during the period. Each Fund shall
receive the net securities lending revenue based on the securities lent from its holdings. A Fund may also pay custodial fees and other expenses associated with a loan.
As of October 31, 2018, the dollar
amounts of gross and net income from securities lending activities received and the related fees and/or compensation paid by each operational Fund were as follows:
Fees
and/or Compensation for Securities Lending Activities and Related Services
|
Fund
Name
|
Gross
Income
from
Securities
Lending
Activities
|
Fees
Paid
to
Securities
Lending
Agent
from the
Revenue
Split
|
Fees
Paid for
any Cash
Collateral
Manage-
ment
Service
(Including
Fees
Deducted
from a
Pooled
Cash
Collateral
Reinvest-
ment
Vehicle)
that are
not
Included
in the
Revenue
Split
|
Admin-
istrative
Fees not
Included
in the
Revenue
Split
|
Indem-
nification
Fees
not
Included
in the
Revenue
Split
|
Borrower
Rebates
|
Other
Fees not
Included
in the
Revenue
Split
(specify)
|
Aggregate
Fees/
Comp-
ensation
for Securities
Lending
Activities
|
Net
Income
from
Securities
Lending
Activities
|
Direxion
Daily Mid Cap Bull 3X Shares
|
$15
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$15
|
Direxion
Daily Mid Cap Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily S&P 500
®
Bull 3X Shares
|
$1
|
$0
|
$-
|
$-
|
$-
|
$-
|
$-
|
$0
|
$1
|
Direxion
Daily S&P 500
®
Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily Small Cap Bull 3X Shares
|
$93,283
|
$9,606
|
$-
|
$-
|
$-
|
$61,262
|
$-
|
$70,868
|
$22,415
|
Direxion
Daily Small Cap Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily MSCI Brazil Bull 3X Shares
|
$122,561
|
$6,144
|
$-
|
$-
|
$-
|
$103,483
|
$-
|
$109,627
|
$12,934
|
Direxion
Daily FTSE China Bull 3X Shares
|
$353,423
|
$68,053
|
$-
|
$-
|
$-
|
$126,572
|
$-
|
$194,626
|
$158,797
|
Direxion
Daily FTSE China Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily MSCI Developed Markets Bull 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily MSCI Developed Markets Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily MSCI Emerging Markets Bull 3X Shares
|
$16,753
|
$1,232
|
$-
|
$-
|
$-
|
$12,646
|
$-
|
$13,878
|
$2,875
|
Direxion
Daily MSCI Emerging Markets Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily FTSE Europe Bull 3X Shares
|
$3,297
|
$454
|
$-
|
$-
|
$-
|
$1,785
|
$-
|
$2,238
|
$1,059
|
Direxion
Daily MSCI India Bull 3X Shares
|
$1,077
|
$60
|
$-
|
$-
|
$-
|
$875
|
$-
|
$936
|
$141
|
Direxion
Daily MSCI Japan Bull 3X Shares
|
$1,445
|
$129
|
$-
|
$-
|
$-
|
$1,042
|
$-
|
$1,171
|
$274
|
Direxion
Daily Latin America Bull 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily MSCI Mexico Bull 3X Shares
|
$9,348
|
$2,525
|
$-
|
$-
|
$-
|
$922
|
$-
|
$3,447
|
$5,901
|
Direxion
Daily Russia Bull 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily Russia Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily MSCI South Korea Bull 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily EURO STOXX 50
®
Bull 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily Aerospace & Defense Bull 3X Shares
|
$4,416
|
$1,098
|
$-
|
$-
|
$-
|
$747
|
$-
|
$1,845
|
$2,571
|
Direxion
Daily S&P Biotech Bull 3X Shares
|
$175,775
|
$33,250
|
$-
|
$-
|
$-
|
$62,796
|
$-
|
$96,045
|
$79,730
|
Direxion
Daily S&P Biotech Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily Consumer Discretionary Bull 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily Consumer Discretionary Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily Consumer Staples Bull 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily Consumer Staples Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily Energy Bull 3X Shares
|
$4,256
|
$615
|
$-
|
$-
|
$-
|
$2,346
|
$-
|
$2,961
|
$1,295
|
Direxion
Daily Energy Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Fees
and/or Compensation for Securities Lending Activities and Related Services
|
Fund
Name
|
Gross
Income
from
Securities
Lending
Activities
|
Fees
Paid
to
Securities
Lending
Agent
from the
Revenue
Split
|
Fees
Paid for
any Cash
Collateral
Manage-
ment
Service
(Including
Fees
Deducted
from a
Pooled
Cash
Collateral
Reinvest-
ment
Vehicle)
that are
not
Included
in the
Revenue
Split
|
Admin-
istrative
Fees not
Included
in the
Revenue
Split
|
Indem-
nification
Fees
not
Included
in the
Revenue
Split
|
Borrower
Rebates
|
Other
Fees not
Included
in the
Revenue
Split
(specify)
|
Aggregate
Fees/
Comp-
ensation
for Securities
Lending
Activities
|
Net
Income
from
Securities
Lending
Activities
|
Direxion
Daily Financial Bull 3X Shares
|
$14,853
|
$2,090
|
$-
|
$-
|
$-
|
$7,877
|
$-
|
$9,967
|
$4,886
|
Direxion
Daily Financial Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily Gold Miners Index Bull 3X Shares
|
$13,549
|
$1,081
|
$-
|
$-
|
$-
|
$9,945
|
$-
|
$11,026
|
$2,523
|
Direxion
Daily Gold Miners Index Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily Healthcare Bull 3X Shares
|
$11,272
|
$915
|
$-
|
$-
|
$-
|
$8,221
|
$-
|
$9,136
|
$2,136
|
Direxion
Daily Homebuilders & Supplies Bull 3X Shares
|
$367
|
$38
|
$-
|
$-
|
$-
|
$239
|
$-
|
$277
|
$90
|
Direxion
Daily Industrials Bull 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily Junior Gold Miners Index Bull 3X Shares
|
$1,770
|
$183
|
$-
|
$-
|
$-
|
$1,313
|
$-
|
$1,496
|
$274
|
Direxion
Daily Junior Gold Miners Index Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily Natural Gas Related Bull 3X Shares
|
$2,753
|
$723
|
$-
|
$-
|
$-
|
$279
|
$-
|
$1,002
|
$1,751
|
Direxion
Daily Natural Gas Related Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily MSCI Real Estate Bull 3X Shares
|
$535
|
$146
|
$-
|
$-
|
$-
|
$46
|
$-
|
$192
|
$343
|
Direxion
Daily MSCI Real Estate Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
|
$196,972
|
$17,877
|
$-
|
$-
|
$-
|
$137,520
|
$-
|
$155,398
|
$41,574
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily Pharmaceutical & Medical Bull 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily Regional Banks Bull 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily Regional Banks Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily Retail Bull 3X Shares
|
$45,126
|
$13,521
|
$-
|
$-
|
$-
|
$-
|
$-
|
$13,521
|
$31,605
|
Direxion
Daily Robotics, Artificial Intelligence
& Automation Index Bull 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily Semiconductor Bull 3X Shares
|
$13,883
|
$1,757
|
$-
|
$-
|
$-
|
$8,029
|
$-
|
$9,786
|
$4,097
|
Direxion
Daily Semiconductor Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily Technology Bull 3X Shares
|
$2,602
|
$240
|
$-
|
$-
|
$-
|
$1,800
|
$-
|
$2,041
|
$561
|
Direxion
Daily Technology Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily Transportation Bull 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily Utilities Bull 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Fees
and/or Compensation for Securities Lending Activities and Related Services
|
Fund
Name
|
Gross
Income
from
Securities
Lending
Activities
|
Fees
Paid
to
Securities
Lending
Agent
from the
Revenue
Split
|
Fees
Paid for
any Cash
Collateral
Manage-
ment
Service
(Including
Fees
Deducted
from a
Pooled
Cash
Collateral
Reinvest-
ment
Vehicle)
that are
not
Included
in the
Revenue
Split
|
Admin-
istrative
Fees not
Included
in the
Revenue
Split
|
Indem-
nification
Fees
not
Included
in the
Revenue
Split
|
Borrower
Rebates
|
Other
Fees not
Included
in the
Revenue
Split
(specify)
|
Aggregate
Fees/
Comp-
ensation
for Securities
Lending
Activities
|
Net
Income
from
Securities
Lending
Activities
|
Direxion
Daily 7-10 Year Treasury Bull 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily 7-10 Year Treasury Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Direxion
Daily 20+ Year Treasury Bull 3X Shares
|
$47,246
|
$3,801
|
$-
|
$-
|
$-
|
$34,481
|
$-
|
$38,282
|
$8,964
|
Direxion
Daily 20+ Year Treasury Bear 3X Shares
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Foreside Fund
Services, LLC, located at 3 Canal Plaza, Suite 100, Portland, Maine 04101, serves as the distributor (“Distributor”) in connection with the continuous offering of each Fund’s shares. The Distributor is a broker-dealer registered
with the SEC under the Securities Exchange Act of 1934 and a member of the Financial Industry Regulatory Authority. The Trust offers Shares of the Funds for sale through the Distributor in Creation Units, as described below. The Distributor will not
sell or redeem Shares in quantities less than Creation Units. The Distributor will deliver a Prospectus to persons purchasing Creation Units and will maintain records of Creation Unit orders placed and confirmations furnished by it. Pursuant to a
written agreement, the Adviser pays the Distributor for distribution-related services. For the fiscal year ended October 31, 2018, the Distributor received $1,046,468 as compensation from Rafferty for distribution services provided to the Trust,
including the operational Funds. For the fiscal year ended October 31, 2018, Foreside did not receive any underwriting commission or discounts, compensation on redemptions and repurchases, or brokerage commissions from the Funds.
The Adviser may pay certain
broker-dealers, banks and other financial intermediaries for participating in activities that are designed to make registered representatives and other professionals more knowledgeable about exchange traded products, including each Fund, or for
other activities such as participating in marketing activities and presentations, educational training programs, conferences, the development of technology platforms and reporting systems. The Adviser had arrangements to make payments based on an
annual fee for its services, as well as based on the average daily assets held by Schwab customers in certain funds managed by the Adviser, for services other than for the educational programs and marketing activities described above, only to
Charles Schwab & Co., Inc. (“Schwab”). Pursuant to the arrangement with Schwab, Schwab has agreed to promote select funds managed by the Adviser, to Schwab’s customers and not to charge certain of its customers any commissions
when those customers purchase or sell shares of those funds. Payments to a broker-dealer or intermediary may create potential conflicts of interest between the broker-dealer or intermediary and its clients. These amounts, which may be significant,
are paid by the Adviser from its own resources and not from the assets of funds managed by the Adviser. Although a portion of the Adviser’s revenue comes directly or indirectly in part from fees paid by each Fund, other ETFs advised by the
Adviser or other exchange-traded products, these payments do not increase the price paid by investors for the purchase of shares of, or the cost of owning, a Fund or other funds managed by the Adviser.
Rule 12b-1 under the 1940 Act, as
amended, (the “Rule”) provides that an investment company may bear expenses of distributing its shares only pursuant to a plan adopted in accordance with the Rule. The Trustees have adopted a Rule 12b-1 Distribution Plan (“Rule
12b-1 Plan”) pursuant to which each Fund may pay certain expenses incurred in the distribution of its shares and the servicing and maintenance of existing shareholder accounts. The Distributor, as the Funds' principal
underwriter, and Rafferty may have a direct or
indirect financial interest in the Rule 12b-1 Plan or any related agreement. Pursuant to the Rule 12b-1 Plan, each Fund may pay a fee of up to 0.25% of the Fund’s average daily net assets. No Rule 12b-1 fee is currently being charged to the
Funds.
The Rule 12b-1 Plan was
approved by the Board, including a majority of the Independent Trustees of the Funds. In approving the Rule 12b-1 Plan, the Trustees determined that there is a reasonable likelihood that the Rule 12b-1 Plan will benefit each Fund and its
shareholders. The Trustees will review quarterly and annually a written report provided by the Treasurer of the amounts expended under the Rule 12b-1 Plan and the purpose for which such expenditures were made.
The Rule 12b-1 Plan permits payments
to be made by each Fund to the Distributor or other third parties for expenditures incurred in connection with the distribution of Fund shares to investors and the provision of certain shareholder services. The Distributor or other third parties are
authorized to engage in advertising, the preparation and distribution of sales literature and other promotional activities on behalf of each Fund. In addition, the Rule 12b-1 Plan authorizes payments by each Fund to the Distributor or other third
parties for the cost related to selling or servicing efforts, preparing, printing and distributing Fund prospectuses, statements of additional information, and shareholder reports to investors.
Independent Registered Public Accounting Firm
Ernst & Young
LLP (“EY”), 220 South Sixth Street, Suite 1400, Minneapolis, Minnesota 55402, is the independent registered public accounting firm for the Trust. The Financial Statements of the Funds for the fiscal year ended October 31, 2018 (that had
commenced operations by that date), audited by EY, have been included in reliance on their report given on their authority as experts in accounting and auditing.
The Trust has selected K&L Gates
LLP, 1601 K Street, N.W., Washington, DC 20006, as its legal counsel.
Determination of Net Asset Value
A fund’s share price is
known as its NAV. Each Fund’s share price (other than the Fixed Income Funds) is calculated as of the close of regular trading on the NYSE, usually 4:00 p.m. Eastern Time (“Valuation Time”), each day the NYSE is open for business
(“Business Day”). The NYSE is open for business Monday through Friday, except in observation of the following holidays: New Year’s Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. In addition to these holidays, the Bond Market is not open on Columbus Day and Veterans’ Day. The NYSE may close early on the business day before each of these holidays and on the day after
Thanksgiving Day. NYSE holiday schedules are subject to change without notice.
Each Fixed Income Fund also
calculates its NAV as of the close of regular trading on the NYSE, usually 4:00 p.m. Eastern Time each Business Day. However, on days that the bond markets close all day, which currently includes the following holidays: New Year's Day, Martin Luther
King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day (a “Bond Market Holiday”), the Fixed Income Funds do not calculate their NAVs, even if
the NYSE is open for business. On such days, orders for purchase or redemption will receive the NAV next calculated on the following Business Day that is not a Bond Market Holiday. Similarly, on days that the bond markets close early but the NYSE
does not (usually at 2 p.m. Eastern Time, and which currently include the Friday before Memorial Day and New Year’s Eve), the Fixed Income Funds treat the portion of the day that the bond markets are closed as a Bond Market Holiday and
calculates their NAVs as of the recommended closing time for the bond markets, which may be before 4:00 p.m. Eastern Time, subject to the discretion of the Adviser. In such instances, orders for purchase or redemption that are received prior to the
close of bond markets will receive the NAV calculated at the time of the bond markets closure, whereas orders for purchase or redemption that are received thereafter will receive the NAV next calculated on the following Business Day that is not a
Bond Market Holiday.
If the
exchange or market on which a Fund’s investments are primarily traded closes early, the NAV may be calculated prior to its normal calculation time. Creation/redemption transaction order time cutoffs would also be accelerated. The value of a
Fund’s assets that trade in markets outside the United States or in currencies other than the U.S. Dollar may fluctuate when foreign markets are open but a Fund is not open for business.
A security listed
or traded on an exchange, domestic or foreign, is valued at its last sales price or settlement price on the principal exchange on which it is traded prior to the time when assets are valued. If no sale is reported at that time, the mean of the last
bid and asked prices is used. Securities primarily traded on the NASDAQ Global Market
®
(“NASDAQ
®
”) for which market quotations are readily available shall be valued using the NASDAQ
®
Official Closing Price (“NOCP”) provided by NASDAQ
®
each Business Day. The NOCP is the most recently reported price as of 4:00:02 p.m. Eastern Time, unless that price is outside the range of the
“inside” bid and asked prices’ in that case, NASDAQ
®
will adjust the price to equal the
inside bid or asked price, whichever is closer. If the
NOCP is not available, such securities shall be valued at the last sale price on the day of valuation, or if there has been no sale on such day, at the mean between the bid and asked prices.
For purposes of determining NAV per
share of a Fund, options and futures contracts are valued based on market quotations, the last sales or settlement price of the exchange on which an asset trades. The value of a futures contract equals the unrealized gain or loss on the contract
that is determined by marking the contract to the last sale price for a like contract acquired on the day on which the futures contract is being valued. The value of options on futures contracts is determined based upon the last sale price for a
like option acquired on the day on which the option is being valued. A last sale price may not be used for the foregoing purposes if the market makes a limited move with respect to a particular instrument.
For valuation purposes, quotations of
foreign securities or other assets denominated in foreign currencies are translated to U.S. Dollar equivalents using the net foreign exchange rate in effect at the close of the stock exchange in the country where the security is issued. Short-term
debt instruments having a maturity of 60 days or less are valued at amortized cost, which approximates market value. If the Board determines that the amortized cost method does not represent the fair value of the short-term debt instrument, the
investment will be valued at fair value as determined by procedures as adopted by the Board. U.S. government securities are valued at the mean between the closing bid and asked price provided by an independent third party pricing service
(“Pricing Service”).
OTC securities held by a Fund will be
valued at the last sales price or, if no sales price is reported, the mean of the last bid and asked price is used. The portfolio securities of a Fund that are listed on national exchanges are valued at the last sales price of such securities; if no
sales price is reported, the mean of the last bid and asked price is used.
Swaps are valued based upon prices from
third party vendor models or quotations from market makers to the extent available.
Dividend income and other distributions
are recorded on the ex-distribution date.
Illiquid securities, securities for
which reliable quotations or pricing services are not readily available, all other assets not valued in accordance with the foregoing principles or for which pricing information is deemed unreliable, or to the Adviser’s knowledge, does not
reflect a significant event occurring in the market, the security or asset will be valued at their respective fair value as determined in good faith by, or under procedures established by, the Trustees, which procedures may include the delegation of
certain responsibilities regarding valuation to Rafferty or the officers of the Trust. The officers of the Trust report, as necessary, to the Trustees regarding portfolio valuation determinations. The Trustees, from time to time, will review these
methods of valuation and will recommend changes that may be necessary to assure that the investments of a Fund are valued at fair value.
Additional Information Concerning Shares
Organization and Description of
Shares of Beneficial Interest
The Trust is a Delaware statutory
trust and registered investment company. The Trust was organized on April 23, 2008, and has authorized capital of unlimited Shares of beneficial interest of no par value which may be issued in more than one class or series. Currently, the Trust
consists of multiple separately managed series. The Board may designate additional series of beneficial interest and classify Shares of a particular series into one or more classes of that series.
All Shares of the Trust are freely
transferable. The Shares do not have preemptive rights or cumulative voting rights, and none of the Shares have any preference to conversion, exchange, dividends, retirements, liquidation, redemption, or any other feature. Shares have equal voting
rights, except that, in a matter affecting a particular series or class of Shares, only Shares of that series of class may be entitled to vote on the matter. Trust shareholders are entitled to require the Trust to redeem Creation Units of their
Shares. The Trust Instrument confers upon the Broad of Trustees the power, by resolution, to alter the number of Shares constituting a Creation Unit or to specify that Shares of the Trust may be individually redeemable. The Trust reserves the right
to adjust the stock prices of Shares of the Trust to maintain convenient trading ranges for investors. Any such adjustments would be accomplished through stock splits or reverse stock splits which would have no effect on the net assets of the
applicable Fund.
Under Delaware
law, the Trust is not required to hold an annual shareholders meeting if the 1940 Act does not require such a meeting. Generally, there will not be annual meetings of Trust shareholders. Trust shareholders may remove Trustees from office by votes
cast at a meeting of Trust shareholders or by written consent. If requested by shareholders of at least 10% of the outstanding Shares of the Trust, the Trust will call a meeting of a Fund’s shareholders for the purpose of voting upon the
question of removal of a Trustee of the Trust and will assist in communications with other Trust shareholders.
The Trust Instrument disclaims
liability of the shareholders of the officers of the Trust for acts or obligations of the Trust which are binding only on the assets and property of the Trust. The Trust Instrument provides for indemnification from the Trust’s property for all
loss and expense of any Fund shareholder held personally liable for the obligations of the Trust. The risk of a Trust shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Funds would not
be able to meet the Trust’s obligations and this risk, thus, should be considered remote.
If a Fund does not grow to a size to
permit it to be economically viable, the Fund may cease operations. In such an event, investors may be required to liquidate or transfer their investments at an inopportune time.
Book Entry Only System
The Depository Trust Company
(“DTC”) acts as securities depositary for the Shares. Shares of each Fund are represented by global securities registered in the name of DTC or its nominee and deposited with, or on behalf of, DTC. Except as provided below, certificates
will not be issued for Shares.
DTC has advised the Trust as follows:
it is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing
agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities of its participants (“DTC Participants”) and to facilitate the clearance and settlement of securities transactions
among the DTC Participants in such securities through electronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the NYSE, the AMEX and the
Financial Industry Regulatory Authority. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or
indirectly (“Indirect Participants”). DTC agrees with and represents to DTC Participants that it will administer its book-entry system in accordance with its rules and by-laws and requirements of law. Beneficial ownership of Shares is
limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in Shares (owners of such beneficial interests are referred to herein as
“Beneficial owners”) is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and
Beneficial owners that are not DTC Participants). Beneficial owners will receive from or through the DTC Participant a written confirmation relating to their purchase of Shares. The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such laws may impair the ability of certain investors to acquire beneficial interests in Shares.
Beneficial owners of Shares are not
entitled to have Shares registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive form and are not considered the registered holder thereof. Accordingly, each Beneficial owner must rely on
the procedures of DTC, the DTC Participant and any Indirect Participant through which such Beneficial owner holds its interests, to exercise any rights of a holder of Shares. The Trust understands that under existing industry practice, in the event
the Trust requests any action of holders of Shares, or a Beneficial owner desires to take any action that DTC, as the record owner of all outstanding Shares, is entitled to take, DTC would authorize the DTC Participants to take such action and that
the DTC Participants would authorize the Indirect Participants and Beneficial owners acting through such DTC Participants to take such action and would otherwise act upon the instructions of Beneficial owners owning through them. As described above,
the Trust recognizes DTC or its nominee as the owner of all Shares for all purposes. Conveyance of all notices, statements and other communications to Beneficial owners is effected as follows. Pursuant to the Depositary Agreement between the Trust
and DTC, DTC is required to make available to the Trust upon request and for a fee to be charged to the Trust a listing of Share holdings of each DTC Participant. The Trust shall inquire of each such DTC Participant as to the number of Beneficial
owners holding Shares, directly or indirectly, through such DTC Participant. The Trust shall provide each such DTC Participant with copies of such notice, statement or other communication, in such form, number and at such place as such DTC
Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or indirectly, to such Beneficial owners. In addition, the Trust shall pay to each such DTC Participant a
fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements.
Distributions of Shares shall be
made to DTC or its nominee, Cede & Co., as the registered holder of all Shares. DTC or its nominee, upon receipt of any such distributions, shall credit immediately DTC Participants’ accounts with payments in amounts proportionate to their
respective beneficial interests in Shares as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial owners of Shares held through such DTC Participants will be governed by standing
instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in a “street name,” and will be the responsibility of such DTC Participants. The Trust has no
responsibility or liability for any aspects of the records relating to or notices to Beneficial owners, or payments made on account of beneficial ownership interests in such Shares, or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants and the Indirect Participants and Beneficial owners owning through such DTC
Participants.
DTC may determine
to discontinue providing its service with respect to Shares at any time by giving reasonable notice to the Trust and discharging its responsibilities with respect thereto under applicable law. Under such circumstances, the Trust shall take action
either to find a replacement for DTC to perform its functions at a comparable cost or, if such a replacement is unavailable, to issue and deliver printed certificates representing ownership of Shares, unless the Trust makes other arrangements
with respect thereto satisfactory to the Exchange.
The Trust will not make the DTC book-entry Dividend Reinvestment Service available for use by Beneficial Owners for reinvestment of their cash proceeds but certain brokers may make a dividend reinvestment service available to their clients. Brokers
offering such services may require investors to adhere to specific procedures and timetables in order to participate. Investors interested in such a service should contact their broker for availability and other necessary details.
Purchases and Redemptions
The Trust issues
and redeems Shares of each Fund only in aggregations of Creation Units. The number of Shares of a Fund that constitute a Creation Unit for each Fund and the value of such Creation Unit as of each Fund’s inception were 50,000 and $1,250,000 for
the Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares, Direxion Daily Preferred Stock Bull 3X Shares, Direxion Daily Communication Services Index Bull 3X Shares, Direxion Daily Communication Services Bull 3X
Shares, Direxion Daily Dow 30 Bull 3X Shares, Direxion Daily Dow 30 Bear 3X Shares, Direxion Daily Aerospace & Defense Bull 3X Shares, Direxion Daily Aerospace & Defense Bear 3X Shares, Direxion Daily Consumer Discretionary Bull 3X Shares,
Direxion Daily Consumer Discretionary Bear 3X Shares, Direxion Daily Consumer Staples Bull 3X Shares Direxion Daily Consumer Staples Bear 3X Shares, Direxion Daily Industrials Bull 3X Shares, Direxion Daily Industrials Bear 3X Shares, Direxion Daily
Metals & Mining Bull 3X Shares, Direxion Daily Metals & Mining Bear 3X Shares, Direxion Daily Pharmaceutical & Medical Bull 3X Shares, Direxion Daily Pharmaceutical & Medical Bear 3X Shares, Direxion Daily Transportation Bull 3X
Shares, Direxion Daily Transportation Bear 3X Shares, Direxion Daily Utilities Bull 3X Shares, Direxion Daily Utilities Bear 3X Shares, Direxion Daily MSCI Canada Bull 3X Shares, Direxion Daily MSCI Canada Bear 3X Shares, Direxion Daily MSCI Italy
Bull 3X Shares, Direxion Daily MSCI Italy Bear 3X Shares, Direxion Daily MSCI Mexico Bull 3X Shares, Direxion Daily MSCI Mexico Bear 3X Shares, Direxion Daily EURO STOXX 50
®
Bull 3X Shares, and the Direxion Daily EURO STOXX
50
®
Bear 3X Shares, and $6,000,000, respectively for the Direxion Daily S&P 500
®
Bull 3X Shares, Direxion Daily S&P 500
®
Bear
3X Shares, Direxion Daily Small Cap Bull 3X Shares, Direxion Daily Small Cap Bear 3X Shares, Direxion Daily Financial Bull 3X Shares, Direxion Daily Financial Bear 3X Shares, Direxion Daily Energy Bull 3X Shares and Direxion Daily Energy Bear 3X
Shares, and 50,000 and $2,000,000, respectively for the remainder of the Funds.
See “Purchase and Issuance of
Creation Units” and “Redemption of Creation Units” below. The Board reserves the right to declare a split or a consolidation in the number of Shares outstanding of any Fund, and may make a corresponding change in the number of
Shares constituting a Creation Unit, in the event that the per Shares price in the secondary market rises (or declines) to an amount that falls outside the range deemed desirable by the Board for any other reason.
Purchase and Issuance of Creation
Units
The Trust issues and sells
Shares only in Creation Units on a continuous basis through the Distributor, without a sales load, at their NAV next determined after receipt, on any Business Day (as defined above), of an order in proper form.
Creation Units of Shares may be
purchased only by or through an Authorized Participant by depositing a basket of securities and/or cash for a Bull Fund. The consideration for purchase of a Creation Unit of Shares of a Bull Fund consists of either cash or the securities and cash
that are held by a Bull Fund (“Deposit Securities”), the Balancing Amount, and the appropriate transaction fee (collectively, the “Portfolio Deposit”). The Balancing Amount will be the amount equal to the differential, if
any, between the total aggregate market value of the Deposit Securities and the NAV of the Creation Unit(s) being purchased and will be paid to, or received from, the Trust after the NAV has been calculated. Creation Units for the Bear Funds will be
sold only for cash equal to the NAV of the Shares being purchased plus the transaction fee described below (“Cash Purchase Amount”).
BNYM or Rafferty makes available
through the National Securities Clearing Corporation (“NSCC”) on each Business Day, either immediately prior to the opening of business on the Exchange or the night before, the list of the names and the required number of shares of each
security (“Deposit Securities”) to be included in the current Portfolio Deposit (based on information at the end of the previous Business Day) for each Bull Fund. The identity and number of shares of the Deposit Securities required for a
Creation Unit will change from time to time. Each Bull Fund reserves the right to permit or require the substitution of an amount of cash
–
i.e.
, a “cash in lieu” amount
–
to be added to the Balancing Amount to replace any Deposit Security that may not be
available in sufficient quantity for delivery, eligible for transfer through the clearing process (discussed below) or the Federal Reserve System or eligible for trading by an Authorized Participant or the investor for which it is acting. For such
custom orders, “cash in lieu” may be added to the Balancing Amount. You must also pay a Transaction Fee, as described in the Prospectus, in cash.
The identity and number of shares of
the Deposit Securities required for a Fund changes as rebalancing adjustments and corporate action events are reflected from time to time by Rafferty with a view to the investment objective of a Fund. The composition of the Deposit Securities may
also change in response to adjustments to the weighting or composition of the securities constituting the relevant securities index or may be a representative sample of the securities in a Fund's underlying index. In addition, the Trust reserves the
right to permit or require the substitution of an amount of cash (
i.e
., a “cash in lieu” amount) to be added to the Balancing Amount to replace any Deposit Security which may not be available in
sufficient
quantity for delivery or for other similar reasons.
The adjustments described above will reflect changes, known to Rafferty on the date of announcement to be in effect by the time of delivery of the Portfolio Deposit, in the composition of the subject index being tracked by a Fund, or resulting from
stock splits and other corporate actions. In addition to the list of names and numbers of securities constituting the current Deposit Securities of a Creation Unit, on each Business Day, the Balancing Amount effective through and including the
previous Business Day, per outstanding Share of a Fund, will be made available.
Such Portfolio Deposit is applicable,
subject to any adjustments as described below, in order to effect purchases of Creation Units of Shares of a Bull Fund until such time as the next-announced Portfolio Deposit made available.
An Authorized Participant will agree
pursuant to the terms of such Authorized Participant Agreement on behalf of itself or any investor on whose behalf it will act, as the case may be, to certain conditions, including that such Authorized Participant will make available an amount of
cash sufficient to pay the Balancing Amount and the Transaction Fee described in the Prospectus. The Authorized Participant may require the investor to enter into an agreement with such Authorized Participant with respect to certain matters,
including payment of the Balancing Amount. Investors who are not Authorized Participants must make appropriate arrangements with an Authorized Participant. Investors should be aware that their particular broker may not be a DTC Participant or may
not have executed an Authorized Participant Agreement, and that therefore orders to purchase Creation Units of Shares may have to be placed by the investor’s broker through an Authorized Participant. As a result, purchase orders placed through
an Authorized Participant may result in additional charges to such investor. An Authorized Participant may place an order to purchase (or redeem) Creation Units (i) through the Continuous Net Settlement clearing processes of NSCC as such processes
have been enhanced to effect purchases (and redemptions) of Creation Units, such processes being referred to herein as the “Enhanced Clearing Process,” or (ii) outside the Enhanced Clearing Process, being referred to herein as the Manual
Clearing Process.
A purchase
order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent’s automated system, telephone, facsimile or other means permitted under the Authorized Participant
Agreement, in order to receive that day's NAV per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day.
All questions as to the number of
shares of each security in the Deposit Securities and the validity, form, eligibility and acceptance for deposit of any securities to be delivered shall be determined by the Trust, and the Trust’s determination shall be final and
binding.
Purchases through the
Enhanced Clearing Process
To
purchase or redeem through the Enhanced Clearing Process, an Authorized Participant must be a member of National Securities Clearing Corporation (“NSCC”) that is eligible to use the Continuous Net Settlement system. For purchase orders
placed through the Enhanced Clearing Process, in the Authorized Participant Agreement the Participant authorizes the Transfer Agent to transmit to the NSCC, on behalf of an Authorized Participant, such trade instructions as are necessary to effect
the Authorized Participant’s purchase order. Pursuant to such trade instructions to the NSCC, the Authorized Participant agrees to deliver the Portfolio Deposit or the Cash Purchase Amount and such additional information as may be required by
the Transfer Agent or the Distributor.
Purchases through the Manual Clearing
Process
An Authorized
Participant that wishes to place an order to purchase Creation Units outside the Enhanced Clearing Process must state that it is not using the Enhanced Clearing Process and that the purchase instead will be effected through a transfer of securities
and cash either through the Federal Reserve System (for cash and U.S. government securities) or directly through DTC. Purchases (and redemptions) of Creation Units of the Bull Funds settled outside the Enhanced Clearing Process will be subject to a
higher Transaction Fee than those settled through the Enhanced Clearing Process. Purchase orders effected outside the Enhanced Clearing Process are likely to require transmittal by the Authorized Participant earlier on the Transmittal Date than
orders effected using the Enhanced Clearing Process. Those persons placing orders outside the Enhanced Clearing Process should ascertain the deadlines applicable to DTC and the Federal Reserve System (for cash and U.S. government securities) by
contacting the operations department of the broker or depository institution effectuating such transfer of the Portfolio Deposit (for the Bull Funds), or of the Cash Purchase Amount (for the Bear Funds).
Shares may be issued in advance of
receipt by the Trust of all or a portion of the applicable Deposit Securities as described below. In these circumstances, the initial deposit will have a greater value than the NAV of the Shares on the date the order is placed in proper form since,
in addition to the available Deposit Securities, cash must be deposited in an amount equal to the sum of (i) the Balancing Amount, plus (ii) 115% of the market value of the undelivered Deposit Securities (the “Additional Cash Deposit”).
An additional amount of cash shall be required to be deposited with the Trust, pending delivery of the missing Deposit Securities to the extent necessary to maintain the Additional Cash Deposit with the Trust in an amount at least equal to 115% of
the daily marked to market value of the missing Deposit Securities. The Participation Agreement will permit the Trust to buy the missing Deposit Securities any time. Authorized Participants will be liable to the Trust for the costs incurred by the
Trust in connection with any such purchases. These costs will be deemed to include the amount by which the actual purchase price of the Deposit Securities exceeds the market value of such Deposit Securities on the
day the purchase order was deemed received by the
Distributor plus the brokerage and related transaction costs associated with such purchases. The Trust will return any unused portion of the Additional Cash Deposit once all of the missing Deposit Securities have been properly received by the
Custodian Bank or purchased by the Trust and deposited into the Trust. In addition, a transaction fee, as listed below, will be charged in all cases. The delivery of Shares so purchased will occur no later than the third Business Day following the
day on which the purchase order is deemed received by the Distributor. Due to the schedule of holidays in certain countries, however, the delivery of Shares may take longer than two Business Days following the day on which the purchase order is
received. In such cases, the local market settlement procedures will not commence until the end of local holiday periods. A list of local holidays in the foreign countries or markets relevant to the international funds is set forth under
“Regular Foreign Holidays” below.
Rejection of Purchase Orders
The Trust reserves the absolute
right to reject a purchase order transmitted to it by the Distributor in respect of any Fund if (a) the purchaser or group of purchasers, upon obtaining the shares ordered, would own 80% or more of the currently outstanding Shares of any Fund; (b)
the Deposit Securities delivered are not as specified by Rafferty and Rafferty has not consented to acceptance of an in-kind deposit that varies from the designated Deposit Securities; (c) acceptance of the purchase transaction order would have
certain adverse tax consequences to a Fund; (d) the acceptance of the purchase transaction order would, in the opinion of counsel, be unlawful; (e) the acceptance of the purchase transaction order would otherwise, in the discretion of the Trust or
Rafferty, have an adverse effect on the Trust or the rights of beneficial owners; (f) the value of a Cash Purchase Amount, or the value of the Balancing Amount to accompany an in-kind deposit exceed a purchase authorization limit extended to an
Authorized Participant by the custodian and the Authorized Participant has not deposited an amount in excess of such purchase authorization with the custodian by 4:00 p.m. Eastern Time on the Transmittal Date; or (g) in the event that circumstances
outside the control of the Trust, the Distributor and Rafferty make it impractical to process purchase orders. The Trust shall notify a prospective purchaser of its rejection of the order of such person. The Trust and the Distributor are under no
duty, however, to give notification of any defects or irregularities in the delivery of purchase transaction orders nor shall either of them incur any liability for the failure to give any such notification.
Redemption of Creation Units
Shares may be redeemed only in
Creation Units at their NAV next determined after receipt of a redemption request in proper form by the Distributor on any Business Day. The Trust will not redeem Shares in amounts less than Creation Units. Beneficial owners also may sell Shares in
the secondary market, but must accumulate enough Shares to constitute a Creation Unit in order to have such Shares redeemed by the Trust. There can be no assurance, however, that there will be sufficient liquidity in the public trading market at any
time to permit assembly of a Creation Unit of Shares. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of Shares to constitute a redeemable Creation Unit.
Generally, Creation Units of Shares
are redeemed by or through an Authorized Participant. Such Authorized Participant will agree pursuant to the terms of such Authorized Participant Agreement on behalf of itself or any investor on whose behalf it will act, as the case may be, to
certain conditions, including that such Authorized Participant will make available an amount of cash sufficient to pay the Balancing Amount and the Transaction Fee described above. The Authorized Participant may require the investor to enter into an
agreement with such Authorized Participant with respect to certain matters, including payment of the Balancing Amount. Investors who are not Authorized Participants must make appropriate arrangements with an Authorized Participant. Investors should
be aware that their particular broker may not be a DTC Participant or may not have executed an Authorized Participant Agreement, and that therefore orders to purchase Creation Units of Shares may have to be placed by the investor’s broker
through an Authorized Participant. As a result, redemption orders placed through an Authorized Participant may result in additional charges to such investor.
In certain instances, Authorized
Participants may create and redeem Creation Unit aggregations of the same Fund on the same trade date. In this instance, the Trust reserves the right to settle these transactions on a net basis.
With respect to each Bull Fund, the
redemption proceeds for a Creation Unit may consist of cash and/or securities. Rafferty makes available through the NSCC immediately prior to the opening of business on the Exchange on each day that the Exchange is open for business the Portfolio
Securities that will be applicable (subject to possible amendment or correction) to redemption requests received in proper form (as defined below) on that day (“Redemption Securities”) plus the Balancing Amount. These securities may, at
times, not be identical to Deposit Securities which are applicable to a purchase of Creation Units. The redemption transaction fee described below is deducted from such redemption proceeds.
For the Bull Funds, a Fund may in its
discretion exercise its option to redeem such Shares in cash, and the redeeming shareholder will be required to receive its redemption proceeds in cash. In addition, an investor may request a redemption in cash which a Fund may, in its sole
discretion, permit. The Fund may also, in its sole discretion, upon request of a shareholder, provide such redeemer a portfolio of securities which differs from the exact composition of the securities held by a Fund but does not differ in NAV.
The redemption proceeds for a
Creation Unit of a Bear Fund will consist solely of cash in an amount equal to the NAV of the Shares being redeemed, as next determined after a receipt of a request in proper form, less the redemption transaction fee described below (“Cash
Redemption Amount”).
A
redemption order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent's automated system, telephone, facsimile or other means permitted under the Authorized
Participant Agreement, in order to receive that day's NAV per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day.
The right of redemption may be
suspended or the date of payment postponed with respect to any Fund (1) for any period during which the NYSE is closed (other than customary weekend and holiday closings); (2) for any period during which trading on the NYSE is suspended or
restricted; (3) for any period during which an emergency exists as a result of which disposal of the shares of the Fund’s portfolio securities or determination of its NAV is not reasonably practicable; or (4) in such other circumstance as is
permitted by the SEC.
Placement of
Redemption Orders Using Enhanced Clearing Process
Orders to redeem Creation Units of
the Funds through the Enhanced Clearing Process must be delivered through an Authorized Participant that is a member of NSCC that is eligible to use the Continuous Net Settlement System. A redemption order must be received in good order by the
transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent's automated system, telephone, facsimile or other means permitted under the Authorized Participant Agreement, in order to receive that day’s NAV
per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day.
Placement of Redemption Orders Outside the
Enhanced Clearing Process
Orders to redeem
Creation Units of the Funds outside the Clearing Process must be delivered through a DTC Participant that has executed the Authorized Participant Agreement , and, for the Fixed Income Funds, has the ability to transact through the Federal Reserve
System. A DTC Participant who wishes to place an order for redemption of Creation Units of a Fund to be effected outside the Clearing Process need not be an Authorized Participant, but such orders must state that the DTC Participant is not using the
Clearing Process and that redemption of Creation Units will instead be effected through transfer of Shares directly through DTC or the Federal Reserve System (for cash and U.S. government securities). The order must be accompanied or preceded by the
requisite number of Shares of the Funds specified in such order, which delivery must be made through DTC or the Federal Reserve System to the Custodian by the third Business Day following such Transmittal Date (“DTC Cut-Off Time”); and
(iii) all other procedures set forth in the Authorized Participant Agreement must be properly followed.
After the Transfer Agent has deemed
an order for redemption of a Bull Fund’s shares outside the Clearing Process received, the Transfer Agent will initiate procedures to transfer the requisite Redemption Securities, which are expected to be delivered within two Business Days,
and the Balancing Amount minus the Transaction Fee. In addition, with respect to Bull Fund redemptions honored in cash, the redeeming party will receive the Cash Redemption Amount by the third Business Day following the Transmittal Date on which
such redemption order is deemed received by the Transfer Agent. Due to the schedule of holidays in certain countries, however, the receipt of the Cash Redemption Amount may take longer than two Business Days following the Transmittal Date. In such
cases, the local market settlement procedures will not commence until the end of local holiday periods. See below for a list of local holidays in the foreign country relevant to the international funds.
Each Fund generally intends to
effect deliveries of Creation Units and portfolio securities on a basis of “T” plus two Business Days (
i.e.
, days on which the national securities exchange is open). A Fund may effect deliveries of
Creation Units and portfolio securities on a basis other than T plus two in order to accommodate local holiday schedules, to account for different treatment among foreign and U.S. markets of dividend record dates and ex-dividend dates or under
certain other circumstances. The ability of the Trust to effect in-kind creations and redemptions within two Business Days of receipt of an order in good form is subject, among other things, to the condition that, within the time period from the
date of the order to the date of delivery of the securities, there are no days that are holidays in the applicable foreign market. For every occurrence of one or more intervening holidays in the applicable foreign market that are not holidays
observed in the U.S. equity market, the redemption settlement cycle will be extended by the number of such intervening holidays. In addition to holidays, other unforeseeable closings in a foreign market due to emergencies may also prevent the Trust
from delivering securities within normal settlement periods. The securities delivery cycles currently practicable for transferring portfolio securities to redeeming Authorized Participants, coupled with foreign market holiday schedules, will require
a delivery process longer than seven calendar days for the international funds, in certain circumstances. The applicable holidays for certain foreign markets are listed in the table below. The proclamation of new holidays, the treatment by market
participants of certain days as “informal holidays” (
e.g.
, days on which no or limited securities transactions occur, as a result of substantially shortened
trading hours), the elimination of existing holidays or
changes in local securities delivery practices could affect the information set forth herein at some time in the future.
The dates from
January 1, 2019 to December 31, 2019 in which the regular holidays affecting the relevant securities markets of the below listed countries are as follows:
Australia
|
|
Austria
|
|
Belgium
|
|
Brazil
|
|
Canada
|
|
Chile
|
|
China
|
January
1
January 28
April 19
April 22
April 25
June 10
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
May 1
June 10
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
May 1
May 30
June 10
August 15
November 1
December 24
December 25
December 26
December 31
|
|
January
1
January 25
March 4
March 5
March 6
April 19
May 1
June 20
July 9
November 15
November 20
December 25
|
|
January
1
January 2
February 18
April 19
May 20
June 24
July 1
August 5
September 2
October 14
November 11
December 25
December 26
|
|
January
1
April 19
May 1
May 21
July 16
August 15
September 18
September 19
September 20
October 31
November 1
December 25
December 31
|
|
January
1
January 21
February 4
February 5
February 6
February 7
February 8
February 18
April 5
April 19
April 22
May 1
May 13
May 27
June 7
July 1
July 4
September 2
September 13
October 1
October 2
October 3
October 4
October 7
October 14
November 11
November 28
December 25
December 26
|
Colombia
|
|
Czech
Republic
|
|
Denmark
|
|
Egypt
|
|
Finland
|
|
France
|
|
Germany
|
January
1
January 7
March 25
April 18
April 19
May 1
June 3
June 24
July 1
August 7
August 19
October 14
November 4
November 11
December 25
|
|
January
1
April 19
April 22
May 1
May 8
July 5
October 28
December 24
December 25
December 26
|
|
January
1
April 18
April 19
April 22
May 1
May 17
May 30
May 31
June 5
June 10
December 24
December 25
December 26
December 31
|
|
January
1
January 7
April 25
April 28
April 29
May 1
June 4
June 5
July 1
July 23
August 11
August 12
October 6
|
|
January
1
April 19
April 22
May 1
May 30
June 21
December 6
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
May 1
May 30
June 10
August 15
November 1
November 11
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
May 1
May 30
June 10
June 20
August 15
October 3
October 31
November 1
November 20
December 24
December 25
December 26
December 31
|
Greece
|
|
Hong
Kong
|
|
Hungary
|
|
India
|
|
Indonesia
|
|
Ireland
|
|
Israel
|
January
1
March 11
March 25
April 19
April 22
April 26
April 29
May 1
June 17
August 15
October 28
December 24
December 25
December 26
|
|
January
1
February 4
February 5
February 6
February 7
April 5
April 19
April 22
May 1
May 13
June 7
July 1
October 1
October 7
December 24
December 25
December 26
December 31
|
|
January
1
March 15
April 19
April 22
May 1
June 10
August 10
August 19
August 20
October 23
November 1
December 7
December 14
December 24
December 25
December 26
December 27
December 31
|
|
February
19
March 4
March 21
April 1
April 17
April 19
May 1
June 5
August 12
August 15
September 2
September 10
October 2
October 8
October 28
November 12
December 25
|
|
January
1
February 5
March 7
April 3
April 19
May 1
May 30
June 3
June 4
June 5
June 6
June 7
December 24
December 25
December 31
|
|
January
1
January 21
February 18
March 18
April 19
April 22
May 1
May 6
May 27
June 3
July 4
August 5
August 26
September 2
October 14
October 28
November 11
November 28
December
24
December 25
December 26
December 31
|
|
March
21
April 21
April 22
April 23
April 24
April 25
April 26
May 8
May 9
June 9
August 11
September 29
September 30
October 1
October 8
October 9
October 13
October 14
October
15
October 16
October 17
October 20
October 21
|
Italy
|
|
Japan
|
|
Korea
|
|
Malaysia
|
|
Mexico
|
|
Morocco
|
|
The
Netherlands
|
January
1
April 19
April 22
May 1
August 15
December 24
December 25
December 26
December 31
|
|
January
1
January 2
January 3
January 14
February 11
March 21
April 29
April 30
May 1
May 2
May 3
May 6
July 15
August 12
September 16
September 23
October 14
October 22
November 4
December 31
|
|
January
1
February 4
February 5
February 6
March 1
May 1
May 6
June 6
August 15
September 12
September 13
October 3
October 9
December 25
December 31
|
|
January
1
January 21
February 1
February 4
February 5
February 6
May 1
May 20
May 22
June 4
June 5
June 6
August 12
September 2
September 9
September 16
October 28
December 25
|
|
January
1
February 4
March 18
April 18
April 19
May 1
September 16
November 18
December 12
December 25
|
|
January
1
January 11
May 1
June 4
June 5
July 30
August 12
August 13
August 14
August 20
August 21
September 2
November 6
November 11
November 12
November 18
|
|
January
1
April 19
April 22
May 1
May 30
June 10
November 1
December 24
December 25
December 26
December 31
|
New
Zealand
|
|
Norway
|
|
Peru
|
|
Philippines
|
|
Poland
|
|
Portugal
|
|
Russia
|
January
1
January 2
January 21
January 28
February 6
April 19
April 22
April 25
June 3
October 28
December 25
December 26
|
|
January
1
April 17
April 18
April 19
April 22
May 1
May 17
May 30
June 10
December 24
December 25
December 26
December 31
|
|
January
1
April 18
April 19
May 1
July 29
August 30
October 8
November 1
December 25
|
|
January
1
February 5
February 25
April 9
April 18
April 19
May 1
June 12
August 21
August 26
November 1
December 24
December 25
December 30
December 31
|
|
January
1
April 19
April 22
May 1
May 3
June 20
August 15
November 1
November 11
December 24
December 25
December 26
December 31
|
|
January
1
April 19
April 22
April 25
May 1
June 10
June 13
June 20
August 15
November 1
December 25
December 26
|
|
January
1
January 2
January 3
January 4
January 7
January 8
March 8
May 1
May 2
May 3
May 9
May 10
June 12
November 4
|
Singapore
|
|
South
Africa
|
|
Spain
|
|
Sweden
|
|
Switzerland
|
|
Taiwan
|
|
Thailand
|
January
1
February 4
February 5
February 6
April 19
May 1
May 20
June 5
August 9
August 12
October 28
December 25
|
|
January
1
March 21
April 19
April 22
May 1
June 17
August 9
September 24
December 16
December 25
December 26
|
|
January
1
March 19
April 18
April 19
April 22
May 1
August 15
November 1
December 6
December 25
December 26
|
|
January
1
April 18
April 19
April 22
April 30
May 1
May 29
May 30
November 1
December 24
December 25
December 26
December 31
|
|
January
1
January 2
April 8
April 19
April 22
May 1
May 30
June 10
August 1
September 9
December 24
December 25
December 26
December 31
|
|
January
1
January 31
February 1
February 4
February 5
February 6
February 7
February 8
February 28
March 1
April 4
April 5
May 1
June 7
September 13
October 10
October 11
|
|
January
1
February 19
April 8
April 15
April 16
May 1
May 20
July 16
July 29
August 12
October 14
October 23
December 5
December 10
December 31
|
Turkey
|
|
United
Kingdom
|
January
1
April 23
May 1
June 3
June 4
June 5
June 6
July 15
August 12
August 13
August 14
August 30
October 28
October 29
|
|
January
1
January 21
February 18
April 19
April 22
May 1
May 6
May 27
July 4
August 26
September 2
October 14
November 11
November 28
December 24
December 25
December 26
December 31
|
The longest redemption cycle for a Fund
is a function of the redemption cycles of the countries whose stocks are held by the Fund.
Transaction fees are imposed as
set forth in the table in the Prospectus. Transaction Fees payable to the Trust are imposed to compensate the Trust for the transfer and other transaction costs of a Fund associated with the issuance and redemption of Creation Units of Shares. There
is a fixed and a variable component to the total Transaction Fee. A fixed Transaction Fee is applicable to each creation or redemption transaction, regardless of the number of Creation Units purchased or redeemed. In addition, a variable Transaction
Fee based upon the value of each Creation Unit also is applicable to each redemption transaction. The Transaction Fee applicable to the redemption of Creation Units will not exceed 2% of the value of the redemption proceeds.
Purchasers of Creation Units of a
Fund for cash may be required to pay an additional charge to compensate the Fund for brokerage and market impact expenses relating to investing in portfolios securities. Where the Trust permits an in-kind purchaser to substitute cash in lieu of
depositing a portion of the Deposit Securities, the purchaser may be assessed an additional charge for cash purchases.
Purchasers of Shares in Creation
Units are responsible for the costs of transferring the securities constituting the Deposit Securities to the account of the Trust. Investors will also bear the costs of transferring securities from a Fund to their account or on their order.
Investors who use the services of a broker or other such intermediary may be charged a fee for such services. In addition, Rafferty may, from time to time, at its own expense, compensate purchasers of Creation Units who have purchased substantial
amounts of Creation Units and other financial institutions for administrative or marketing services.
The method by which Creation
Units of Shares are created and traded may raise certain issues under applicable securities laws. Because new Creation Units of Shares are issued and sold by the Trust on an ongoing basis, at any point a “distribution,” as such term is
used in the Securities Act, may occur. Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants in a distribution in a manner which could render
them statutory underwriters and subject them to the prospectus delivery and liability provisions of the Securities Act. For example, a broker-dealer firm or its client may be deemed a statutory underwriter if it takes Creation Units after placing an
order with the Distributor, breaks them down into constituent Shares, and sells some or all of the Shares comprising such Creation Units directly to its customers; or if it chooses to couple the creation of a supply of new Shares with an active
selling effort involving solicitation of secondary market demand for Shares. A determination of whether a person is an underwriter for the purposes of the Securities Act depends upon all the facts and circumstances pertaining to that person’s
activities. Thus, the examples mentioned above should not be considered a complete description of all the activities that could lead to a categorization as an underwriter. Broker-dealer firms should also note that dealers who are effecting
transactions in Shares, whether or not participating in the distribution of Shares, are generally required to deliver a prospectus. This is because the prospectus delivery exemption in Section 4(3) of the Securities Act is not available in respect
of such transactions as a result of Section 24(d) of the 1940 Act. Broker-dealer firms should note that dealers who are not “underwriters” but are participating in a distribution (as contrasted to ordinary secondary market transaction),
and thus dealing with Shares that are part of an “unsold allotment” within the meaning of section 4(3)(C) of the Securities Act, would be unable to take advantage of the prospectus delivery exemption provided by section 4(3) of the
Securities Act. Firms that incur a prospectus-delivery obligation with respect to Shares are reminded that under Securities Act Rule 153 a prospectus delivery obligation under Section 5(b)(2) of the Securities Act owed to a national securities
exchange member in connection with a sale on the national securities exchange is satisfied by the fact that the Fund’s prospectus is available at the national securities exchange on which the Shares of such Fund trade upon request. The
prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions on a national securities exchange and not with respect to “upstairs” transactions.
Dividends, Other Distributions and Taxes
The Tax Cuts and
Jobs Act (the “Tax Act”) makes significant changes to the U.S. Federal income tax rules for taxation of individuals and corporations, generally effective for taxable years beginning after December 31, 2017. Many of the changes applicable
to individuals are not permanent and only apply to taxable years beginning after December 31, 2017 and before January 1, 2026. While there are minor changes to the RIC rules, the Tax Act makes changes to the tax rules affecting shareholders and each
Fund, including various investments that each Fund may make. Potential investors are urged to consult their own tax advisors for more detailed information.
Dividends and other Distributions
As stated in the Prospectus, each
Fund declares and distributes dividends to its shareholders from its net investment income at least annually; for these purposes, net investment income includes dividends, accrued interest, and accretion of OID and market discount, less amortization
of market premium and estimated expenses, and is calculated immediately prior to the determination of a Fund’s NAV per share. Each Fund also distributes the excess of its net short-term capital gain over net long-term capital loss
(“short-term gain”), if any, annually but may make more frequent distributions thereof if necessary to avoid federal income or excise taxes. Each Fund may realize net capital gain (
i.e.
, the excess
of net long-term capital gain over net short-term capital loss) and thus anticipates making annual distributions thereof. The Trustees may revise this distribution policy, or postpone the payment of distributions, if a Fund has or anticipates any
large unexpected expense, loss or fluctuation in net assets that, in the Trustees’ opinion, might have a significant adverse effect on its shareholders.
Investors should be aware that if
shares are purchased shortly before the record date for any dividend or capital gain distribution, the shareholder will pay full price for the shares and receive some portion of the purchase price back as a taxable distribution (with the tax
consequences described in the Prospectus).
Taxes
Regulated Investment Company Status
. Each Fund is treated as a separate entity for federal tax purposes and intends to qualify, or to continue to qualify, for treatment as a
RIC. If a Fund so qualifies and satisfies the Distribution Requirement (defined below) for a taxable year, it will not be subject to federal income tax on the part of its investment company taxable income (generally consisting of net investment
income, short-term gain, and net gains and losses from certain foreign currency transactions, all determined without regard to any deduction for dividends paid) and net capital gain it distributes to its shareholders for that year.
To qualify for treatment as a RIC, a
Fund must distribute to its shareholders for each taxable year at least the sum of 90% of its investment company taxable income (“Distribution Requirement”) and 90% of its net exempt interest income and
must meet several
additional requirements. For each Fund, these requirements include the following: (1) the Fund must derive at least 90% of its gross income each taxable year from the following sources (collectively, “Qualifying Income”): (a) dividends,
interest, payments with respect to certain securities loans, and gains from the sale or other disposition of securities or foreign currencies, or other income (including gains from options, futures, or forward contracts) derived with respect to its
business of investing in securities or those currencies, and (b) net income from an interest in a “qualified publicly traded partnership” (“QPTP”) (“Income Requirement”); and (2) at the close of each quarter of
the Fund’s taxable year, (a) at least 50% of the value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with those other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the value of the Fund’s total assets and that does not represent more than 10% of the issuer’s outstanding voting securities (equity securities of QPTPs being considered voting
securities for these purposes), and (b) not more than 25% of the value of its total assets may be invested in (i) securities (other than U.S. government securities or the securities of other RICs) of any one issuer, (ii) securities (other than
securities of other RICs) of two or more issuers the Fund controls that are determined to be engaged in the same, similar or related trades or businesses, or (iii) securities of one or more QPTPs (collectively, “Diversification
Requirements”). The Internal Revenue Service (“Service”) has ruled that income from a derivative contract on a commodity index generally is not Qualifying Income.
Although each Fund intends to
satisfy, or to continue to satisfy, all the foregoing requirements, there is no assurance that a Fund will be able to do so. The investment by a Fund primarily in options and futures positions entails some risk that it might fail to satisfy one or
both of the Diversification Requirements. There is some uncertainty regarding the valuation of such positions for purposes of those requirements; accordingly, it is possible that the method of valuation a Fund uses, pursuant to which each of them
would expect to be treated as satisfying the Diversification Requirements, would not be accepted in an audit by the Service, which might apply a different method resulting in disqualification of one or more funds.
If a Fund failed to qualify for
treatment as a RIC for any taxable year, (1) its taxable income, including net capital gain, would be taxed at corporate income tax rates (up to 21%), (2) it would not receive a deduction for the distributions it makes to its shareholders, and (3)
the shareholders would treat all those distributions, including distributions of net capital gain, as dividends (that is, ordinary income, except for the part of those dividends that is “qualified dividend income” (described in the
Prospectus) (“QDI”)) if certain holding period and other requirements are met) to the extent of the Fund’s earnings and profits; those dividends would be eligible for the dividends-received deduction available to corporations under
certain circumstances. In addition, the Fund would be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying for RIC treatment. However, the Regulated Investment Company
Modernization Act of 2010 (“RIC Mod Act”) provides certain savings provisions that enable a RIC to cure a failure to satisfy any of the Income and Diversification Requirements as long as the failure “is due to reasonable cause and
not due to willful neglect” and the RIC pays a deductible tax calculated in accordance with those provisions and meets certain other requirements.
Excise Tax
. Each Fund will be subject to a nondeductible 4% excise tax (“Excise Tax”) to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net income for the one-year period ending on October 31 of that year, plus certain other amounts.
Income from Foreign Securities
. Dividends and interest a Fund receives, and gains it realizes, on foreign securities may be subject to income, withholding, or other taxes
imposed by foreign countries and U.S. possessions that would reduce the yield and/or total return on its securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by foreign investors.
Gains or losses (1) from the
disposition of foreign currencies, including forward currency contracts, (2) on the disposition of each foreign-currency-denominated debt security that are attributable to fluctuations in the value of the foreign currency between the dates of
acquisition and disposition of the security, and (3) that are attributable to fluctuations in exchange rates that occur between the time a Fund accrues dividends, interest, or other receivables, or expenses or other liabilities, denominated in a
foreign currency and the time the Fund actually collects the receivables or pays the liabilities, generally will be treated as ordinary income or loss. These gains or losses will increase or decrease the amount of a Fund’s investment company
taxable income to be distributed to its shareholders.
Each Fund may invest in the stock of
“passive foreign investment companies” (“PFICs”). A PFIC is any foreign corporation (with certain exceptions) that, in general, meets either of the following tests for a taxable year: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held for the production of, passive income. Under certain circumstances, a Fund will be subject to federal income tax on a portion of any “excess distribution” it
receives on the stock of a PFIC or of any gain on its disposition of the stock (collectively, “PFIC income”), plus interest thereon, even if the Fund distributes the PFIC income as a dividend to its shareholders. The balance of the PFIC
income will be included in the Fund’s investment company taxable income and, accordingly, will not be taxable to it to the extent it distributes that income to its shareholders. Fund distributions thereof will not be eligible for the maximum
federal income tax rates applicable to QDI.
If a Fund invests in a PFIC and
elects to treat the PFIC as a “qualified electing fund” (“QEF”), then, in lieu of the foregoing tax and interest obligation, the Fund would be required to include in income each taxable year its pro rata share of the
QEF’s annual ordinary earnings and net capital gain -- which the Fund probably would have to distribute to satisfy the Distribution Requirement and avoid imposition of the Excise Tax -- even if the Fund did not receive those earnings and gain
from the QEF. In most instances it will be very difficult, if not impossible, to make this election because of certain requirements thereof.
Each Fund may elect to “mark to
market” its stock in any PFIC. “Marking-to-market,” in this context, means including in gross income each taxable year (and treating as ordinary income) the excess, if any, of the fair market value of the PFIC’s stock over a
Fund’s adjusted basis therein as of the end of that year. Pursuant to the election, a Fund also would be allowed to deduct (as an ordinary, not a capital, loss) the excess, if any, of its adjusted basis in PFIC stock over the fair market value
thereof as of the taxable year-end, but only to the extent of any net mark-to-market gains with respect to that stock the Fund included in income for prior taxable years under the election. A Fund’s adjusted basis in each PFIC’s stock
with respect to which it makes this election would be adjusted to reflect the amounts of income included and deductions taken thereunder.
Derivatives Strategies
. The use of derivatives strategies, such as writing (selling) and purchasing options and futures contracts and entering into forward contracts,
involves complex rules that will determine for income tax purposes the amount, character, and timing of recognition of the gains and losses a Fund realizes in connection therewith. Gains from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and gains from options, futures, and forward contracts a Fund derives with respect to its business of investing in securities or foreign currencies, will be treated as Qualifying Income.
Each Fund will monitor its transactions, make appropriate tax elections, and make appropriate entries in its books and records when it acquires any foreign currency, option, futures contract, forward contract, or hedged investment to mitigate the
effect of these rules, seek to prevent its disqualification as a RIC, and minimize the imposition of federal income and excise taxes.
Some futures contracts, foreign
currency contracts that are traded in the interbank market, and “nonequity” options (
i.e.
, certain listed options, such as those on a “broad-based” securities index)
—
except any “securities futures contract” that is not a “dealer securities futures contract” (both as defined in the Code) and any interest rate
swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement
—
in
which a Fund invests may be subject to Code section 1256 (collectively “section 1256 contracts”). Section 1256 contracts that a Fund holds at the end of its taxable year must be “marked to market” (that is, treated as having
been sold at that time for their fair market value) for federal income tax purposes, with the result that unrealized gains or losses will be treated as though they were realized. Sixty percent of any net gain or loss recognized on these deemed
sales, and 60% of any net realized gain or loss from any actual sales of section 1256 contracts, will be treated as long-term capital gain or loss, and the balance will be treated as short-term capital gain or loss. These rules may operate to
increase the amount that a Fund must distribute to satisfy the Distribution Requirement (
i.e.
, with respect to the portion treated as short-term capital gain), which will be taxable to its shareholders as
ordinary income when distributed to them, and to increase the net capital gain a Fund recognizes, without in either case increasing the cash available to it. A Fund may elect not to have the foregoing rules apply to any “mixed straddle”
(that is, a straddle, which the Fund clearly identifies in accordance with applicable regulations, at least one (but not all) of the positions of which are section 1256 contracts), although doing so may have the effect of increasing the relative
proportion of short-term capital gain (taxable as ordinary income) and thus increasing the amount of dividends it must distribute. Section 1256 contracts also may be marked-to-market for purposes of the Excise Tax.
Code section 1092
(dealing with straddles) also may affect the taxation of options, futures, and forward contracts in which a Fund may invest. That section defines a “straddle” as offsetting positions with respect to actively traded personal property; for
these purposes, options, futures, and forward contracts are positions in personal property. Under that section, any loss from the disposition of a position in a straddle may be deducted only to the extent the loss exceeds the unrecognized gain on
the offsetting position(s) of the straddle. In addition, these rules may postpone the recognition of loss that otherwise would be recognized under the mark-to-market rules discussed above. The regulations under section 1092 also provide certain
“wash sale” rules, which apply to transactions where a position is sold at a loss and a new offsetting position is acquired within a prescribed period, and “short sale” rules applicable to straddles. If a Fund makes certain
elections, the amount, character, and timing of recognition of gains and losses from the affected straddle positions would be determined under rules that vary according to the elections made. Because only a few of the regulations implementing the
straddle rules have been promulgated, the tax consequences to a Fund of straddle transactions are not entirely clear.
If a call option written by a Fund
lapses (
i.e.
, terminates without being exercised), the amount of the premium it received for the option will be short-term capital gain. If a Fund enters into a closing purchase transaction with respect to a
written call option, it will have a short-term capital gain or loss based on the difference between the premium it received for the option it wrote and the premium it pays for the option it buys. If such an option is exercised and a Fund thus sells
the securities or futures contract subject to the option, the premium the Fund received will be added to the exercise price to determine the gain or loss on the sale. If a call option purchased by a Fund lapses, it will realize short-term or
long-term capital loss, depending on its holding period for the option. If a Fund exercises a purchased call option, the premium it paid for the option will be added to the basis in the subject securities or futures contract.
If a Fund has an “appreciated
financial position” - generally, an interest (including an interest through an option, futures, or forward contract or short sale) with respect to any stock, debt instrument (other than “straight debt”), or partnership interest the
fair market value of which exceeds its adjusted basis - and enters into a “constructive sale” of the position, the Fund will be treated as having made an actual sale thereof, with the result that it will recognize gain at that time. A
constructive sale generally consists of a short sale, an offsetting notional principal contract, or a futures or forward contract a Fund or a related person enters into with respect to the same or substantially identical property. In addition, if
the appreciated financial position is itself a short sale or such a contract, acquisition of the underlying property or substantially identical property will be deemed a constructive sale. The foregoing will not apply, however, to a Fund’s
transaction during any taxable year that otherwise would be treated as a constructive sale if the transaction is closed within 30 days after the end of that year and the Fund holds the appreciated financial position unhedged for 60 days after that
closing (
i.e.
, at no time during that 60-day period is the Fund’s risk of loss regarding that position reduced by reason of certain specified transactions with respect to substantially identical or
related property, such as having an option to sell, being contractually obligated to sell, making a short sale, or granting an option to buy substantially identical stock or securities).
Income from Zero-Coupon and Payment-in-Kind Securities
. A Fund may acquire zero-coupon or other securities (such as strips) issued with OID. As a holder of those securities,
a Fund must include in its gross income the OID that accrues on the securities during the taxable year, even if it receives no corresponding payment on them during the year. Similarly, a Fund must include in its gross income securities it receives
as “interest” on payment-in-kind securities. With respect to “market discount bonds” (
i.e.
, bonds purchased at a price less than their issue price plus the portion of OID previously
accrued thereon), a Fund may elect to accrue and include in income each taxable year a portion of the bonds’ market discount. Because each Fund annually must distribute substantially all of its investment company taxable income, including any
accrued OID and other non-cash income, to satisfy the Distribution Requirement and avoid imposition of the Excise Tax, a Fund may be required in a particular year to distribute as a dividend an amount that is greater than the total amount of cash it
actually receives. Those distributions will be made from a Fund’s cash assets or from the proceeds of sales of portfolio securities, if necessary. A Fund may realize capital gains or losses from those sales, which would increase or decrease
its investment company taxable income and/or net capital gain.
Income from REITs
. A Fund may invest in REITs that (1) hold residual interests in real estate mortgage investment conduits (“REMICs”) or (2) engage in mortgage
securitization transactions that cause the REITs to be taxable mortgage pools (“TMPs”) or have a qualified REIT subsidiary that is a TMP. A portion of the net income allocable to REMIC residual interest holders may be an “excess
inclusion.” The Code authorizes the issuance of regulations dealing with the taxation and reporting of excess inclusion income of REITs and RICs that hold residual REMIC interests and of REITs, or qualified REIT subsidiaries that are TMPs.
Although those regulations have not yet been issued, the U.S. Treasury Department and the Service issued a notice in 2006 (“Notice”) announcing that, pending the issuance of further guidance, the Service would apply the principles in the
following paragraphs to all excess inclusion income, whether from REMIC residual interests or TMPs.
The Notice provides that a REIT must
(1) determine whether it or its qualified REIT subsidiary (or a part of either) is a TMP and, if so, calculate the TMP’s excess inclusion income under a “reasonable method,” (2) allocate its excess inclusion income to its
shareholders generally in proportion to dividends paid, (3) inform shareholders that are not “disqualified organizations” (
i.e.
, governmental units and tax-exempt entities that are not subject to
the unrelated business income tax) of the amount and character of the excess inclusion income allocated thereto, (4) pay tax (at the highest federal income tax rate imposed on corporations) on the excess inclusion income allocable to its
shareholders that are disqualified organizations, and (5) apply the withholding tax provisions with respect to the excess inclusion part of dividends paid to foreign persons without regard to any treaty exception or reduction in tax rate. Excess
inclusion income allocated to certain tax-exempt entities (including qualified retirement plans, individual retirement accounts, and public charities) constitutes unrelated business taxable income to them.
A RIC with excess inclusion income is
subject to rules identical to those in clauses (2) through (5) (substituting “who are nominees” for “that are not ‘disqualified organizations’” in clause (3) and inserting “record” after
“its” in clause (4)). The Notice further provides that a RIC is not required to report the amount and character of the excess inclusion income allocated to its shareholders that are not nominees, except that (1) a RIC with excess
inclusion income from all sources that exceeds 1% of its gross income must do so and (2) any other RIC must do so by taking into account only excess inclusion income allocated to the RIC from a REIT the excess inclusion income of which exceeded 3%
of the REIT’s dividends. A Fund will not invest directly in REMIC residual interests, and does not intend to invest in REITs that, to its knowledge, invest in those interests or are TMPs or have a qualified REIT subsidiary that is a TMP.
Each Fund may
invest in REITs. REIT dividends and capital gain distributions are generally effective for taxable years beginning after December 31, 2017, the Code generally allows individuals and certain other non-corporate entities a deduction for 20% of (1)
qualified REIT dividends and (2) qualified publicly traded partnership income. Recently issued proposed regulations allow a RIC to pass the character of its qualified REIT dividends through to its shareholders provided certain holding period
requirements are met. As a result, an investor who invests directly in REITs will be able to receive the benefit of such deductions, while a shareholder in a Fund that invests in REITs will not.
Taxation
of Shareholders
.
Basis Election and Reporting
. A shareholder’s basis in Shares of a Fund that he or she acquires after December 31, 2011 (“Covered Shares”), will be determined in accordance with the Fund’s default method, which is average
basis, unless the shareholder affirmatively elects in writing (which may be electronic) to use a different acceptable basis determination method, such as a specific identification method. The basis determination method a Fund shareholder elects (or
the default method) may not be changed with respect to a redemption of Covered Shares after the settlement date of the redemption.
In addition to the requirement to
report the gross proceeds from redemptions of shares, each Fund (or its administrative agent) must report to the Service and furnish to its shareholders the basis information for Covered Shares and indicate whether they had a short-term (one year or
less) or long-term (more than one year) holding period. Fund shareholders should consult with their tax advisers to decide the best Service-accepted basis determination method for their tax situation and to obtain more information about how the
basis reporting law applies to them.
Foreign Account
Tax Compliance Act (“FATCA”)
. As mentioned in the Prospectus, under FATCA “foreign financial institutions” (“FFIs”) or “non-financial foreign entities”
(“NFFEs”) that are Fund shareholders may be subject to a generally nonrefundable 30% withholding tax on income dividends. That withholding tax generally can be avoided, however, as discussed below.
An FFI can avoid FATCA withholding by
becoming a “participating FFI,” which requires the FFI to enter into a tax compliance agreement with the Service. Under such an agreement, a participating FFI agrees to (1) verify and document whether it has U.S. accountholders, (2)
report certain information regarding their accounts to the Service, and (3) meet certain other specified requirements.
The U.S. Treasury has negotiated
intergovernmental agreements (“IGAs”) with certain countries and is in various stages of negotiations with other foreign countries with respect to one or more alternative approaches to implement FATCA; entities in those countries may be
required to comply with the terms of the IGA instead of Treasury regulations. An FFI resident in a country that has entered into a Model I IGA with the United States must report to that country’s government (pursuant to the terms of the
applicable IGA and applicable law), which will, in turn, report to the Service. An FFI resident in a Model II IGA country generally must comply with U.S. regulatory requirements, with certain exceptions, including the treatment of recalcitrant
accountholders. An FFI resident in one of those countries that complies with whichever of the foregoing applies will be exempt from FATCA withholding.
An NFFE that is the beneficial owner
of a payment from a Fund can avoid FATCA withholding generally by certifying its status as such and, in certain circumstances that it does not have any substantial U.S. owners or by providing the name, address, and taxpayer identification number of
each such owner. The NFFE will report to the Fund or other applicable withholding agent, which will, in turn, report information to the Service.
Those non-U.S. shareholders also may
fall into certain exempt, excepted, or deemed compliant categories established by Treasury regulations, IGAs, and other guidance regarding FATCA. An FFI or NFFE that invests in a Fund will need to provide the Fund with documentation properly
certifying the entity’s status under FATCA to avoid FATCA withholding. The requirements imposed by FATCA are different from, and in addition to, the tax certification rules to avoid backup withholding described above. Foreign investors are
urged to consult their tax advisers regarding the application of these requirements to their own situation and the impact thereof on their investment in a Fund.
* * * * *
The foregoing is only a general
summary of some of the important federal tax considerations generally affecting the Funds. No attempt is made to present a complete explanation of the federal tax treatment of the Funds’ activities, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors are urged to consult their own tax advisers for more detailed information and for information regarding any state, local, or foreign taxes applicable to a Fund and to
distributions therefrom.
Capital Loss Carryforwards
.
As of October 31, 2018, the following operational Funds had capital loss carryforwards available to offset future capital gains in the respective
amounts, through the year indicated below:
|
Utilized
in
Current Year
|
October
31, 2019
|
October
31, 2018
|
Unlimited
Short-Term
|
Unlimited
Long-Term
|
Funds
|
|
|
|
|
|
Direxion
Daily Mid Cap Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
—
|
$
—
|
Direxion
Daily Mid Cap Bear 3X Shares
|
$
—
|
$
22,162,993
|
$—
|
$
45,144,477
|
$
—
|
Direxion
Daily S&P 500
®
Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
—
|
$
—
|
Direxion
Daily S&P 500
®
Bear 3X Shares
|
$
—
|
$227,849,840
|
$—
|
$
961,776,178
|
$
—
|
Direxion
Daily Small Cap Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
—
|
$
—
|
Direxion
Daily Small Cap Bear 3X Shares
|
$
—
|
$447,535,089
|
$—
|
$2,553,912,942
|
$
—
|
Direxion
Daily EURO STOXX 50
®
Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
596,269
|
$
—
|
Direxion
Daily FTSE China Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
—
|
$
—
|
Direxion
Daily FTSE China Bear 3X Shares
|
$
—
|
$
—
|
$—
|
$
50,619,233
|
$
—
|
|
Utilized
in
Current Year
|
October
31, 2019
|
October
31, 2018
|
Unlimited
Short-Term
|
Unlimited
Long-Term
|
Funds
|
|
|
|
|
|
Direxion
Daily FTSE Europe Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
6,390,944
|
$
—
|
Direxion
Daily Latin America Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
39,355,479
|
$
—
|
Direxion
Daily MSCI Brazil Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
3,790,652
|
$
—
|
Direxion
Daily MSCI Developed Markets Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
—
|
$
—
|
Direxion
Daily MSCI Developed Markets Bear 3X Shares
|
$
—
|
$
6,226,800
|
$—
|
$
32,478,051
|
$
—
|
Direxion
Daily MSCI Emerging Markets Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
35,353,225
|
$
47,245,171
|
Direxion
Daily MSCI Emerging Markets Bear 3X Shares
|
$
—
|
$
73,271,322
|
$—
|
$
257,458,762
|
$
—
|
Direxion
Daily MSCI India Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
8,124,647
|
$
—
|
Direxion
Daily MSCI Japan Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
1,069,549
|
$
—
|
Direxion
Daily MSCI Mexico Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
72,031
|
$
—
|
Direxion
Daily MSCI South Korea Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
310,966
|
$
—
|
Direxion
Daily Russia Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
78,881,526
|
$
—
|
Direxion
Daily Russia Bear 3X Shares
|
$
—
|
$
649,297
|
$—
|
$
133,901,348
|
$
—
|
Direxion
Daily Aerospace & Defense Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
—
|
$
—
|
Direxion
Daily Energy Bull 3X Shares
|
$44,882,668
|
$
—
|
$—
|
$
64,298,470
|
$
—
|
Direxion
Daily Energy Bear 3X Shares
|
$
—
|
$
12,590,578
|
$—
|
$
165,631,411
|
$
—
|
Direxion
Daily Financial Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
—
|
$
—
|
Direxion
Daily Financial Bear 3X Shares
|
$
—
|
$679,926,863
|
$—
|
$2,496,194,497
|
$
—
|
Direxion
Daily Gold Miners Index Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
959,248,537
|
$599,634,572
|
Direxion
Daily Gold Miners Index Bear 3X Shares
|
$
—
|
$
—
|
$—
|
$
336,212,868
|
$
—
|
Direxion
Daily Healthcare Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
—
|
$
—
|
Direxion
Daily Homebuilders & Supplies Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
10,354,988
|
$
—
|
Direxion
Daily Industrials Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
67,627
|
$
—
|
Direxion
Daily Junior Gold Miners Index Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
595,064,992
|
$
—
|
Direxion
Daily Junior Gold Miners Index Bear 3X Shares
|
$
—
|
$
—
|
$—
|
$
78,229,788
|
$
—
|
Direxion
Daily MSCI Real Estate Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
653,727
|
$
1,185,872
|
Direxion
Daily MSCI Real Estate Bear 3X Shares
|
$
—
|
$
81,864,882
|
$—
|
$
55,180,662
|
$
—
|
Direxion
Daily Natural Gas Related Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
167,716,691
|
$
6,238,239
|
Direxion
Daily Natural Gas Related Bear 3X Shares
|
$
—
|
$
—
|
$—
|
$
8,410,481
|
$
—
|
Direxion
Daily Pharmaceutical & Medical Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
61,148
|
$
—
|
Direxion
Daily Regional Banks Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
—
|
$
—
|
Direxion
Daily Regional Banks Bear 3X Shares
|
$
—
|
$
—
|
$—
|
$
3,637,773
|
$
—
|
Direxion
Daily Retail Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
—
|
$
—
|
Direxion
Daily Robotics, Artificial Intelligence & Automation Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
825,299
|
$
—
|
|
Utilized
in
Current Year
|
October
31, 2019
|
October
31, 2018
|
Unlimited
Short-Term
|
Unlimited
Long-Term
|
Funds
|
|
|
|
|
|
Direxion
Daily S&P Biotech Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
—
|
$
—
|
Direxion
Daily S&P Biotech Bear 3X Shares
|
$
—
|
$
—
|
$—
|
$
118,838,735
|
$
—
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
—
|
$
—
|
Direxion
Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
|
$
—
|
$
—
|
$—
|
$
32,650,299
|
$
—
|
Direxion
Daily Semiconductor Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
—
|
$
—
|
Direxion
Daily Semiconductor Bear 3X Shares
|
$
—
|
$
961,396
|
$—
|
$
158,995,730
|
$
—
|
Direxion
Daily Technology Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
—
|
$
—
|
Direxion
Daily Technology Bear 3X Shares
|
$
—
|
$
37,175,240
|
$—
|
$
92,174,625
|
$
—
|
Direxion
Daily Transportation Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
—
|
$
—
|
Direxion
Daily Utilities Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
—
|
$
—
|
Direxion
Daily 7-10 Year Treasury Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
615,020
|
$
—
|
Direxion
Daily 7-10 Year Treasury Bear 3X Shares
|
$
—
|
$
2,880,591
|
$—
|
$
54,769,766
|
$
—
|
Direxion
Daily 20+ Year Treasury Bull 3X Shares
|
$
—
|
$
—
|
$—
|
$
6,354,675
|
$
—
|
Direxion
Daily 20+ Year Treasury Bear 3X Shares
|
$
—
|
$101,871,069
|
$—
|
$
799,167,302
|
$
—
|
For federal income tax purposes, a
Fund is generally permitted to carry forward a net capital loss in any year to offset net capital gains, if any, during its taxable years following the year of the loss. The carryforward of capital losses realized in taxable years beginning prior to
December 23, 2010, however, is limited to an eight-year period following the year of realization. Thereafter, capital losses carried forward will retain their character as either short-term or long-term capital losses rather than being considered
all short-term as under previous law. A Fund must use losses that do not expire before it uses losses that do expire and a Fund’s ability to utilize capital losses in a given year or in total may be limited. To the extent subsequent net
capital gains are offset by such losses, they would not result in federal income tax liability to a Fund and as noted above, would not be distributed as such to shareholders.
The Funds' financial
statements for the fiscal year ended October 31, 2018, are incorporated herein by reference from the Funds' Annual Report to Shareholders dated October 31, 2018.
To receive a copy of the Prospectus or
Annual or Semi-Annual Report to shareholders, without charge, write to or call the Trust at the contact information listed below:
Write
to:
|
Direxion
Shares ETF Trust
1301 Avenue of the Americas (6th Avenue), 28th Floor
New York, New York 10019
|
Call:
|
866-476-7523
|
By
Internet:
|
www.direxioninvestments.com
|
APPENDIX A
Description of Corporate Bond Ratings
Moody’s
Investors Service and S&P Global Ratings are two prominent independent rating agencies that rate the quality of bonds. Following are expanded explanations of the ratings shown in the Prospectus and this SAI.
Moody’s Investors Service
–
Global Long-Term Ratings
Ratings assigned
on Moody’s global long-term rating scale are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and
public sector entities. Long-term ratings are assigned to issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a default or impairment on contractual financial obligations and the expected
financial loss suffered in the event of default or impairment. Such ratings have been published by Moody’s Investors Service, Inc. and Moody’s Analytics Inc.
Aaa
:
Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
Aa
:
Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A
:
Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
Baa
:
Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.
Ba
:
Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
B
:
Obligations rated B are considered speculative and are subject to high credit risk.
Caa
:
Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
Ca
:
Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C
:
Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody’s appends numerical
modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of that generic rating category. Additionally, a “(hyb)” indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms.*
* By their terms, hybrid securities
allow for the omission of scheduled dividends, interest, or principal payments, which can potentially result in impairment if such an omission occurs. Hybrid securities may also be subject to contractually allowable write-downs of principal that
could result in impairment. Together with the hybrid indicator, the long-term obligation rating assigned to a hybrid security is an expression of the relative credit risk associated with that security.
Moody’s Investors Service
–
National Scale Long-Term Ratings
Moody’ s long-term National
Scale Ratings (NSRs) are opinions of the relative creditworthiness of issuers and financial obligations within a particular country. NSRs are not designed to be compared among countries; rather, they address relative credit risk within a given
country. Moody’s assigns national scale ratings in certain local capital markets in which investors have found the global rating scale provides inadequate differentiation among credits or is inconsistent with a rating scale already in common
use in the country. In each specific country, the last two characters of the rating indicate the country in which the issuer is located (
e.g.
, Aaa.br for Brazil).
Aaa.n
:
Issuers or issues rated Aaa.n demonstrate the strongest creditworthiness relative to other domestic issuers.
Aa.n
:
Issuers or issues rated Aa.n demonstrate very strong creditworthiness relative to other domestic issuers.
A.n
:
Issuers or issues rated A.n present above-average creditworthiness relative to other domestic issuers.
Baa.n
:
Issuers or issues rated Baa.n represent average creditworthiness relative to other domestic issuers.
Ba.n
:
Issuers or issues rated Ba.n demonstrate below-average creditworthiness relative to other domestic issuers.
B.n
:
Issuers or issues rated B.n demonstrate weak creditworthiness relative to other domestic issuers.
Caa.n
:
Issuers or issues rated Caa.n demonstrate very weak creditworthiness relative to other domestic issuers.
Ca.n
:
Issuers or issues rated Ca.n demonstrate extremely weak creditworthiness relative to other domestic issuers.
C.n
:
Issuers or issues rated C.n demonstrate the weakest creditworthiness relative to other domestic issuers.
Note: Moody’s appends numerical
modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of that generic rating category. National scale long-term ratings of D.ar and E.ar may also be applied to Argentine obligations.
S&P Global Ratings
–
Long-Term Issue Credit Ratings*
An S&P Global Ratings issue
credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note
programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The
opinion reflects S&P Global Ratings' view of the obligor's capacity and willingness to meet its financial commitments as they come due, and this opinion may assess terms, such as collateral security and subordination, which could affect ultimate
payment in the event of default. Issue credit ratings can be either long-term or short-term. Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. Short-term ratings are also used to indicate
the creditworthiness of an obligor with respect to put features on long-term obligations. Medium-term notes are assigned long-term ratings.
Issue credit ratings are based, in
varying degrees, on S&P Global Ratings' analysis of the following considerations:
•
|
The likelihood of
payment--the capacity and willingness of the obligor to meet its financial commitments on an obligation in accordance with the terms of the obligation;
|
•
|
The nature and provisions
of the financial obligation, and the promise we impute; and
|
•
|
The
protection afforded by, and relative position of, the financial obligation in the event of a bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
|
Issue ratings are an assessment of
default risk, but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above.
(Such differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)
AAA
: An obligation rated 'AAA' has the highest rating assigned by S&P Global Ratings. The obligor's capacity to meet its financial commitments on the obligation is extremely strong.
AA
: An
obligation rated 'AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitments on the obligation is very strong.
A
: An
obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitments on the
obligation is still strong.
BBB
: An
obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments on the obligation.
BB; B; CCC; CC; and C
: Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposure to adverse conditions.
BB
:
An obligation rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to the obligor's inadequate
capacity to meet its financial commitments on the obligation.
B
: An
obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitments on the obligation. Adverse business, financial, or economic conditions will likely impair
the obligor's capacity or willingness to meet its financial commitments on the obligation.
CCC
:
An obligation rated 'CCC' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation. In the event of adverse business,
financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitments on the obligation.
CC
: An
obligation rated 'CC' is currently highly vulnerable to nonpayment. The 'CC' rating is used when a default has not yet occurred, but S&P Global Ratings expects default to be a virtual certainty, regardless of the anticipated time to
default.
C
: An obligation rated 'C' is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared with obligations that are rated
higher.
D
: An obligation rated 'D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the 'D' rating category is used when payments on an obligation are not made on the date due, unless S&P
Global Ratings believes that such payments will be made within five business days in the absence of a stated grace period or within the earlier of the stated grace period or 30 calendar days. The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligation's rating is lowered to 'D' if it is subject to a distressed exchange
offer.
NR
: This
indicates that no rating has been requested, or that there is insufficient information on which to base a rating, or that S&P Global Ratings does not rate a particular obligation as a matter of policy.
*The ratings from 'AA' to 'CCC' may be
modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
Moody’s Investors Service
–
Short Term Obligation Ratings
The Municipal Investment Grade (MIG)
scale is used to rate US municipal bond anticipation notes of up to three years maturity. Municipal notes rated on the MIG scale may be secured by either pledged revenues or proceeds of a take-out financing received prior to note maturity. MIG
ratings expire at the maturity of the obligation, and the issuer’s long-term rating is only one consideration in assigning the MIG rating. MIG ratings are divided into three levels
—
MIG 1 through MIG 3
—
while speculative grade short-term obligations are designated SG.
MIG 1
:
This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
MIG 2
:
This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
MIG 3
:
This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.
SG
: This
designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
S&P Global Ratings
–
Municipal Short-Term Note Ratings
An S&P Global
Ratings U.S. municipal note rating reflects S&P Global Ratings opinion about the liquidity factors and market access risks unique to the notes. Notes due in three years or less will likely receive a note rating. Notes with an original maturity
of more than three years will most likely receive a long-term debt rating. In determining which type of rating, if any, to assign, S&P Global Ratings analysis will review the following considerations:
•
|
Amortization
schedule--the larger the final maturity relative to other maturities, the more likely it will be treated as a note; and
|
•
|
Source
of payment--the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
|
SP-1
:
Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.
SP-2
:
Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
SP-3
:
Speculative capacity to pay principal and interest.
Moody’s Investors Service
–
Global Short Term Rating Scale
Ratings assigned
on Moody’s global short-term rating scale are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and
public sector entities. Short-term ratings are assigned to obligations with an original maturity of thirteen months or less and reflect both on the likelihood of a default or impairment on contractual financial obligations and the expected financial
loss suffered in the event of default or impairment.
P-1
:
Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
P-2
:
Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
P-3
:
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
NP
:
Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
S&P Global Ratings
–
Short-Term Issue Credit Ratings
A-1
:
A short-term obligation rated 'A-1' is rated in the highest category by S&P Global Ratings. The obligor's capacity to meet its financial commitments on the obligation is strong. Within this category, certain obligations are designated with a
plus sign (+). This indicates that the obligor's capacity to meet its financial commitments on these obligations is extremely strong.
A-2
:
A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial
commitments on the obligation is satisfactory.
A-3
: A
short-term obligation rated 'A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments on the
obligation.
B
: A
short-term obligation rated 'B' is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties that could lead to the
obligor's inadequate capacity to meet its financial commitments.
C
: A
short-term obligation rated 'C' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation.
D
: A
short-term obligation rated 'D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the 'D' rating category is used when payments on an obligation are not made on the date due, unless S&P Global Ratings believes
that such payments will be made within any stated grace period. However, any stated grace period longer than five business days will be treated as five business days. The 'D' rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action and where default on an obligation is a virtual certainty, for example, due to automatic stay provisions. An obligation’s rating is lowered to ‘D’ if it is subject to a distressed exchange
offer.
Dual ratings may
be assigned to debt issues that have a put option or demand feature. The first component of the rating addresses the likelihood of repayment of principal and interest as due, and the second component of the rating addresses only the demand feature.
The first component of the rating can relate to either a short-term or long-term transaction and accordingly use either short-term or long-term rating symbols. The second component of the rating relates to the put option and is assigned a short-term
rating symbol (for example, 'AAA/A-1+' or 'A-1+/A-1'). With U.S. municipal short-term demand debt, the U.S. municipal short-term note rating symbols are used for the first component of the rating (for example, 'SP-1+/A-1+').
DIREXION SHARES ETF TRUST
PART C
OTHER INFORMATION
Item 28. Exhibits
|
|
|
|
|
(a)
|
|
(i)
|
|
Certificate of Trust dated April 23, 2008 is herein incorporated by reference from the Direxion Shares ETF Trusts
(the Trust) Initial Registration Statement on Form N-1A filed with the Securities and Exchange Commission (SEC) on April 30, 2008.
|
|
|
|
|
|
(ii)
|
|
Trust Instrument is herein incorporated by reference from the
Pre-Effective
Amendment No. 1 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on August 20, 2008.
|
|
|
|
(b)
|
|
|
|
Amended and Restated
By-Laws
dated February 14, 2019 filed
herewith.
|
|
|
|
(c)
|
|
|
|
Shareholders Rights are contained in Articles IV, V, VI, IX, and X of the Trusts Trust Instrument and Articles
V, VI, VII, VIII and IX of the Trusts
By-Laws.
|
|
|
|
(d)
|
|
(i)(A)
|
|
Investment Advisory Agreement between the Trust and Rafferty Asset Management, LLC (RAM) dated August 13,
2008 is herein incorporated by reference from the Post-Effective Amendment No. 171 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on October 19, 2016.
|
|
|
|
|
|
(i)(B)
|
|
Amended Schedule A to the Investment Advisory Agreement between the Trust and RAM - filed herewith.
|
|
|
|
|
|
(i)(C)
|
|
Investment Advisory Agreement between the Trust and Direxion Advisors, LLC (DAL) dated November 21, 2017
is herein incorporated by reference from the Post-Effective Amendment No. 204 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on January 17, 2018.
|
|
|
|
(e)
|
|
(i)(A)
|
|
Distribution Agreement between the Trust and Foreside Fund Services, LLC (Foreside) dated March 31, 2009
is herein incorporated by reference from the Post-Effective Amendment No. 171 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on October 19, 2016.
|
|
|
|
|
|
(i)(B)
|
|
Amended Appendix A to the Distribution Agreement - filed herewith.
|
|
|
|
|
|
(ii)
|
|
Form of Authorized Participant Agreement is herein incorporated by reference from the
Pre-Effective
Amendment No. 1 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on August 20, 2008.
|
|
|
|
(f)
|
|
|
|
Bonus, profit sharing contracts None.
|
|
|
|
(g)
|
|
(i)(A)
|
|
Form of Custody Agreement between the Trust and The Bank of New York (BONY) is herein incorporated by reference
from the
Pre-Effective
Amendment No. 1 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on August 20, 2008.
|
|
|
|
|
|
(i)(B)
|
|
Tenth Amended Schedule II to the Custody Agreement is herein incorporated by reference from the Post-Effective Amendment
No. 133 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on June 3, 2015.
|
|
|
|
|
|
(ii)
|
|
Custody Agreement between the Trust and U.S Bank National Association is herein incorporated by reference from the
Post-Effective Amendment No. 89 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on September 16, 2013.
|
1
|
|
|
|
|
(h)
|
|
(i)(A)
|
|
Form of Transfer Agency and Service Agreement between the Trust and BONY is herein incorporated by reference from the
Pre-Effective Amendment No. 1 to the Trusts Registration Statement filed on Form N-1A with the SEC on August 20, 2008.
|
|
|
|
|
|
(i)(B)
|
|
Ninth Amended Appendix I to the Transfer Agency and Service Agreement is herein incorporated by reference from the
Post-Effective Amendment No. 133 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on June 3, 2015.
|
|
|
|
|
|
(ii)
|
|
Transfer Agent Servicing Agreement between the Trust and U.S. Bancorp Fund Services, LLC is herein incorporated by
reference from the Post-Effective Amendment No. 89 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on September 16, 2013.
|
|
|
|
|
|
(iii)
|
|
Fund Administration Agreement between the Trust and U. S. Bancorp Fund Services, LLC is herein incorporated by reference
from the Post-Effective Amendment No. 80 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on November 30, 2012.
|
|
|
|
|
|
(iv)(A)
|
|
Fund Accounting Agreement between the Trust and BONY is herein incorporated by reference from the Post-Effective Amendment
No. 80 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on November 30, 2012.
|
|
|
|
|
|
(iv)(B)
|
|
Amended Exhibit A to the Fund Accounting Agreement between the Trust and BONY is herein incorporated by reference from the
Post-Effective Amendment No. 133 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on June 3, 2015.
|
|
|
|
|
|
(v)
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Fund Accounting Agreement between the Trust and U.S. Bancorp Fund Services, LLC is herein incorporated by reference from
the Post-Effective Amendment No. 89 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on September 16, 2013.
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(vi)(A)
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Advisory Fee Waiver Agreement between the Trust and RAM is herein incorporated by reference from the Post-Effective
Amendment No. 69 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on June 13, 2012.
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(vi)(B)
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Amended Schedule A to the Advisory Fee Waiver Agreement between the Trust and RAM -filed herewith.
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(vi)(C)
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Advisory Fee Waiver Agreement between the Trust and DAL is herein incorporated by reference from the Post-Effective
Amendment No. 204 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on January 17, 2018.
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(vii)(A)
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Third Amended and Restated Operating Expense Limitation Agreement between the Trust and RAM is herein incorporated by
reference from the Post-Effective Amendment No. 179 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on February 15, 2017.
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(vii)(B)
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Amended Appendix A to the Third Amended and Restated Operating Expense Limitation Agreement between the Trust and RAM -
filed herewith.
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(vii)(C)
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Operating Expense Limitation Agreement between the Trust and DAL is herein incorporated by reference from the
Post-Effective Amendment No. 204 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on January 17, 2018.
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(viii)(A)
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Management Services Agreement between the Trust and RAM is herein incorporated by reference from the Post-Effective
Amendment No. 155 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on December 18, 2015.
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(viii)(B)
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Amended Schedule A to the Management Services Agreement between the Trust and RAM - filed
herewith.
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2
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(viii)(C)
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Management Services Agreement between the Trust and DAL is herein incorporated by reference from the Post-Effective
Amendment No. 204 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on January 17, 2018.
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(i)
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Opinion and consent of counsel filed herewith.
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(j)
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(i)
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Power of Attorney and Certified Resolutions is herein incorporated by reference from the Post-Effective Amendment
No. 232 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on December 28, 2018.
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(ii)
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Consent of Independent Registered Public Accounting Firm filed herewith.
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(k)
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Financial Statements omitted from prospectus None.
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(l)
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Initial Capital Agreement is herein incorporated by reference from the
Pre-Effective
Amendment No. 1 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on August 20, 2008.
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(m)
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(i)(A)
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Rule
12b-1
Distribution Plan is herein incorporated by reference from the
Pre-Effective
Amendment No. 1 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on August 20, 2008.
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(i)(B)
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Amended Appendix A to the Rule
12b-1
Distribution Plan - filed
herewith.
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(n)
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Rule
18f-3
Plan None.
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(o)
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Reserved.
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(p)
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Code of Ethics for the Direxion Funds, Direxion Insurance Trust, Direxion Shares ETF Trust, Rafferty Asset Management, LLC,
and Direxion Advisors LLC is herein incorporated by reference from the Post-Effective Amendment No. 232 to the Trusts Registration Statement filed on Form
N-1A
with the SEC on December 28,
2018.
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Item 29. Persons Controlled by or Under Common Control with Registrant
Immediately prior to the public offering of the Registrants shares for each series, the following persons may be deemed
individually to control the Funds or the Trust:
Rafferty Asset Management, LLC will be the sole shareholder immediately
prior to the public offering of each Fund.
Item 30. Indemnification
Article IX of the Trust Instrument of the Registrant provides as follows:
Section 1. LIMITATION OF LIABILITY. All persons contracting with or having any claim against the
Trust or a particular Series shall look only to the assets of the Trust or Assets belonging to such Series, respectively, for payment under such contract or claim; and neither the Trustees nor any of the Trusts officers or employees, whether
past, present or future, shall be personally liable therefor. Every written instrument or obligation on behalf of the Trust or any Series may contain a statement to the foregoing effect, but the absence of such statement shall not operate to make
any Trustee or officer of the Trust liable thereunder. Provided they have exercised reasonable care and have acted under the reasonable belief that their actions are in the best interest of the Trust, the Trustees and officers of the Trust shall not
be responsible or liable for any act or omission or for neglect or wrongdoing of them or any officer, agent, employee, investment adviser, principal underwriter or independent contractor of the Trust, but nothing contained in this Trust Instrument
or in the Delaware Act shall protect any Trustee or officer of the Trust against liability to the Trust or to Shareholders to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office.
3
Section 2. INDEMNIFICATION.
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(a)
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Subject to the exceptions and limitations contained in subsection (b) below:
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(i)
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every person who is, or has been, a Trustee or an officer, employee or agent of the Trust, including persons
who act at the request of the Trust as directors, trustees, officers, employees or agents of another organization in which the Trust has an interest as a shareholder, creditor or otherwise (Covered Person) shall be indemnified by the
Trust or the appropriate Series to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him or her in connection with any claim, action, suit or proceeding in which he or she becomes involved
as a party or otherwise by virtue of his or her being or having been a Covered Person and against amounts paid or incurred by him or her in the settlement thereof.
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(ii)
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as used herein, the words claim, action, suit or proceeding
shall apply to all claims, actions, suits or proceedings (civil, criminal or other, including appeals), actual or threatened, and the words liability and expenses shall include, without limitation, counsel fees, costs,
judgments, amounts paid in settlement, fines, penalties and other liabilities.
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(b)
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No indemnification shall be provided hereunder to a Covered Person:
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(i)
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who shall have been adjudicated by a court or body before which the proceeding was brought (A) to be
liable to the Trust or its Shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office or (B) not to have acted in good faith in the reasonable
belief that his or her action was in the best interest of the Trust; or
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(ii)
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in the event of a settlement, if there has been a determination that such Covered Person engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office: (A) by the court or other body approving the settlement; (B) by at least a majority of those Trustees who are
neither Interested Persons of the Trust nor are parties to the matter based upon a review of readily available facts (as opposed to a full trial-type inquiry); or (C) by written opinion of independent legal counsel based upon a review of
readily available facts (as opposed to a full trial-type inquiry).
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(c)
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The rights of indemnification herein provided may be insured against by policies maintained by the Trust,
shall be severable, shall not be exclusive of or affect any other rights to which any Covered Person may now or hereafter be entitled and shall inure to the benefit of the heirs, executors and administrators of a Covered Person. Nothing contained
herein shall affect any rights to indemnification to which Trust personnel other than Covered Persons may be entitled by contract or otherwise under law.
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(d)
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To the maximum extent permitted by applicable law, expenses in connection with the preparation and
presentation of a defense to any claim, action, suit or proceeding of the character described in subsection (a) of this Section shall be paid by the Trust or applicable Series from time to time prior to final disposition thereof upon receipt of
an undertaking by or on behalf of such Covered Person that such amount will be paid over by him or her to the Trust or applicable Series if it is ultimately determined that he or she is not entitled to indemnification under this Section.
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(e)
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Any repeal or modification of this Article IX by the Shareholders, or adoption or modification of any other
provision of this Trust Instrument or the
By-laws
inconsistent with this Article, shall be prospective only, to the extent that such, repeal or modification would, if applied retrospectively, adversely affect
any limitation on the liability of any Covered Person or indemnification available to any Covered Person with respect to any act or omission which occurred prior to such repeal, modification or adoption.
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Section 3. INDEMNIFICATION OF SHAREHOLDERS. If any Shareholder or former Shareholder of any Series
is held personally liable solely by reason of his or her being or having been a Shareholder and not
4
because of his or her acts or omissions or for some other reason, the Shareholder or former Shareholder (or his or her heirs, executors, administrators or other legal representatives or, in the
case of any entity, its general successor) shall be entitled out of the Assets belonging to the applicable Series to be held harmless from and indemnified against all loss and expense arising from such liability. The Trust, on behalf of the affected
Series, shall, upon request by such Shareholder or former Shareholder, assume the defense of any claim made against him or her for any act or obligation of the Series and satisfy any judgment thereon from the Assets belonging to the Series.
Article IX, Section 3 of the
By-laws
of the Registrant provides as follows:
Section 3. Advance Payment of Indemnifiable Expenses. Expenses incurred by an agent in
connection with the preparation and presentation of a defense to any proceeding may be paid by the Trust from time to time prior to final disposition thereof upon receipt of an undertaking by, or on behalf of, such agent that such amount will be
paid over by him or her to the Trust if it is ultimately determined that he or she is not entitled to indemnification; provided, however, that (a) such agent shall have provided appropriate security for such undertaking, (b) the Trust is
insured against losses arising out of any such advance payments, or (c) either a majority of the Trustees who are neither Interested Persons of the Trust nor parties to the proceeding, or independent legal counsel in a written opinion, shall
have determined, based upon a review of the readily available facts (as opposed to a trial-type inquiry or full investigation), that there is reason to believe that such agent will be found entitled to indemnification.
Section 7 of the Investment Advisory Agreement provides as follows:
The Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust or any Fund
in connection with the matters to which this Agreement relate except a loss resulting from the willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations and
duties under this Agreement. Any person, even though also an officer, partner, employee, or agent of the Adviser, who may be or become an officer, trustee, employee or agent of the Trust shall be deemed, when rendering services to the Trust or
acting in any business of the Trust, to be rendering such services to or acting solely for the Trust and not as an officer, partner, employee, or agent or one under the control or direction of the Adviser even though paid by it.
Section 6 of the Distribution Agreement provides as follows:
(a) The Trust agrees to indemnify and hold harmless the Distributor, its affiliates and each of their
directors, officers and employees and agents and any person who controls the Distributor within the meaning of Section 15 of the 1933 Act (any of the Distributor, its officers, employees, agents and directors or such control persons, for
purposes of this paragraph, a Distributor Indemnitee) against any loss, liability, claim, damages or expense (including the reasonable cost of investigating or defending any alleged loss, liability, claim, damages or expense and
reasonable counsel fees incurred in connection therewith) arising out of or based upon (i) any claim that the Registration Statement, Prospectus, Statement of Additional Information, Product Description, shareholder reports, sales literature
and advertisements specifically approved by the Trust and Investment Adviser or other information filed or made public by the Trust (as from time to time amended) included an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements therein (and in the case of the Prospectus, Statement of Additional Information and Product Description, in light of the circumstances under which they were made) not
misleading under the 1933 Act, or any other statute or the common law, (ii) the breach by the Trust of any obligation, representation or warranty contained in this Agreement or (iii) the Trusts failure to comply in any material
respect with applicable securities laws.
The Trust does not agree to indemnify the Distributor or hold it harmless to
the extent that the statement or omission was made in reliance upon, and in conformity with, information furnished to the Trust by or on behalf of the Distributor. The Trust will also not indemnify any Distributor Indemnitee with respect to any
untrue statement or omission made in the Registration Statement, Prospectus, Statement of Additional Information or Product Description that is subsequently corrected in such document (or an amendment thereof or supplement thereto) if a copy of the
Prospectus (or such amendment or supplement) was not sent or given to the person asserting any such loss, liability, claim, damage or expense at or before the written confirmation
5
to such person in any case where such delivery is required by the 1933 Act and the Trust had notified the Distributor of the amendment or supplement prior to the sending of the confirmation. In
no case (i) is the indemnity of the Trust in favor of any Distributor Indemnitee to be deemed to protect the Distributor Indemnitee against any liability to the Trust or its shareholders to which the Distributor Indemnitee would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations under this Agreement, or (ii) is the Trust to be liable under its indemnity
agreement contained in this Section with respect to any claim made against any Distributor Indemnitee unless the Distributor Indemnitee shall have notified the Trust in writing of the claim within a reasonable time after the summons or other first
written notification giving information of the nature of the claim shall have been served upon Distributor Indemnitee (or after Distributor Indemnitee shall have received notice of service on any designated agent).
Failure to notify the Trust of any claim shall not relieve the Trust from any liability that it may have to any Distributor
Indemnitee against whom such action is brought unless failure or delay to so notify the Trust prejudices the Trusts ability to defend against such claim. The Trust shall be entitled to participate at its own expense in the defense, or, if it
so elects, to assume the defense of any suit brought to enforce any claims, but if the Trust elects to assume the defense, the defense shall be conducted by counsel chosen by it and satisfactory to Distributor Indemnitee, defendant or defendants in
the suit. In the event the Trust elects to assume the defense of any suit and retain counsel, Distributor Indemnitee, defendant or defendants in the suit, shall bear the fees and expenses of any additional counsel retained by them. If the Trust does
not elect to assume the defense of any suit, it will reimburse the Distributor Indemnitee, defendant or defendants in the suit, for the reasonable fees and expenses of any counsel retained by them. The Trust agrees to notify the Distributor promptly
of the commencement of any litigation or proceedings against it or any of its officers or Trustees in connection with the issuance or sale of any of the Creation Units or the Shares.
(b) The Distributor agrees to indemnify and hold harmless the Trust and each of its Trustees and
officers and any person who controls the Trust within the meaning of Section 15 of the 1933 Act (for purposes of this paragraph, the Trust and each of its Trustees and officers and its controlling persons are collectively referred to as the
Trust Affiliates) against any loss, liability, claim, damages or expense (including the reasonable cost of investigating or defending any alleged loss, liability, claim, damages or expense and reasonable counsel fees incurred in
connection therewith) arising out of or based upon (i) the allegation of any wrongful act of the Distributor or any of its directors, officers, employees, (ii) the breach of any obligation, representation or warranty pursuant to this
Agreement by the Distributor, (iii) the Distributors failure to comply in any material respect with applicable securities laws, including applicable FINRA regulations, or (iv) any allegation that the Registration Statement,
Prospectus, Statement of Additional Information, Product Description, shareholder reports, any information or materials relating to the Funds (as described in section 3(g)) or other information filed or made public by the Trust (as from time to time
amended) included an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements not misleading, insofar as such statement or omission was made in reliance upon,
and in conformity with information furnished to the Trust by or on behalf of the Distributor, it being understood that the Trust will rely upon certain information provided by the Distributor for use in the preparation of the Registration Statement,
Prospectus, Statement of Additional Information, Product Description, shareholder reports or other information relating to the Funds or made public by the Trust.
In no case (i) is the indemnity of the Distributor in favor of any Trust Affiliate to be deemed to protect any Trust
Affiliate against any liability to the Trust or its security holders to which such Trust Affiliate would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its
reckless disregard of its obligations and duties under this Agreement, or (ii) is the Distributor to be liable under its indemnity agreement contained in this Section with respect to any claim made against any Trust Affiliate unless the Trust
Affiliate shall have notified the Distributor in writing of the claim within a reasonable time after the summons or other first written notification giving information of the nature of the claim shall have been served upon the Trust Affiliate (or
after the Trust Affiliate shall have received notice of service on any designated agent).
Failure to notify the
Distributor of any claim shall not relieve the Distributor from any liability that it may have to the Trust Affiliate against whom such action is brought unless failure or delay to so notify the
6
Distributor prejudices the Distributors ability to defend against such claim. The Distributor shall be entitled to participate at its own expense in the defense or, if it so elects, to
assume the defense of any suit brought to enforce the claim, but if the Distributor elects to assume the defense, the defense shall be conducted by counsel chosen by it and satisfactory to the Trust, its officers and Board and to any controlling
person or persons, defendant or defendants in the suit. In the event that Distributor elects to assume the defense of any suit and retain counsel, the Trust or controlling person or persons, defendant or defendants in the suit, shall bear the fees
and expenses of any additional counsel retained by them. If the Distributor does not elect to assume the defense of any suit, it will reimburse the Trust, its officers and Trustees or controlling person or persons, defendant or defendants in the
suit, for the reasonable fees and expenses of any counsel retained by them. The Distributor agrees to notify the Trust promptly of the commencement of any litigation or proceedings against it or any of its officers or directors in connection with
the issuance or sale of any of the Creation Units or the Shares.
(c) No indemnified party shall
settle any claim against it for which it intends to seek indemnification from the indemnifying party, under the terms of section 6(a) or 6(b) above, without the prior written notice to and consent from the indemnifying party, which consent shall not
be unreasonably withheld. No indemnified or indemnifying party shall settle any claim unless the settlement contains a full release of liability with respect to the other party in respect of such action. This section 6 shall survive the termination
of this Agreement.
Section 13 of the Authorized Participant Agreement provides as follows:
(a) The Participant hereby agrees to indemnify and hold harmless the Distributor, the Funds, the Index
Receipt Agent, their respective subsidiaries, affiliates, directors, officers, employees, and agents, and each person, if any, who controls such persons within the meaning of Section 15 of the 1933 Act (each an Indemnified Party),
from and against any loss, liability, cost, or expense (including attorneys fees) incurred by such Indemnified Party as a result of (i) any breach by the Participant of any provision of this Agreement; (ii) any failure on the part of
the Participant to perform any of its obligations set forth in this Agreement; (iii) any failure by the Participant to comply with applicable laws, including rules and regulations of self-regulatory organizations; (iv) actions of such
Indemnified Party in reliance upon any instructions issued in accordance with the Fund Documents, AP Handbook or Annex II (as each may be amended from time to time) reasonably believed by the Distributor and/or the Index Receipt Agent to be genuine
and to have been given by the Participant; or (v) the Participants failure to complete a Purchase Order or Redemption Order that has been accepted. The Participant understands and agrees that the Funds as third party beneficiaries to this
Agreement are entitled to proceed directly against the Participant in the event that the Participant fails to honor any of its obligations under this Agreement that benefit the Fund. The Distributor shall not be liable to the Participant for any
damages arising out of mistakes or errors in data provided to the Distributor, or out of interruptions or delays of communications with the Indemnified Parties who are service providers to the Fund, nor is the Distributor liable for any action,
representation, or solicitation made by the wholesalers of the Fund.
(b) The Distributor hereby
agrees to indemnify and hold harmless the Participant and the Index Receipt Agent, their respective subsidiaries, affiliates, directors, officers, employees, and agents, and each person, if any, who controls such persons within the meaning of
Section 15 of the 1933 Act (each an Indemnified Party), from and against any loss, liability, cost, or expense (including attorneys fees) incurred by such Indemnified Party as a result of (i) any breach by the Distributor
of any provision of this Agreement; (ii) any failure on the part of the Distributor to perform any of its obligations set forth in this Agreement; (iii) any failure by the Distributor to comply with applicable laws, including rules and
regulations of self-regulatory organizations; or (iv) actions of such Indemnified Party in reliance upon any representations made in accordance with the Fund Documents and AP Handbook (as e ach may be amended from time to time) reasonably
believed by the Participant to be genuine and to have been given by the Distributor. The Participant shall not be liable to the Distributor for any damages arising out of mistakes or errors in data provided to the Participant, or out of
interruptions or delays of communications with the Indemnified Parties who are service providers to the Fund, nor is the Participant liable for any action, representation, or solicitation made by the wholesalers of the Fund.
(c) The Funds, the Distributor, the Index Receipt Agent, or any person who controls such persons
within the meaning of Section 15 of the 1933 Act, shall not be liable to the Participant for any damages arising from any differences in performance between the Deposit Securities in a Fund Deposit and the Funds benchmark index.
7
The general effect of this Indemnification will be to indemnify the officers,
trustees, employees and agents of the Registrant from costs and expenses arising from any action, suit or proceeding to which they may be made a party by reason of their being or having been a trustee, officer, employee or agent of the Registrant,
except where such action is determined to have arisen out of the willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the trustees, officers, employees or agents
office.
Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to trustees,
officers and controlling persons of the Registrant pursuant to the foregoing or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
Item 31. Business and Other Connections of Investment Adviser
Rafferty Asset Management, LLC (Rafferty) provides investment advisory services to the Trust. Rafferty was organized as a New York
limited liability corporation in June 1997.
Direxion Advisors, LLC (DAL) provides investment advisory services to certain
series of the Trust. DAL was organized as a Delaware limited liability corporation in October 2017. DAL is a wholly owned subsidiary of Rafferty.
Lawrence C. Rafferty controls Rafferty through his ownership in Rafferty Holdings, LLC. Rafferty and DALs offices are
located at 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019. Information as to the directors and officers of Rafferty is included in its current Form ADV filed with the SEC (File
No. 801-54679)
and will be included in DALs Form ADV to be filed with the SEC.
Item 32.
Principal Underwriter
(a) Foreside Fund Services, LLC, the Registrants principal
underwriter, also serves as principal underwriter for the following investment companies registered under the Investment Company Act of 1940, as amended: ABS Long/Short Strategies Fund, Absolute Shares Trust, Active Weighting Funds ETF Trust,
AdvisorShares Trust, AmericaFirst Quantitative Funds, American Beacon Funds, American Beacon Select Funds, American Century ETF Trust, ARK ETF Trust, Avenue Mutual Funds Trust, BP Capital TwinLine Energy Fund, Series of Professionally Managed
Portfolios, BP Capital TwinLine MLP Fund, Series of Professionally Managed Portfolios, Braddock Multi-Strategy Income Fund, Series of Investment Managers Series Trust, Bridgeway Funds, Inc., Brinker Capital Destinations Trust, Calvert Ultra-Short
Duration Income NextShares, Series of Calvert Management Series, Center Coast MLP & Infrastructure Fund, Center Coast MLP Focus Fund, Series of Investment Managers Series Trust, Context Capital Funds, CornerCap Group of Funds, Davis
Fundamental ETF Trust, Direxion Shares ETF Trust, Eaton Vance NextShares Trust, Eaton Vance NextShares Trust II, EIP Investment Trust, Elkhorn ETF Trust, EntrepreneurShares Series Trust, Evanston Alternative Opportunities Fund, Exchange Listed Funds
Trust (f/k/a Exchange Traded Concepts Trust II), FEG Absolute Access Fund I LLC, Fiera Capital Series Trust, FlexShares Trust, Forum Funds, Forum Funds II, FQF Trust, Friess Small Cap Growth Fund, Series of Managed Portfolio Series, GraniteShares
ETF Trust, Guinness Atkinson Funds, Horizons ETF Trust, Horizons ETF Trust I (f/k/a Recon Capital Series Trust), Infinity Core Alternative Fund, Innovator IBD
®
50 ETF, Series of Innovator ETFs
Trust, Innovator IBD
®
ETF Leaders ETF, Series of Innovator ETFs Trust, Ironwood Institutional Multi-Strategy Fund LLC, Ironwood Multi-Strategy Fund LLC, John Hancock Exchange-Traded Fund
Trust, Manor Investment Funds, Miller/Howard Funds Trust, Miller/Howard High Income Equity Fund, Moerus Worldwide Value Fund, Series of Northern Lights Fund Trust IV, MProved Systematic Long-Short Fund, Series Portfolios Trust, MProved Systematic
Merger Arbitrage Fund, Series Portfolios Trust, MProved Systematic Multi-Strategy Fund, Series Portfolios Trust, OSI ETF Trust, Palmer Square Opportunistic Income Fund, Partners Group
8
Private Income Opportunities, LLC, PENN Capital Funds Trust, Performance Trust Mutual Funds, Series of Trust for Professional Managers, Pine Grove Alternative Institutional Fund, Plan Investment
Fund, Inc., PMC Funds, Series of Trust for Professional Managers, Point Bridge GOP Stock Tracker ETF, Series of ETF Series Solutions, Quaker Investment Trust, Ranger Funds Investment Trust, Renaissance Capital Greenwich Funds, RMB Investors Trust
(f/k/a Burnham Investors Trust), Robinson Opportunistic Income Fund, Series of Investment Managers Series Trust, Robinson Tax Advantaged Income Fund, Series of Investment Managers Series Trust, Salient MF Trust, SharesPost 100 Fund, Sound Shore
Fund, Inc., Steben Alternative Investment Funds, Steben Select Multi-Strategy Fund, Strategy Shares, The 504 Fund (f/k/a The Pennant 504 Fund), The Chartwell Funds, The Community Development Fund, The Relative Value Fund, Third Avenue Trust, Third
Avenue Variable Series Trust, TIFF Investment Program, Transamerica ETF Trust, U.S. Global Investors Funds, VictoryShares Developed Enhanced Volatility Wtd ETF, Series of Victory Portfolios II, VictoryShares Dividend Accelerator ETF, Series of
Victory Portfolios II, VictoryShares Emerging Market High Div Volatility Wtd ETF, Series of Victory Portfolios II, VictoryShares Emerging Market Volatility Wtd ETF, Series of Victory Portfolios II, VictoryShares International High Div Volatility Wtd
ETF, Series of Victory Portfolios II, VictoryShares International Volatility Wtd ETF, Series of Victory Portfolios II, VictoryShares US 500 Enhanced Volatility Wtd ETF, Series of Victory Portfolios II, VictoryShares US 500 Volatility Wtd ETF, Series
of Victory Portfolios II, VictoryShares US Discovery Enhanced Volatility Wtd ETF, Series of Victory Portfolios II, VictoryShares US EQ Income Enhanced Volatility Wtd ETF, Series of Victory Portfolios II, VictoryShares US Large Cap High Div
Volatility Wtd ETF, Series of Victory Portfolios II, VictoryShares US Multi-Factor Minimum Volatility ETF, Series of Victory Portfolios II, VictoryShares US Small Cap High Div Volatility Wtd ETF, Series of Victory Portfolios II, VictoryShares US
Small Cap Volatility Wtd ETF, Series of Victory Portfolios II, Vivaldi Opportunities Fund, West Loop Realty Fund, Series of Investment Managers Series Trust (f/k/a Chilton Realty Income & Growth Fund), Wintergreen Fund, Inc., WisdomTree
Trust, and WST Investment Trust.
(b) The following table identifies the officers of Foreside and
their positions, if any, with the Registrant. The business address of each of these individuals is also indicated below.
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Name
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Business Address
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Position with Underwriter
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Position
with
Registrant
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Richard J. Berthy
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Three Canal Plaza, Suite 100,
Portland, Maine
04101
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President, Treasurer and Manager
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None
|
Mark A. Fairbanks
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Three Canal Plaza, Suite 100,
Portland, Maine
04101
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Vice President
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None
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Jennifer K. DiValerio
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899 Cassatt Road,
400 Berwyn Park, Suite 110,
Berwyn, PA 19312
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Vice President
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None
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Nanette K. Chern
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Three Canal Plaza, Suite 100,
Portland, Maine
04101
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Vice President and Chief Compliance Officer
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None
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Jennifer E. Hoopes
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Three Canal Plaza, Suite 100,
Portland, Maine
04101
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Secretary
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None
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(c) Not applicable.
Item 33. Location of Accounts and Records
The books and records required to be maintained by Section 31(a) of the Investment Company Act of 1940, as amended, (the
1940 Act) are maintained in the physical possession of the Direxion Shares ETF Trusts investment adviser, subadviser, administrator, custodian, subcustodian, or transfer agent.
Item 34. Management Services
Not applicable.
Item 35.
Undertakings
Not applicable.
9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, (the Securities Act) and the 1940 Act, the
Registrant certifies that this Post-Effective Amendment No. 239 to its Registration Statement meets all the requirements for effectiveness pursuant to Rule 485(b) of the Securities Act, and the Registrant has duly caused this Post-Effective
Amendment No. 239 to its Registration Statement on Form
N-1A
to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and the State of New York on
February 26, 2019.
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DIREXION SHARES ETF TRUST
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By:
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/s/ Patrick J. Rudnick*
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Patrick J. Rudnick
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Principal Executive Officer
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Pursuant to the requirements of the Securities Act, this Post-Effective Amendment No. 239 to its
Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
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Signature
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Title
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Date
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/s/ Daniel D. ONeill*
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Chairman of the Board
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February 26, 2019
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Daniel D. ONeill
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/s/ Gerald E. Shanley III*
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Trustee
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February 26, 2019
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Gerald E. Shanley III
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/s/ John Weisser*
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Trustee
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February 26, 2019
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John Weisser
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/s/ Jacob C. Gaffey*
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Trustee
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February 26, 2019
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Jacob C. Gaffey
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/s/ David L. Driscoll*
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Trustee
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February 26, 2019
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David L. Driscoll
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/s/ Henry W. Mulholland*
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Trustee
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February 26, 2019
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Henry W. Mulholland
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/s/ Patrick J. Rudnick*
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Principal Executive Officer
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February 26, 2019
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Patrick J. Rudnick
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and Principal Financial Officer
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*By: /s/ Angela Brickl
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Attorney-In-Fact
pursuant to
the Power of Attorney filed with Post-Effective Amendment No. 232 to the Trusts Registration Statement filed with the SEC on December 28, 2018.
INDEX TO EXHIBITS
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Exhibit
Number
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Description
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(b)
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Amended and Restated
By-Laws
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(d)(i)(B)
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Amended Schedule A to the Investment Advisory Agreement
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(e)(i)(B)
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Amended Appendix A to the Distribution Agreement
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(h)(vi)(B)
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Amended Schedule A to the Advisory Fee Waiver Agreement
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(h)(vii)(B)
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Amended Appendix A to the Third Amended and Restated Operating Expense Limitation Agreement
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(h)(viii)(B)
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Amended Schedule A to the Management Services Agreement
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(i)
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Opinion and Consent of Counsel
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(j)(ii)
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Consent of Independent Registered Public Accounting Firm
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(m)(i)(B)
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Amended Appendix A to the Rule
12b-1
Distribution Plan
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Exhibit (b)
DIREXION SHARES ETF TRUST
BY-LAWS
Amended and Restated as of February 14, 2019
TABLE OF CONTENTS
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Page
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ARTICLE I PRINCIPAL OFFICE AND SEAL
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1
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Section 1.
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Principal Office
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1
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Section 2.
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Delaware Office
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1
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Section 3.
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Seal
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1
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ARTICLE II TRUSTEES
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1
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Section 1.
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Powers
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1
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Section 2.
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Compensation of Trustees
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1
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Section 3.
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Place of Meetings and Meetings by Telephone
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1
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Section 4.
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Regular Meetings
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2
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Section 5.
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Special Meetings
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2
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Section 6.
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Quorum; Action by Trustees
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2
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Section 7.
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Notice
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2
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Section 8.
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Adjournment
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2
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Section 9.
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Action Without a Meeting
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2
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ARTICLE III COMMITTEES
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2
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Section 1.
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Establishment
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2
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Section 2.
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Proceedings; Quorum; Action
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3
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Section 3.
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Audit Committee
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3
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Section 4.
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Nominating and Governance Committee
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3
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ARTICLE IV BOARD CHAIR AND TRUST OFFICERS
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3
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Section 1.
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Chairperson of the Board
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3
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Section 2.
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Trust Officers
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3
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Section 3.
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Election, Tenure and Qualifications of Officers
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3
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i
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Section 4.
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Vacancies and Newly Created Offices
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4
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Section 5.
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Removal and Resignation
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4
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Section 6.
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President
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4
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Section 6A.
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Principal Executive Officer
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4
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Section 7.
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Vice President(s)
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4
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Section 8.
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Principal Financial Officer
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4
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Section 9.
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Secretary
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4
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Section 10.
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Chief Compliance Officer
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4
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Section 11.
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Other Officers
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5
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ARTICLE V MEETINGS OF SHAREHOLDERS
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5
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Section 1.
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Annual Meetings
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5
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Section 2.
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Special Meetings
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5
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Section 3.
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Notice of Meeting
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5
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Section 4.
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Manner of Giving Notice; Waiver of Notice
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6
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Section 5.
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Adjourned Meetings
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6
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Section 6.
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Validity of Proxies
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6
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Section 7.
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Organization of Meetings
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7
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Section 8.
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Record Date
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7
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Section 9.
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Action Without a Meeting
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7
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ARTICLE VI SHARES OF BENEFICIAL INTEREST
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8
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Section 1.
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No Share Certificates
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8
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Section 2.
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Register
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8
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Section 3.
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Transfer of Shares
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8
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ii
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ARTICLE VII INSPECTION OF RECORDS AND REPORTS
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8
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ARTICLE VIII AMENDMENTS
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8
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ARTICLE IX GENERAL MATTERS
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8
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Section 1.
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Advance Payment of Indemnifiable Expenses
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8
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Section 2.
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Severability
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9
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Section 3.
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Headings
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9
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iii
BY-LAWS
OF
DIREXION SHARES ETF
TRUST
These
By-laws
of Direxion Shares ETF Trust (the Trust), a
Delaware statutory trust, are subject to the Trust Instrument of the Trust dated April 30, 2008, as from time to time amended, supplemented or restated (the Trust Instrument). Capitalized terms used herein and not herein defined
have the same meanings as in the Trust Instrument. In the event of any inconsistency between the terms hereof and the terms of the Trust Instrument, the terms of the Trust Instrument shall control.
ARTICLE I
PRINCIPAL
OFFICE AND SEAL
Section 1.
Principal Office
. The principal executive office of
the Trust shall be located in the State of New York or such other location as the Trustees determine. The Trust may establish and maintain other branches or subordinate offices and places of business as the Trustees determine.
Section 2.
Delaware Office
. The registered office of the Trust in the State of Delaware
is located at 2711 Centerville Road, Suite 400, Wilmington, New Castle County, Delaware 19808. The name of the registered agent of the Trust for service of process at such location is Corporation Service Company.
Section 3.
Seal
. The Trustees may adopt a seal for the Trust in such form and with such
inscription as the Trustees determine. Any Trustee or officer of the Trust shall have authority to affix the seal to any document.
ARTICLE II
TRUSTEES
Section 1.
Powers
. Subject to the applicable provisions of the 1940 Act, the
Delaware Act, the Trust Instrument and these
By-laws
relating to action required to be approved by Shareholders, the business and affairs of the Trust shall be managed and all powers shall be exercised by or
under the direction of the Trustees.
Section 2.
Compensation of Trustees
. Trustees and
members of committees may receive for their services as such, compensation and reimbursement of expenses as may be fixed or determined by resolution of the Trustees. This Section 2 shall not be construed to preclude any Trustee from serving the
Trust in any other capacity as an officer, agent, employee, or otherwise and receiving compensation for those services.
Section
3.
Place of Meetings and Meetings by Telephone
. All meetings of the Trustees and any adjournments thereof may be held at any place and time that has been selected from time to time by the Trustees.
Subject to any applicable requirements of the 1940 Act, any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all Trustees participating in the meeting can hear one another.
1
Section 4.
Regular Meetings
. Regular meetings of
the Trustees may be held without notice, provided that any Trustee who is absent when such determination is made shall be given notice of the determination.
Section 5.
Special Meetings
. Special meetings of the Trustees may be called by the Secretary
at the written request of the President or any two Trustees, and if the Secretary, when so requested, refuses or fails for more than 24 hours to call such meeting, the President or such two Trustees may, in the same of the Secretary, call such
meeting by giving due notice in the manner required when notice is to be given by the Secretary.
Section 6.
Quorum; Action by Trustees
. A majority of the Trustees shall constitute a quorum at
any meeting. Unless otherwise specified herein or in the Trust Instrument or required by law, any action by the Trustees shall be deemed effective if approved or taken by a majority of the Trustees present at a duly called meeting of Trustees at
which a quorum is present or by written consent of a majority of Trustees (or such greater number as may be required by applicable law) without a meeting. A meeting at which a quorum is initially present may continue to transact business
notwithstanding the withdrawal of Trustees if any action taken is approved by at least a majority of the required quorum for that meeting.
Section 7.
Notice
. Notice of the time, date and place of all special meetings shall be given
to each Trustee by telephone, facsimile or other electronic means sent to his or her home or business address at least twenty-four hours in advance of the meeting. Notice need not be given to any Trustee who attends the meeting without objecting to
the lack of notice or who signs a waiver of notice either before or after the meeting. Any written consent or waiver may be provided and delivered to the Trust by facsimile or other electronic means.
Section 8.
Adjournment
. A majority of the Trustees present, whether or not constituting a
quorum, may adjourn any meeting to another time and place.
Section 9.
Action Without a
Meeting
. Unless the 1940 Act requires that a particular action be taken only at a meeting at which the Trustees are present in person, any action to be taken by the Trustees at a meeting may be taken without such meeting by the written consent
of a majority of the Trustees then in office. Any such written consent may be executed and given by telecopy or similar electronic means. Such written consents shall be filed with the minutes of the proceedings of the Trustees. If any action is so
taken by the Trustees by the written consent of less than all of the Trustees, prompt notice of the taking of such action shall be furnished to each Trustee who did not execute such written consent, provided that the effectiveness of such action
shall not be impaired by any delay or failure to furnish such notice.
ARTICLE III
COMMITTEES
Section
1.
Establishment
. The Trustees may designate one or more committees of the Trustees, which shall include a Nominating and Governance Committee and an Audit Committee (together, the Established
Committees). The Trustees shall determine the number of members of each committee and its powers and shall appoint its members. The Trustees may designate one or more Trustees as alternate members of any committee, who may replace any absent
or recused
2
member at any meeting of such committee. Each committee member shall serve at the pleasure of the Trustees. The Trustees may abolish any committee, other than the Established Committees, at any
time. Each committee shall maintain records of its meetings and report its actions to the Trustees when required. The Trustees may rescind any action of any committee, but such rescission shall not have retroactive effect. The Trustees may delegate
to any committee any of its powers, subject to the limitations of applicable law.
Section 2.
Proceedings; Quorum; Action
. In the absence of an appropriate resolution of the
Trustees, each committee may adopt such rules governing its proceedings, quorum and manner of acting as it shall deem proper and desirable. In the absence of such rules, a majority of any committee shall constitute a quorum, and a committee shall
act by the vote of a majority of a quorum.
Section 3.
Audit Committee
. The Trustees shall
elect from their own number an Audit Committee composed entirely of trustees who are not interested persons of the Trust, as defined in the 1940 Act (Disinterested Trustees). The Audit Committee shall have the power to review
and evaluate the Trusts audit function, including recommending an independent registered public accounting firm and shall have such other powers and perform such other duties as may be assigned to it from time to time by the Trustees. One
member of the committee may be designated as chairperson to serve for a term to be determined by such committee, or as provided for in any charter adopted by the Audit Committee, and until a successor is elected.
Section 4.
Nominating and Governance Committee
. The Trustees shall elect from their own number
a Nominating and Governance Committee composed entirely of Disinterested Trustees. The Nominating and Governance Committee shall have the power to select and nominate Disinterested Trustees, and shall have such other powers and perform such other
duties as may be assigned to it from time to time by the Trustees. One member of the Committee may be designated as chairperson to serve for a term to be determined by such Committee, or as provided for in any charter adopted by the Nominating and
Governance Committee, and until a successor is elected.
ARTICLE IV
BOARD CHAIR AND TRUST OFFICERS
Section 1.
Chairperson of the Board
. The Board of Trustees shall be required to elect a
Chairperson of the Board. Any Chairperson of the Board shall be elected from among the Trustees of the Trust and may hold such office only so long as he or she continues to be a Trustee. The Chairperson shall normally preside at meetings of the
Trustees and of Shareholders. The Chairperson shall have such additional powers and duties as may be assigned to him or her from time to time by the Board of Trustees.
Section 2.
Trust Officers
. The officers of the Trust shall include a President and/or
Principal Executive Officer, a Principal Financial Officer, a Secretary and a Chief Compliance Officer, and may include one or more Assistant Treasurers or Assistant Secretaries and such other officers (Other Officers) as the Trustees
may determine.
Section 3.
Election, Tenure and Qualifications of Officers
. The Trustees
shall elect the officers of the Trust. Each officer elected by the Trustees shall hold office until his or her successor
3
shall have been elected and qualified or until his or her earlier death, inability to serve, removal or resignation. Any person may hold one or more offices, except that the President and the
Secretary may not be the same individual. No officer need be a Shareholder.
Section 4.
Vacancies and Newly Created Offices
. Whenever a vacancy shall occur in any office
or if any new office is created, the Trustees may fill such vacancy or new office.
Section 5.
Removal and Resignation
. Officers serve at the pleasure of the Trustees and may be
removed at any time with or without cause. Such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer may resign from office at any time by delivering a written resignation to the Trustees, or the
President. Unless otherwise specified therein, such resignation shall take effect upon delivery. Any resignation is without prejudice to the rights, if any, of the Trust under any contract to which the officer is a party.
Section 6.
President
. Subject to the direction of the Trustees, the President shall have
general charge, supervision and control over the Trusts business affairs and shall be responsible for the management thereof and the execution of policies established by the Trustees. In the absence of the Chairperson, the President shall
preside at any Shareholders meetings. Except as the Trustees may otherwise order, the President shall have the power to grant, issue, execute or sign such powers of attorney, proxies, agreements or other documents on the Trusts behalf.
The President also shall have the power to employ attorneys, accountants and other advisers and agents for the Trust, except as the Trustees may otherwise direct. The President shall have such other powers and perform such other duties as the
Trustees may determine.
Section
6A
.
Principal Executive Officer.
At the
request or in the absence or disability of the President, the Principal Executive Officer shall perform all the duties of the President and, when so acting, shall have all the powers of the President. The Principal Executive Officer shall have such
other powers and perform such other duties as the Trustees may determine.
Section 7.
Vice
President(s)
. Any Vice President(s) shall have such powers and perform such duties as the Trustees or the President may determine.
Section 8.
Principal Financial Officer
. Subject to the direction of the Trustees, the
Principal Financial Officer shall have general charge of the finances and books of the Trust, and shall report to the Trustees annually regarding the financial condition of each Series as soon as possible after the close of such Series fiscal
year. The Principal Financial Officer shall have such other powers and perform such other duties as the Trustees may determine.
Section 9.
Secretary
. The Secretary shall record all votes and proceedings of the meetings of
Trustees and Shareholders in books to be kept for that purpose. The Secretary shall be responsible for giving and serving notices of the Trust. The Secretary shall have custody of any seal of the Trust. The Secretary shall have such other powers and
perform such other duties as the Trustees may determine.
Section 10.
Chief Compliance
Officer
. The Chief Compliance Officer shall be responsible for administering the Trusts compliance policies and procedures that are reasonably designed to prevent violation of the federal securities laws by the Trust, its investment
adviser, principal underwriter, administrator and transfer agent. The election, compensation and removal of the Chief Compliance Officer shall be approved by the Trustees, including a majority of the Disinterested Trustees.
4
Section 11.
Other Officers
. The Trustees may
appoint from time to time such other officers and agents as they may deem advisable, each of whom shall have such title, hold office for such period, have such authority and perform such duties as the Trustees may determine. The Trustees may
delegate from time to time to one or more officers or committees of Trustees the power to appoint any such subordinate officers or agents and to prescribe their respective rights, terms of office, authorities and duties.
ARTICLE V
MEETINGS OF
SHAREHOLDERS
Section 1.
Annual Meetings
. The Trust shall not hold annual meetings,
unless required by law.
Section 2.
Special Meetings
. The Secretary shall call a special
meeting of Shareholders of any Series or Class whenever ordered by the Trustees or by the President for the purpose of taking action upon any matter requiring the vote or authority of the Shareholders as herein provided or provided in the Trust
Instrument or upon any other matter as to which such vote or authority is deemed by the Trustees or the President to be necessary or desirable.
The Secretary also shall call a special meeting of Shareholders of any Series or Class upon the written request of
Shareholders owning at least twenty-five percent (25%) (or 10% to the extent required by Section 16 of the 1940 Act) of the Outstanding Shares of such Series or Class entitled to vote at such meeting; provided, that (1) such request
shall state the purposes of such meeting and the matters proposed to be acted on, and (2) the Shareholders requesting such meeting shall have paid to the Trust the reasonably estimated cost of preparing and mailing the notice thereof, which the
Secretary shall determine and specify to such Shareholders. If the Secretary fails for more than thirty days to call a special meeting when required to do so, the Trustees or the Shareholders requesting such a meeting may, in the name of the
Secretary, call the meeting by giving the required notice. The Secretary shall not call a special meeting upon the request of Shareholders of any Series or Class to consider any matter that is substantially the same as a matter voted upon at
any special meeting of Shareholders of such Series or Class held during the preceding twelve months, unless requested by the holders of a majority of the Outstanding Shares of such Series or Class entitled to be voted at such meeting.
A special meeting of Shareholders of any Series or Class shall be held at the principal place of business of the Trust or
at such other place in the United States as the Trustees may designate. If the meeting is a meeting of the Shareholders of one or more series or classes of Shares, but not a meeting of all Shareholders of the Trust, then only the Shareholders of
such one or more series shall be entitled to notice of and to vote at such meeting.
Section
3.
Notice of Meeting
. The Secretary shall call a meeting of Shareholders by giving written notice of the place, date, time and general nature of the business to be transacted at that meeting at least fifteen
(15) days before the date of such meeting.
5
Section 4.
Manner of Giving Notice; Waiver of
Notice
. Notice of any meeting of Shareholders shall be (i) given either by hand delivery, telephone, overnight courier, facsimile, telex, telecopier, electronic mail or other electronic means or by mail, postage prepaid, and
(ii) addressed to the Shareholder at the address of that Shareholder appearing on the books of the Trust or its transfer or similar agent or given by the Shareholder to the Trust for the purpose of notice. If no such address appears on the
Trusts or its agents books or is not given to the Trust, notice shall be deemed to have been given if sent to that Shareholder at the Trusts principal executive office, or if published at least once in a newspaper of general
circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication or electronic submission or, where
notice is given by publication, on the date of publication. Whenever any notice of any meeting of Shareholders is required to be given, a written waiver signed or an electronic waiver, whether before or after the meeting is held, by the person(s)
entitled to such notice and filed with the records of the meeting, or attendance at the meeting in person or by proxy shall be deemed notice to such persons.
Section 5.
Adjourned Meetings
. A Shareholders meeting may be adjourned one or more times
for any reason, including the failure of a quorum to attend the meeting. No notice of adjournment of a meeting to another time or place need be given to Shareholders if such time and place are announced at the meeting at which the adjournment is
taken or reasonable notice is given to persons present at the meeting, and if the adjourned meeting is held within a reasonable time after the date set for the original meeting. Any business that might have been transacted at the original meeting
may be transacted at any adjourned meeting. If, after the adjournment, a new record date is fixed for the adjourned meeting, the Secretary shall give notice of the adjourned meeting to Shareholders of record entitled to vote at such meeting. Any
irregularities in the notice of any meeting or the
non-receipt
of any such notice by any of the Shareholders shall not invalidate any action otherwise properly taken at any such meeting.
Section 6.
Validity of Proxies
. Subject to the provisions of the Trust Instrument, Shareholders
entitled to vote may vote either in person or by proxy; provided, that either the Shareholder or his or her duly authorized agent or attorney-in-fact has (i) signed and dated a written instrument authorizing such proxy to act, or (ii) transmitted by
electronic, telephonic, computerized, facsimile, telecommunication, telex, oral communication or other alternative to execution of a written instrument authorizing such proxy to act. Acceptable methods of authorizing a proxy to act shall be set
forth in the proxy statement soliciting such proxy. Notwithstanding the foregoing, if a proposal is submitted to a vote by anyone other than the officers or Trustees, is submitted to a vote of the Shareholders of any Series or Class, or if there is
a proxy contest, solicitation or proposal in opposition to any proposal by the officers or Trustees, Shares may be voted only in person or by written proxy. Unless the proxy provides otherwise, it shall not be valid for more than eleven (11) months
before the date of the meeting. All proxies shall be delivered to the Secretary or other person responsible for recording the proceedings before being voted. A valid proxy which does not state that it is irrevocable shall continue in full force and
effect unless (i) revoked by the person executing it before the vote pursuant to that proxy is taken (a) by a writing delivered to the Trust stating that the proxy is revoked, or (b) by a subsequent proxy executed by such person, or (c) attendance
at the meeting and voting in person by the person executing that proxy, or (d) revocation by such person using any electronic, telephonic, computerized or other alternative means
6
authorized by the Trustees for authorizing the proxy to act; or (ii) written notice of the death or incapacity of the maker of that proxy is received by the Trust before the vote pursuant to
that proxy is counted. A proxy with respect to Shares held in the name of two or more persons shall be valid if executed by one of them unless at or prior to exercise of such proxy the Trust receives a specific written notice to the contrary from
any one of them. Unless otherwise specifically limited by their terms, proxies shall entitle the Shareholder to vote at any adjournment of a Shareholders meeting. A proxy purporting to be executed by or on behalf of a Shareholder shall be
deemed valid unless challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the challenger. Subject to the provisions of the Delaware Code entitled Treatment of Delaware Statutory Trusts, the Trust
Instrument, or these
By-laws,
the General Corporation Law of the State of Delaware relating to proxies, and judicial interpretations thereunder shall govern all matters concerning the giving, voting or
validity of proxies, as if the Trust were a Delaware corporation and the Shareholders were shareholders of a Delaware corporation.
Section 7.
Organization of Meetings
. In the absence of the Chairperson and the
President, the meeting shall be chaired by a person elected for such purpose at the meeting. In the absence of the Secretary, then a person designated by the Secretary or a person elected by the meeting, shall act as secretary for the meeting.
The Board of Trustees of the Trust shall be entitled to make such rules and regulations for the conduct of meetings of
Shareholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations, if any, the chairperson of any meeting of the Shareholders shall determine the order of business and the procedures for conducting business at
the meeting.
Section 8.
Record Date
. For the purpose of determining the
Shareholders who are entitled to vote or act at any meeting, or who are entitled to participate in any dividend or distribution, or for the purpose of any other action, the Trustees may from time to time close the transfer or similar books for such
period, not exceeding thirty days (except at or in connection with the termination of the Trust), as the Trustees may determine; or without closing the transfer books the Trustees may fix a date and time, as permitted by applicable law, prior to the
date of any meeting of Shareholders or other action as the date and time of record for the determination of Shareholders entitled to vote at such meeting or to be treated as Shareholders of record for purposes of such other action. Any Shareholder
who was a Shareholder at the date and time so fixed shall be entitled to vote at such meeting or to be treated as a Shareholder of record for purposes of such other action, even though such Shareholder has since that date and time disposed of its
Shares, and no Shareholder becoming such after that date and time shall be so entitled to vote at such meeting or to be treated as a Shareholder of record for purposes of such other action.
Section 9.
Action Without a Meeting
. Shareholders may take any action without a meeting
if a majority (or such other amount as may be required by law) of the Outstanding Shares entitled to vote on the matter consent to the action in writing and such written consents are filed with the records of Shareholders meetings. Such
written consent shall be treated for all purposes as a vote at a meeting of the Shareholders.
7
ARTICLE VI
SHARES OF BENEFICIAL INTEREST
Section 1.
No Share Certificates
. Neither the Trust nor any Series or Class shall
issue certificates certifying the ownership of Shares, unless the Trustees may otherwise specifically authorize such certificates.
Section 2.
Register
. A register shall be kept by the Trust or by the transfer agent,
registrar or other agent of the Trust or Series, under the direction of the Trustees, which shall contain the names and addresses of the Shareholders and interests held by each Shareholder. Each such register shall be conclusive as to the identity
of the Shareholders of the Trust and the persons who shall be entitled to payments of distributions or otherwise to exercise or enjoy the rights of Shareholders. No Shareholder shall be entitled to receive payment of any distribution, nor to have
notice given to it as herein provided, until it has given its address to such officer or agent of the Trustees as shall keep the said register for entry thereon.
Section 3.
Transfer of Shares
. Shares in the Trust shall be transferable, so as to
affect the rights of the Trust, only by transfer recorded on the books of the Trust or its transfer or similar agent. The Trust shall be entitled to treat the holder of record of any Share or Shares as the absolute owner for all purposes, and shall
not be bound to recognize any legal, equitable or other claim or interest in such Share or Shares on the part of any other person except as otherwise expressly provided by law.
ARTICLE VII
INSPECTION
OF RECORDS AND REPORTS
Every Trustee shall have the absolute right at any reasonable time to inspect all books,
records, and documents of every kind and the physical properties of the Trust. This inspection by a Trustee may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts of documents. No
Shareholder shall have any right to inspect any account or book or document of the Trust except as conferred by law or otherwise by the Trustees.
ARTICLE VIII
AMENDMENTS
These
By-laws
may be amended by a majority vote of the Trustees of the Trust without
any Shareholder vote.
ARTICLE IX
GENERAL MATTERS
Section 1.
Advance Payment of Indemnifiable Expenses
. Expenses incurred by an agent in
connection with the preparation and presentation of a defense to any proceeding may be paid by the Trust from time to time prior to final disposition thereof upon receipt of an undertaking by, or on behalf of, such agent that such amount will be
paid over by him or her to the Trust if it is ultimately determined that he or she is not entitled to indemnification; provided, however, that (a)
8
such agent shall have provided appropriate security for such undertaking, (b) the Trust is insured against losses arising out of any such advance payments, or (c) either a majority of
the Trustees who are neither Interested Persons of the Trust nor parties to the proceeding, or independent legal counsel in a written opinion, shall have determined, based upon a review of the readily available facts (as opposed to a trial-type
inquiry or full investigation), that there is reason to believe that such agent will be found entitled to indemnification.
Section 2.
Severability
. The provisions of these
By-laws
are severable. If the Board of Trustees determines, with the advice of counsel, that any provision hereof conflicts with the 1940 Act, the regulated investment company provisions of the Internal
Revenue Code of 1986, as amended, or other applicable laws and regulations, the conflicting provision shall be deemed never to have constituted a part of these
By-laws;
provided, however, that such
determination shall not affect any of the remaining provisions of these
By-laws
or render invalid or improper any action taken or omitted prior to such determination. If any provision hereof shall be held
invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision only in such jurisdiction and shall not affect any other provision of these
By-laws.
Section 3.
Headings
. Headings are placed in these
By-laws
for convenience of reference only and in case of any conflict, the text of these
By-laws
rather than the headings shall control.
9
Exhibit (d)(i)(B)
Schedule A
to the
Investment Advisory Agreement
between Direxion Shares ETF Trust and Rafferty Asset Management, LLC
Pursuant to section 1 of the Investment Advisory Agreement between Direxion Shares ETF Trust (the Trust) and
Rafferty Asset Management, LLC (Rafferty), the Trust hereby appoints Rafferty to manage the investment and reinvestment of the Funds of the Trust listed below. As compensation for such, the Trust shall pay to Rafferty pursuant to section
7 of the Investment Advisory Agreement a fee, computed daily and paid monthly, at the following annual rates as percentages of each Funds average daily net assets:
ACTIVELY MANAGED FUNDS
|
|
|
|
|
Direxion Auspice Broad Commodity Strategy ETF
|
|
|
0.50
|
%
|
Direxion Bitcoin Shares
|
|
|
0.75
|
%
|
NON-LEVERAGED
FUNDS
|
|
|
|
|
Direxion NASDAQ-100
®
Equal Weighted Index Shares
|
|
|
0.30
|
%
|
Direxion All Cap Insider Sentiment Shares
|
|
|
0.40
|
%
|
Direxion Zacks MLP High Income Index Shares
|
|
|
0.50
|
%
|
Direxion Factor Dog ETF
|
|
|
0.30
|
%
|
150/50 FUNDS
|
|
|
|
|
Direxion Russell 1000 Value Over Growth ETF
|
|
|
0.40
|
%
|
Direxion Russell 1000 Growth Over Value ETF
|
|
|
0.40
|
%
|
Direxion Russell Large Over Small Cap ETF
|
|
|
0.40
|
%
|
Direxion Russell Small Over Large Cap ETF
|
|
|
0.40
|
%
|
Direxion MSCI USA Cyclical Over Defensive ETF
|
|
|
0.40
|
%
|
Direxion MSCI USA Defensive Over Cyclical ETF
|
|
|
0.40
|
%
|
Direxion MSCI Emerging Over Developed Markets ETF
|
|
|
0.40
|
%
|
Direxion MSCI Developed Over Emerging Markets ETF
|
|
|
0.40
|
%
|
Direxion FTSE/Russell International Over US ETF
|
|
|
0.40
|
%
|
Direxion FTSE/Russell US Over International ETF
|
|
|
0.40
|
%
|
1X BEAR FUNDS
|
|
|
|
|
Direxion Daily 7-10 Year Treasury Bear 1X
Shares
|
|
|
0.35
|
%
|
Direxion Daily 20+ Year Treasury Bear 1X Shares
|
|
|
0.35
|
%
|
Direxion Daily S&P 500
®
Bear 1X
Shares
|
|
|
0.35
|
%
|
Direxion Daily Municipal Bond Taxable Bear 1X Shares
|
|
|
0.35
|
%
|
Direxion Daily Small Cap Bear 1X Shares
|
|
|
0.35
|
%
|
Direxion Daily Total Bond Market Bear 1X Shares
|
|
|
0.35
|
%
|
Direxion Daily CSI 300 China A Share Bear 1X Shares
|
|
|
0.60
|
%
|
Direxion Daily CSI China Internet Index Bear 1X Shares
|
|
|
0.60
|
%
|
Direxion Daily MSCI China A Bear 1X Shares
|
|
|
0.60
|
%
|
Direxion Daily MSCI Real Estate Bear 1X Shares
|
|
|
0.35
|
%
|
LEVERAGED FUNDS
|
|
|
|
|
|
|
|
|
|
|
1.5X Funds
|
|
Direxion Factor Dog Bull 1.5X Shares
|
|
|
0.45%
|
|
|
|
|
|
2X Funds
|
|
Direxion Daily S&P 500
®
Bull 2X Shares
|
|
|
0.50%
|
|
|
|
|
|
|
|
Direxion Daily CSI 300 China A Share Bull 2X Shares
|
|
|
0.75%
|
|
|
|
|
|
|
|
Direxion Daily Small Cap Bull 2X Shares
|
|
|
0.50%
|
|
|
|
|
|
|
|
Direxion Daily CSI China Internet Index Bull 2X Shares
|
|
|
0.75%
|
|
|
|
|
|
|
|
Direxion Daily MSCI China A Bull 2X Shares
|
|
|
0.75%
|
|
|
|
|
|
|
|
Direxion Daily MSCI European Financials Bull 2X Shares
|
|
|
0.60%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion Daily High Yield Bear 2X Shares
|
|
|
0.60
|
%
|
Direxion Daily Dow Jones Internet Bull 2X Shares
|
|
|
0.60%
|
|
|
|
|
|
|
|
Direxion Daily Factor Dog Bull 2X Shares
|
|
|
0.60%
|
|
|
|
|
|
|
|
Direxion Daily Lithium & Battery Tech Bull 2X Shares
|
|
|
0.60%
|
|
|
|
|
|
|
|
Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares
|
|
|
0.60%
|
|
|
|
|
|
|
|
Direxion Daily Preferred Stock Bull 2X Shares
|
|
|
0.60%
|
|
|
|
|
|
|
|
|
3X Funds
|
|
Direxion Daily 7-10 Year Treasury Bull 3X Shares
|
|
|
0.75%
|
|
|
Direxion Daily 7-10 Year Treasury Bear 3X Shares
|
|
|
0.75%
|
|
Direxion Daily 20+ Year Treasury Bull 3X Shares
|
|
|
0.75%
|
|
|
Direxion Daily 20+ Year Treasury Bear 3X Shares
|
|
|
0.75%
|
|
Direxion Daily MSCI Brazil Bull 3X Shares
|
|
|
0.75%
|
|
|
|
|
|
|
|
Direxion Daily FTSE China Bull 3X Shares
|
|
|
0.75%
|
|
|
Direxion Daily FTSE China Bear 3X Shares
|
|
|
0.75%
|
|
Direxion Daily MSCI Developed Markets Bull 3X Shares
|
|
|
0.75%
|
|
|
Direxion Daily MSCI Developed Markets Bear 3X Shares
|
|
|
0.75%
|
|
Direxion Daily MSCI Emerging Markets Bull 3X Shares
|
|
|
0.75%
|
|
|
Direxion Daily MSCI Emerging Markets Bear 3X Shares
|
|
|
0.75%
|
|
Direxion Daily Energy Bull 3X Shares
|
|
|
0.75%
|
|
|
Direxion Daily Energy Bear 3X Shares
|
|
|
0.75%
|
|
Direxion Daily Financial Bull 3X Shares
|
|
|
0.75%
|
|
|
Direxion Daily Financial Bear 3X Shares
|
|
|
0.75%
|
|
Direxion Daily Gold Miners Index Bull 3X Shares
|
|
|
0.75%
|
|
|
Direxion Daily Gold Miners Index Bear 3X Shares
|
|
|
0.75%
|
|
Direxion Daily Healthcare Bull 3X Shares
|
|
|
0.75%
|
|
|
|
|
|
|
|
Direxion Daily MSCI India Bull 3X Shares
|
|
|
0.75%
|
|
|
|
|
|
|
|
Direxion Daily Latin America Bull 3X Shares
|
|
|
0.75%
|
|
|
|
|
|
|
|
Direxion Daily Mid Cap Bull 3X Shares
|
|
|
0.75%
|
|
|
Direxion Daily Mid Cap Bear 3X Shares
|
|
|
0.75%
|
|
Direxion Daily Natural Gas Related Bull 3X Shares
|
|
|
0.75%
|
|
|
Direxion Daily Natural Gas Related Bear 3X Shares
|
|
|
0.75%
|
|
Direxion Daily MSCI Real Estate Bull 3X Shares
|
|
|
0.75%
|
|
|
Direxion Daily MSCI Real Estate Bear 3X Shares
|
|
|
0.75%
|
|
Direxion Daily Regional Banks Bull 3X Shares
|
|
|
0.75%
|
|
|
Direxion Daily Regional Banks Bear 3X Shares
|
|
|
0.75%
|
|
Direxion Daily Retail Bull 3X Shares
|
|
|
0.75%
|
|
|
|
|
|
|
|
Direxion Daily Russia Bull 3X Shares
|
|
|
0.75%
|
|
|
Direxion Daily Russia Bear 3X Shares
|
|
|
0.75%
|
|
Direxion Daily S&P 500
®
Bull 3X Shares
|
|
|
0.75%
|
|
|
Direxion Daily S&P 500
®
Bear 3X Shares
|
|
|
0.75%
|
|
Direxion Daily Semiconductor Bull 3X Shares
|
|
|
0.75%
|
|
|
Direxion Daily Semiconductor Bear 3X Shares
|
|
|
0.75%
|
|
Direxion Daily Small Cap Bull 3X Shares
|
|
|
0.75%
|
|
|
Direxion Daily Small Cap Bear 3X Shares
|
|
|
0.75%
|
|
Direxion Daily MSCI South Korea Bull 3X Shares
|
|
|
0.75%
|
|
|
|
|
|
|
|
Direxion Daily Technology Bull 3X Shares
|
|
|
0.75%
|
|
|
Direxion Daily Technology Bear 3X Shares
|
|
|
0.75%
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion Daily Junior Gold Miners Index Bull 3X Shares
|
|
|
0.75
|
%
|
|
Direxion Daily Junior Gold Miners Index Bear 3X
Shares
|
|
|
0.75
|
%
|
Direxion Daily FTSE Europe Bull 3X Shares
|
|
|
0.75
|
%
|
|
|
|
|
|
|
Direxion Daily MSCI Japan Bull 3X Shares
|
|
|
0.75
|
%
|
|
|
|
|
|
|
Direxion Daily Homebuilders & Supplies Bull 3X Shares
|
|
|
0.75
|
%
|
|
|
|
|
|
|
Direxion Daily S&P Biotech Bull 3X Shares
|
|
|
0.75
|
%
|
|
Direxion Daily S&P Biotech Bear 3X Shares
|
|
|
0.75
|
%
|
Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
|
|
|
0.75
|
%
|
|
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear
3X Shares
|
|
|
0.75
|
%
|
Direxion Daily Dow 30 Bull 3X Shares
|
|
|
0.75
|
%
|
|
Direxion Daily Dow 30 Bear 3X Shares
|
|
|
0.75
|
%
|
Direxion Daily Consumer Discretionary Bull 3X Shares
|
|
|
0.75
|
%
|
|
Direxion Daily Consumer Discretionary Bear 3X
Shares
|
|
|
0.75
|
%
|
Direxion Daily Consumer Staples Bull 3X Shares
|
|
|
0.75
|
%
|
|
Direxion Daily Consumer Staples Bear 3X
Shares
|
|
|
0.75
|
%
|
Direxion Daily Utilities Bull 3X Shares
|
|
|
0.75
|
%
|
|
Direxion Daily Utilities Bear 3X Shares
|
|
|
0.75
|
%
|
Direxion Daily MSCI Canada Bull 3X Shares
|
|
|
0.75
|
%
|
|
Direxion Daily MSCI Canada Bear 3X Shares
|
|
|
0.75
|
%
|
Direxion Daily Aerospace & Defense Bull 3X Shares
|
|
|
0.75
|
%
|
|
Direxion Daily Aerospace & Defense Bear 3X
Shares
|
|
|
0.75
|
%
|
Direxion Daily MSCI Mexico Bull 3X Shares
|
|
|
0.75
|
%
|
|
Direxion Daily MSCI Mexico Bear 3X Shares
|
|
|
0.75
|
%
|
Direxion Daily Transportation Bull 3X Shares
|
|
|
0.75
|
%
|
|
Direxion Daily Transportation Bear 3X Shares
|
|
|
0.75
|
%
|
Direxion Daily Industrials Bull 3X Shares
|
|
|
0.75
|
%
|
|
Direxion Daily Industrials Bear 3X Shares
|
|
|
0.75
|
%
|
Direxion Daily Metals & Mining Bull 3X Shares
|
|
|
0.75
|
%
|
|
Direxion Daily Metals & Mining Bear 3X
Shares
|
|
|
0.75
|
%
|
Direxion Daily MSCI Italy Bull 3X Shares
|
|
|
0.75
|
%
|
|
Direxion Daily MSCI Italy Bear 3X Shares
|
|
|
0.75
|
%
|
|
|
|
|
Direxion Daily Pharmaceutical & Medical Bull 3X Shares
|
|
|
0.75
|
%
|
|
Direxion Daily Pharmaceutical & Medical Bear
3X Shares
|
|
|
0.75
|
%
|
Direxion Daily EURO STOXX 50
®
Bull 3X Shares
|
|
|
0.75
|
%
|
|
Direxion Daily EURO STOXX 50
®
Bear 3X
Shares
|
|
|
0.75
|
%
|
Direxion Daily Dow Jones Internet Bull 3X Shares
|
|
|
0.75
|
%
|
|
|
|
|
|
|
Direxion Daily Factor Dog Bull 3X Shares
|
|
|
0.75
|
%
|
|
|
|
|
|
|
Direxion Daily Lithium & Battery Tech Bull 3X Shares
|
|
|
0.75
|
%
|
|
|
|
|
|
|
Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
|
|
|
0.75
|
%
|
|
|
|
|
|
|
Direxion Daily Preferred Stock Bull 3X Shares
|
|
|
0.75
|
%
|
|
|
|
|
|
|
Direxion Daily Communication Services Index Bull 3X Shares
|
|
|
0.75
|
%
|
|
Direxion Daily Communication Services Index
Bear 3X Shares
|
|
|
0.75
|
%
|
|
|
|
|
Last Updated: November 20, 2018
|
|
|
|
|
|
|
|
|
|
|
Exhibit (e)(i)(B)
DIREXION SHARES ETF TRUST
The maximum annualized fee rate pursuant to Paragraph 1 of the Direxion Shares ETF Trust Distribution Plan shall be 0.25% for
the following Funds:
ACTIVELY MANAGED FUNDS
|
|
|
|
|
Direxion Auspice Broad Commodity Strategy ETF
|
|
|
Direxion Bitcoin Shares
|
NON-LEVERAGED
FUNDS
|
|
|
|
|
Direxion
NASDAQ-100
®
Equal Weighted Index Shares
|
|
|
Direxion All Cap Insider Sentiment Shares
|
|
|
Direxion Zacks MLP High Income Index Shares
|
|
|
Direxion Factor Dog ETF
|
150/50 FUNDS
|
|
|
|
|
Direxion Russell 1000
®
Value Over Growth ETF
|
|
|
Direxion Russell 1000
®
Growth Over Value ETF
|
|
|
Direxion Russell Large Over Small Cap ETF
|
|
|
Direxion Russell Small Over Large Cap ETF
|
|
|
Direxion MSCI USA Cyclical Over Defensive ETF
|
|
|
Direxion MSCI USA Defensive Over Cyclical ETF
|
|
|
Direxion MSCI Emerging Over Developed Markets ETF
|
|
|
Direxion MSCI Developed Over Emerging Markets ETF
|
|
|
Direxion FTSE/Russell International Over US ETF
|
|
|
Direxion FTSE/Russell US Over International ETF
|
1X BEAR FUNDS
|
|
|
|
|
Direxion Daily
7-10
Year Treasury Bear 1X Shares
|
|
|
Direxion Daily 20+ Year Treasury Bear 1X Shares
|
|
|
Direxion Daily S&P 500
®
Bear 1X Shares
|
|
|
Direxion Daily Municipal Bond Taxable Bear 1X Shares
|
|
|
Direxion Daily Small Cap Bear 1X Shares
|
|
|
Direxion Daily Total Bond Market Bear 1X Shares
|
|
|
Direxion Daily CSI 300 China A Share Bear 1X Shares
|
|
|
Direxion Daily CSI China Internet Index Bear 1X Shares
|
|
|
Direxion Daily MSCI China A Bear 1X Shares
|
|
|
Direxion Daily MSCI Real Estate Bear 1X Shares
|
LEVERAGED FUNDS
1.25X Funds
|
|
|
|
|
PortfolioPlus S&P 500
®
ETF
|
|
|
PortfolioPlus S&P
®
Small Cap ETF
|
|
|
PortfolioPlus S&P
®
Mid Cap ETF
|
|
|
|
|
|
PortfolioPlus Developed Markets ETF
|
|
|
PortfolioPlus Emerging Markets ETF
|
|
|
PortfolioPlus Real Estate ETF
|
|
|
PortfolioPlus 20+ Year Treasury ETF
|
|
|
Direxion 1.25X High Beta/Low Volatility Index ETF
|
|
|
Direxion 1.25X State Street GX Dynamic Allocation ETF
|
1.5X Funds
|
|
|
|
|
Direxion Factor Dog Bull 1.5X Shares
|
2X Funds
|
|
|
Direxion Daily S&P 500
®
Bull 2X Shares
|
|
|
Direxion Daily CSI 300 China A Share Bull 2X Shares
|
|
|
Direxion Daily Small Cap Bull 2X Shares
|
|
|
Direxion Daily CSI China Internet Index Bull 2X Shares
|
|
|
Direxion Daily MSCI China A Bull 2X Shares
|
|
|
Direxion Daily MSCI European Financials Bull 2X Shares
|
|
|
|
|
Direxion Daily High Yield Bear 2X Shares
|
Direxion Daily Dow Jones Internet Bull 2X Shares
|
|
|
Direxion Daily Factor Dog Bull 2X Shares
|
|
|
Direxion Daily Lithium & Battery Tech Bull 2X Shares
|
|
|
Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares
|
|
|
Direxion Daily Preferred Stock Bull 2X Shares
|
|
|
3X Funds
|
Direxion Daily
7-10
Year Treasury Bull 3X Shares
|
|
Direxion Daily
7-10
Year Treasury Bear 3X Shares
|
Direxion Daily 20+ Year Treasury Bull 3X Shares
|
|
Direxion Daily 20+ Year Treasury Bear 3X Shares
|
Direxion Daily MSCI Brazil Bull 3X Shares
|
|
|
Direxion Daily FTSE China Bull 3X Shares
|
|
Direxion Daily FTSE China Bear 3X Shares
|
Direxion Daily MSCI Developed Markets Bull 3X Shares
|
|
Direxion Daily MSCI Developed Markets Bear 3X Shares
|
Direxion Daily MSCI Emerging Markets Bull 3X Shares
|
|
Direxion Daily MSCI Emerging Markets Bear 3X Shares
|
Direxion Daily Energy Bull 3X Shares
|
|
Direxion Daily Energy Bear 3X Shares
|
Direxion Daily Financial Bull 3X Shares
|
|
Direxion Daily Financial Bear 3X Shares
|
Direxion Daily Gold Miners Index Bull 3X Shares
|
|
Direxion Daily Gold Miners Index Bear 3X Shares
|
Direxion Daily Healthcare Bull 3X Shares
|
|
|
Direxion Daily MSCI India Bull 3X Shares
|
|
|
Direxion Daily Latin America Bull 3X Shares
|
|
|
Direxion Daily Mid Cap Bull 3X Shares
|
|
Direxion Daily Mid Cap Bear 3X Shares
|
Direxion Daily Natural Gas Related Bull 3X Shares
|
|
Direxion Daily Natural Gas Related Bear 3X Shares
|
Direxion Daily MSCI Real Estate Bull 3X Shares
|
|
Direxion Daily MSCI Real Estate Bear 3X Shares
|
Direxion Daily Regional Banks Bull 3X Shares
|
|
Direxion Daily Regional Banks Bear 3X Shares
|
Direxion Daily Retail Bull 3X Shares
|
|
|
Direxion Daily Russia Bull 3X Shares
|
|
Direxion Daily Russia Bear 3X Shares
|
Direxion Daily S&P 500
®
Bull 3X Shares
|
|
Direxion Daily S&P 500
®
Bear 3X Shares
|
Direxion Daily Semiconductor Bull 3X Shares
|
|
Direxion Daily Semiconductor Bear 3X Shares
|
Direxion Daily Small Cap Bull 3X Shares
|
|
Direxion Daily Small Cap Bear 3X Shares
|
Direxion Daily MSCI South Korea Bull 3X Shares
|
|
|
|
|
|
Direxion Daily Technology Bull 3X Shares
|
|
Direxion Daily Technology Bear 3X Shares
|
Direxion Daily Junior Gold Miners Index Bull 3X Shares
|
|
Direxion Daily Junior Gold Miners Index Bear 3X Shares
|
Direxion Daily FTSE Europe Bull 3X Shares
|
|
|
Direxion Daily MSCI Japan Bull 3X Shares
|
|
|
Direxion Daily Homebuilders & Supplies Bull 3X Shares
|
|
|
Direxion Daily S&P Biotech Bull 3X Shares
|
|
Direxion Daily S&P Biotech Bear 3X Shares
|
Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
|
|
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
|
Direxion Daily Dow 30 Bull 3X Shares
|
|
Direxion Daily Dow 30 Bear 3X Shares
|
Direxion Daily Consumer Discretionary Bull 3X Shares
|
|
Direxion Daily Consumer Discretionary Bear 3X Shares
|
Direxion Daily Consumer Staples Bull 3X Shares
|
|
Direxion Daily Consumer Staples Bear 3X Shares
|
Direxion Daily Utilities Bull 3X Shares
|
|
Direxion Daily Utilities Bear 3X Shares
|
Direxion Daily MSCI Canada Bull 3X Shares
|
|
Direxion Daily MSCI Canada Bear 3X Shares
|
Direxion Daily Aerospace & Defense Bull 3X Shares
|
|
Direxion Daily Aerospace & Defense Bear 3X Shares
|
Direxion Daily MSCI Mexico Bull 3X Shares
|
|
Direxion Daily MSCI Mexico Bear 3X Shares
|
Direxion Daily Transportation Bull 3X Shares
|
|
Direxion Daily Transportation Bear 3X Shares
|
Direxion Daily Industrials Bull 3X Shares
|
|
Direxion Daily Industrials Bear 3X Shares
|
Direxion Daily Metals & Mining Bull 3X Shares
|
|
Direxion Daily Metals & Mining Bear 3X Shares
|
Direxion Daily MSCI Italy Bull 3X Shares
|
|
Direxion Daily MSCI Italy Bear 3X Shares
|
Direxion Daily Pharmaceutical & Medical Bull 3X Shares
|
|
Direxion Daily Pharmaceutical & Medical Bear 3X Shares
|
Direxion Daily EURO STOXX 50
®
Bull 3X Shares
|
|
Direxion Daily EURO STOXX 50
®
Bear 3X Shares
|
Direxion Daily Dow Jones Internet Bull 3X Shares
|
|
|
Direxion Daily Factor Dog Bull 3X Shares
|
|
|
Direxion Daily Lithium & Battery Tech Bull 3X Shares
|
|
|
Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
|
|
|
Direxion Daily Preferred Stock Bull 3X Shares
|
|
|
Direxion Daily Communication Services Index Bull 3X Shares
|
|
Direxion Daily Communication Services Index Bear 3X Shares
|
Up to 0.25% of average daily net assets. The current authorized maximum annualized fee is 0% of
average daily net assets.
Last Updated: November 20, 2018
Exhibit (h)(vi)(B)
SCHEDULE A
TO DIREXION
SHARES ETF TRUST ADVISORY FEE WAIVER AGREEMENT
As of September 1, 2011 through September 1, 2020 (the applicable
Period)
Advisory Fee Breakpoint for each of the Funds listed below:
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
|
Net Assets
|
|
Rate
|
|
|
|
|
|
0
|
|
>
|
|
$500,000,000
|
|
|
0.40
|
%
|
$500,000,000 and above
|
|
|
|
|
|
|
0.31
|
%
|
Funds
Direxion All Cap
Insider Sentiment Shares
Tiered Advisory Fee Limit for each of the leveraged Funds listed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
|
Net Assets
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
>
|
|
|
$
|
1,500,000,000
|
|
|
|
0.75
|
%
|
$1,500,000,000
|
|
|
>
|
|
|
$
|
2,000,000,000
|
|
|
|
0.70
|
%
|
$2,000,000,000
|
|
|
>
|
|
|
$
|
2,500,000,000
|
|
|
|
0.65
|
%
|
$2,500,000,000
|
|
|
>
|
|
|
$
|
3,000,000,000
|
|
|
|
0.60
|
%
|
$3,000,000,000
|
|
|
>
|
|
|
$
|
3,500,000,000
|
|
|
|
0.55
|
%
|
$3,500,000,000
|
|
|
>
|
|
|
$
|
4,000,000,000
|
|
|
|
0.50
|
%
|
$4,000,000,000
|
|
|
>
|
|
|
$
|
4,500,000,000
|
|
|
|
0.45
|
%
|
$4,500,000,000 and above
|
|
|
|
|
|
|
|
|
|
|
0.40
|
%
|
Funds
Direxion
Daily S&P 500
®
Bull 3X Shares
Direxion Daily S&P 500
®
Bear 3X Shares
Direxion Daily Mid Cap Bull 3X Shares
Direxion Daily Mid Cap Bear 3X Shares
Direxion Daily Small Cap
Bull 3X Shares
Direxion Daily Small Cap Bear 3X Shares
Direxion Daily MSCI Developed Markets Bull 3X Shares
Direxion
Daily MSCI Developed Markets Bear 3X Shares
Direxion Daily MSCI Emerging Markets Bull 3X Shares
Direxion Daily MSCI Emerging Markets Bear 3X Shares
Direxion
Daily FTSE China Bull 3X Shares
Direxion Daily FTSE China Bear 3X Shares
Direxion Daily MSCI India Bull 3X Shares
Direxion Daily Latin
America Bull 3X Shares
Direxion Daily Energy Bull 3X Shares
Direxion Daily Energy Bear 3X Shares
Direxion Daily Financial
Bull 3X Shares
Direxion Daily Financial Bear 3X Shares
Direxion Daily Technology Bull 3X Shares
Direxion Daily
Technology Bear 3X Shares
Direxion Daily MSCI Real Estate Bull 3X Shares
Direxion Daily MSCI Real Estate Bear 3X Shares
Direxion Daily
7-10
Year Treasury Bull 3X Shares
Direxion Daily
7-10
Year Treasury Bear 3X
Shares
Direxion Daily 20+ Year Treasury Bull 3X Shares
Direxion Daily 20+ Year Treasury Bear 3X Shares
Direxion Daily
Healthcare Bull 3X Shares
Direxion Daily Retail Bull 3X Shares
Direxion Daily Semiconductor Bull 3X Shares
Direxion Daily
Semiconductor Bear 3X Shares
Direxion Daily Gold Miners Index Bull 3X Shares
Direxion Daily Gold Miners Index Bear 3X Shares
Direxion Daily
Natural Gas Related Bull 3X Shares
Direxion Daily Natural Gas Related Bear 3X Shares
Direxion Daily Russia Bull 3X Shares
Direxion Daily Russia Bear
3X Shares
Direxion Daily Junior Gold Miners Index Bull 3X Shares
Direxion Daily Junior Gold Miners Index Bear 3X Shares
Direxion
Daily Regional Banks Bull 3X Shares
Direxion Daily Regional Banks Bear 3X Shares
Direxion Daily MSCI Brazil Bull 3X Shares
Direxion Daily FTSE
Europe Bull 3X Shares
Direxion Daily MSCI South Korea Bull 3X Shares
Direxion Daily MSCI Japan Bull 3X Shares
Direxion Daily
Homebuilders & Supplies Bull 3X Shares
Direxion Daily S&P Biotech Bull 3X Shares
Direxion Daily S&P Biotech Bear 3X Shares
Direxion Daily
S&P Oil & Gas Exp. & Prod. Bull 3X Shares
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
Direxion Daily Dow 30 Bull 3X Shares
Direxion Daily Dow 30 Bear
3X Shares
Direxion Daily Consumer Discretionary Bull 3X Shares
Direxion Daily Consumer Discretionary Bear 3X Shares
Direxion
Daily Consumer Staples Bull 3X Shares
Direxion Daily Consumer Staples Bear 3X Shares
Direxion Daily Utilities Bull 3X Shares
Direxion Daily Utilities
Bear 3X Shares
Direxion Daily MSCI Canada Bull 3X Shares
Direxion Daily MSCI Canada Bear 3X Shares
Direxion Daily
Aerospace & Defense Bull 3X Shares
Direxion Daily Aerospace & Defense Bear 3X Shares
Direxion Daily MSCI Mexico Bull 3X Shares
Direxion Daily MSCI
Mexico Bear 3X Shares
Direxion Daily Transportation Bull 3X Shares
Direxion Daily Transportation Bear 3X Shares
Direxion Daily
Industrials Bull 3X Shares
Direxion Daily Industrials Bear 3X Shares
Direxion Daily Metals & Mining Bull 3X Shares
Direxion
Daily Metals & Mining Bear 3X Shares
Direxion Daily MSCI Italy Bull 3X Shares
Direxion Daily MSCI Italy Bear 3X Shares
Direxion Daily Pharmaceutical & Medical Bull 3X Shares
Direxion Daily Pharmaceutical & Medical Bear 3X Shares
Direxion Daily EURO STOXX 50
®
Bull 3X Shares
Direxion Daily EURO STOXX 50
®
Bear 3X Shares
Direxion Daily Dow Jones Internet Bull 3X Shares
Direxion Daily
Factor Dog Bull 3X Shares
Direxion Daily Lithium & Battery Tech Bull 3X Shares
Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
Direxion Daily Preferred Stock Bull 3X Shares
Direxion Daily
Communication Services Index Bull 3X Shares
Direxion Daily Communication Services Index Bear 3X Shares
Last Updated: November 20, 2018
Exhibit (h)(vii)(B)
APPENDIX A
Operating
Expense Limitation Agreement
Direxion Shares ETF Trust
Rafferty Asset Management, LLC has contractually agreed to cap all or a portion of its management fee and/or reimburse each Fund for Other
Expenses through September 1, 2020, to the extent that a Funds Total Annual Fund Operating Expenses exceeds a Funds daily net assets as listed below.
ACTIVELY MANAGED FUNDS
|
|
|
Direxion Auspice Broad Commodity Strategy ETF
|
|
0.70%
|
Direxion Bitcoin Shares
|
|
0.95%
|
NON-LEVERAGED
FUNDS
|
|
|
Direxion
NASDAQ-100
®
Equal Weighted Index Shares
|
|
0.35%
|
Direxion All Cap Insider Sentiment
Shares
|
|
0.59%
|
Direxion Zacks MLP High Income Index
Shares
|
|
0.65%
|
Direxion Factor Dog ETF
|
|
0.35%
|
150/50 FUNDS
|
|
|
Direxion Russell 1000
®
Value Over Growth ETF
|
|
0.45%
|
Direxion Russell 1000
®
Growth Over Value ETF
|
|
0.45%
|
Direxion Russell Large Over Small Cap
ETF
|
|
0.45%
|
Direxion Russell Small Over Large Cap
ETF
|
|
0.45%
|
Direxion MSCI USA Cyclical Over Defensive
ETF
|
|
0.45%
|
Direxion MSCI USA Defensive Over Cyclical
ETF
|
|
0.45%
|
Direxion MSCI Emerging Over Developed Markets
ETF
|
|
0.45%
|
Direxion MSCI Developed Over Emerging Markets
ETF
|
|
0.45%
|
Direxion FTSE/Russell International Over US
ETF
|
|
0.45%
|
Direxion FTSE/Russell US Over International
ETF
|
|
0.45%
|
1X BEAR FUNDS
|
|
|
Direxion Daily 7-10 Year Treasury Bear 1X
Shares
|
|
0.45%
|
Direxion Daily 20+ Year Treasury Bear 1X
Shares
|
|
0.45%
|
Direxion Daily S&P 500
®
Bear 1X Shares
|
|
0.45%
|
Direxion Daily Municipal Bond Taxable Bear
1X Shares
|
|
0.45%
|
Direxion Daily Small Cap Bear 1X
Shares
|
|
0.45%
|
Direxion Daily Total Bond Market Bear 1X
Shares
|
|
0.45%
|
Direxion Daily CSI 300 China A Share Bear 1X
Shares
|
|
0.80%
|
Direxion Daily CSI China Internet Index Bear
1X Shares
|
|
0.80%
|
Direxion Daily MSCI China A Bear 1X
Shares
|
|
0.80%
|
Direxion Daily MSCI Real Estate Bear 1X
Shares
|
|
0.45%
|
LEVERAGED FUNDS
1.5X Funds
|
|
|
Direxion Factor Dog Bull 1.5X
Shares
|
|
0.55%
|
A-1
2X Funds
|
|
|
|
|
|
|
Direxion Daily S&P 500
®
Bull 2X Shares
|
|
0.60%
|
|
|
|
|
Direxion Daily CSI 300 China A Share Bull 2X Shares
|
|
0.95%
|
|
|
|
|
Direxion Daily Small Cap Bull 2X Shares
|
|
0.60%
|
|
|
|
|
Direxion Daily CSI China Internet Index Bull 2X Shares
|
|
0.95%
|
|
|
|
|
Direxion Daily MSCI China A Bull 2X Shares
|
|
0.95%
|
|
|
|
|
Direxion Daily MSCI European Financials Bull 2X Shares
|
|
0.80%
|
|
|
|
|
|
|
|
|
Direxion Daily High Yield Bear 2X Shares
|
|
0.80%
|
Direxion Daily Dow Jones Internet Bull 2X Shares
|
|
0.80%
|
|
|
|
|
Direxion Daily Factor Dog Bull 2X Shares
|
|
0.80%
|
|
|
|
|
Direxion Daily Lithium & Battery Tech Bull 2X Shares
|
|
0.80%
|
|
|
|
|
Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares
|
|
0.80%
|
|
|
|
|
Direxion Daily Preferred Stock Bull 2X Shares
|
|
0.80%
|
|
|
|
|
3X Funds
|
Direxion Daily 7-10 Year Treasury Bull 3X
Shares
|
|
0.95%
|
|
Direxion Daily 7-10 Year Treasury Bear 3X
Shares
|
|
0.95%
|
Direxion Daily 20+Year Treasury Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily 20+Year Treasury Bear 3X Shares
|
|
0.95%
|
Direxion Daily MSCI Brazil Bull 3X Shares
|
|
0.95%
|
|
|
|
|
Direxion Daily FTSE China Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily FTSE China Bear 3X Shares
|
|
0.95%
|
Direxion Daily MSCI Developed Markets Bull 3X Shares
|
|
0.95%
|
|
Direxion MSCI Daily Developed Markets Bear 3X Shares
|
|
0.95%
|
Direxion Daily MSCI Emerging Markets Bull 3X Shares
|
|
0.95%
|
|
Direxion MSCI Daily Emerging Markets Bear 3X Shares
|
|
0.95%
|
Direxion Daily Energy Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily Energy Bear 3X Shares
|
|
0.95%
|
Direxion Daily Financial Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily Financial Bear 3X Shares
|
|
0.95%
|
Direxion Daily Gold Miners Index Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily Gold Miners Index Bear 3X Shares
|
|
0.95%
|
Direxion Daily Healthcare Bull 3X Shares
|
|
0.95%
|
|
|
|
|
Direxion Daily MSCI India Bull 3X Shares
|
|
0.95%
|
|
|
|
|
Direxion Daily Latin America Bull 3X Shares
|
|
0.95%
|
|
|
|
|
Direxion Daily Mid Cap Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily Mid Cap Bear 3X Shares
|
|
0.95%
|
Direxion Daily Natural Gas Related Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily Natural Gas Related Bear 3X Shares
|
|
0.95%
|
Direxion Daily MSCI Real Estate Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily MSCI Real Estate Bear 3X Shares
|
|
0.95%
|
Direxion Daily Regional Banks Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily Regional Banks Bear 3X Shares
|
|
0.95%
|
Direxion Daily Retail Bull 3X Shares
|
|
0.95%
|
|
|
|
|
Direxion Daily Russia Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily Russia Bear 3X Shares
|
|
0.95%
|
Direxion Daily S&P 500
®
Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily S&P 500
®
Bear 3X Shares
|
|
0.95%
|
Direxion Daily Semiconductor Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily Semiconductor Bear 3X Shares
|
|
0.95%
|
Direxion Daily Small Cap Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily Small Cap Bear 3X Shares
|
|
0.95%
|
Direxion Daily MSCI South Korea Bull 3X Shares
|
|
0.95%
|
|
|
|
|
Direxion Daily Technology Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily Technology Bear 3X Shares
|
|
0.95%
|
A-2
|
|
|
|
|
|
|
Direxion Daily Junior Gold Miners Index Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily Junior Gold Miners Index Bear 3X Shares
|
|
0.95%
|
Direxion Daily FTSE Europe Bull 3X Shares
|
|
0.95%
|
|
|
|
|
Direxion Daily MSCI Japan Bull 3X Shares
|
|
0.95%
|
|
|
|
|
Direxion Daily Homebuilders & Supplies Bull 3X Shares
|
|
0.95%
|
|
|
|
|
Direxion Daily S&P Biotech Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily S&P Biotech Bear 3X Shares
|
|
0.95%
|
Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
|
|
0.95%
|
Direxion Daily Dow 30 Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily Dow 30 Bear 3X Shares
|
|
0.95%
|
Direxion Daily Consumer Discretionary Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily Consumer Discretionary Bear 3X Shares
|
|
0.95%
|
Direxion Daily Consumer Staples Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily Consumer Staples Bear 3X Shares
|
|
0.95%
|
Direxion Daily Utilities Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily Utilities Bear 3X Shares
|
|
0.95%
|
Direxion Daily MSCI Canada Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily MSCI Canada Bear 3X Shares
|
|
0.95%
|
Direxion Daily Aerospace & Defense Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily Aerospace & Defense Bear 3X Shares
|
|
0.95%
|
Direxion Daily MSCI Mexico Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily MSCI Mexico Bear 3X Shares
|
|
0.95%
|
Direxion Daily Transportation Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily Transportation Bear 3X Shares
|
|
0.95%
|
Direxion Daily Industrials Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily Industrials Bear 3X Shares
|
|
0.95%
|
Direxion Daily Metals & Mining Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily Metals & Mining Bear 3X Shares
|
|
0.95%
|
Direxion Daily MSCI Italy Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily MSCI Italy Bear 3X Shares
|
|
0.95%
|
Direxion Daily Pharmaceutical & Medical Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily Pharmaceutical & Medical Bear 3X Shares
|
|
0.95%
|
Direxion Daily EURO STOXX 50
®
Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily EURO STOXX 50
®
Bear 3X Shares
|
|
0.95%
|
Direxion Daily Dow Jones Internet Bull 3X Shares
|
|
0.95%
|
|
|
|
|
Direxion Daily Factor Dog Bull 3X Shares
|
|
0.95%
|
|
|
|
|
Direxion Daily Lithium & Battery Tech Bull 3X Shares
|
|
0.95%
|
|
|
|
|
Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
|
|
0.95%
|
|
|
|
|
Direxion Daily Preferred Stock Bull 3X Shares
|
|
0.95%
|
|
|
|
|
Direxion Daily Communications Services Index Bull 3X Shares
|
|
0.95%
|
|
Direxion Daily Communication Services Bear 3X Shares
|
|
0.95%
|
Last Updated: November 20, 2018
A-3
Exhibit (h)(viii)(B)
SCHEDULE A
TO THE
MANAGEMENT SERVICES AGREEMENT
BETWEEN DIREXION SHARES ETF TRUST
AND RAFFERTY ASSET MANAGEMENT, LLC
Rafferty Asset Management, LLC (RAM) shall be paid 0.026% on the first $10 billion of the aggregate net assets of the Funds
that are series of the Direxion Shares ETF Trust and the funds that are a series of the Direxion Funds and then 0.024% on the aggregate net assets above $10 billion to provide the services listed on Schedule B to the Direxion Shares ETF Trust.
ACTIVELY MANAGED FUNDS
|
|
|
|
|
Direxion Auspice Broad Commodity Strategy ETF
|
|
|
Direxion Bitcoin Shares
|
NON-LEVERAGED
FUNDS
|
|
|
|
|
Direxion
NASDAQ-100
®
Equal Weighted Index Shares
|
|
|
Direxion All Cap Insider Sentiment Shares
|
|
|
Direxion Zacks MLP High Income Index Shares
|
|
|
Direxion Factor Dog ETF
|
150/50 FUNDS
|
|
|
|
|
Direxion Russell 1000
®
Value Over Growth ETF
|
|
|
Direxion Russell 1000
®
Growth Over Value ETF
|
|
|
Direxion Russell Large Over Small Cap ETF
|
|
|
Direxion Russell Small Over Large Cap ETF
|
|
|
Direxion MSCI USA Cyclical Over Defensive ETF
|
|
|
Direxion MSCI USA Defensive Over Cyclical ETF
|
|
|
Direxion MSCI Emerging Over Developed Markets ETF
|
|
|
Direxion MSCI Developed Over Emerging Markets ETF
|
|
|
Direxion FTSE/Russell International Over US ETF
|
|
|
Direxion FTSE/Russell US Over International ETF
|
1X BEAR FUNDS
|
|
|
|
|
Direxion Daily
7-10
Year Treasury Bear 1X Shares
|
|
|
Direxion Daily 20+ Year Treasury Bear 1X Shares
|
|
|
Direxion Daily S&P 500
®
Bear 1X Shares
|
|
|
Direxion Daily Municipal Bond Taxable Bear 1X Shares
|
|
|
Direxion Daily Small Cap Bear 1X Shares
|
|
|
Direxion Daily Total Bond Market Bear 1X Shares
|
|
|
Direxion Daily CSI 300 China A Share Bear 1 Shares
|
|
|
Direxion Daily CSI China Internet Index Bear 1X Shares
|
|
|
Direxion Daily MSCI China A Bear 1X Shares
|
|
|
Direxion Daily MSCI Real Estate Bear 1X Shares
|
LEVERAGED FUNDS
1.5X Funds
|
|
|
|
|
Direxion Factor Dog Bull 1.5X Shares
|
2X Funds
|
|
|
Direxion Daily S&P 500
®
Bull 2X Shares
|
|
|
Direxion Daily CSI 300 China A Share Bull 2X Shares
|
|
|
Direxion Daily Small Cap Bull 2X Shares
|
|
|
Direxion Daily CSI China Internet Index Bull 2X Shares
|
|
|
Direxion Daily MSCI China A Bull 2X Shares
|
|
|
Direxion Daily MSCI European Financials Bull 2X Shares
|
|
|
|
|
Direxion Daily High Yield Bear 2X Shares
|
Direxion Daily Dow Jones Internet Bull 2X Shares
|
|
|
Direxion Daily Factor Dog Bull 2X Shares
|
|
|
Direxion Daily Lithium & Battery Tech Bull 2X Shares
|
|
|
Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares
|
|
|
Direxion Daily Preferred Stock Bull 2X Shares
|
|
|
3X Funds
|
|
|
Direxion Daily
7-10
Year Treasury Bull 3X Shares
|
|
Direxion Daily
7-10
Year Treasury Bear 3X Shares
|
Direxion Daily 20+ Year Treasury Bull 3X Shares
|
|
Direxion Daily 20+ Year Treasury Bear 3X Shares
|
Direxion Daily MSCI Brazil Bull 3X Shares
|
|
|
Direxion Daily FTSE China Bull 3X Shares
|
|
Direxion Daily FTSE China Bear 3X Shares
|
Direxion Daily MSCI Developed Markets Bull 3X Shares
|
|
Direxion Daily MSCI Developed Markets Bear 3X Shares
|
Direxion Daily MSCI Emerging Markets Bull 3X Shares
|
|
Direxion Daily MSCI Emerging Markets Bear 3X Shares
|
Direxion Daily Energy Bull 3X Shares
|
|
Direxion Daily Energy Bear 3X Shares
|
Direxion Daily Financial Bull 3X Shares
|
|
Direxion Daily Financial Bear 3X Shares
|
Direxion Daily Gold Miners Index Bull 3X Shares
|
|
Direxion Daily Gold Miners Index Bear 3X Shares
|
Direxion Daily Healthcare Bull 3X Shares
|
|
|
Direxion Daily MSCI India Bull 3X Shares
|
|
|
Direxion Daily Latin America Bull 3X Shares
|
|
|
Direxion Daily Mid Cap Bull 3X Shares
|
|
Direxion Daily Mid Cap Bear 3X Shares
|
Direxion Daily Natural Gas Related Bull 3X Shares
|
|
Direxion Daily Natural Gas Related Bear 3X Shares
|
Direxion Daily MSCI Real Estate Bull 3X Shares
|
|
Direxion Daily MSCI Real Estate Bear 3X Shares
|
Direxion Daily Regional Banks Bull 3X Shares
|
|
Direxion Daily Regional Banks Bear 3X Shares
|
Direxion Daily Retail Bull 3X Shares
|
|
|
Direxion Daily Russia Bull 3X Shares
|
|
Direxion Daily Russia Bear 3X Shares
|
Direxion Daily S&P 500
®
Bull 3X Shares
|
|
Direxion Daily S&P 500
®
Bear 3X Shares
|
Direxion Daily Semiconductor Bull 3X Shares
|
|
Direxion Daily Semiconductor Bear 3X Shares
|
|
|
|
Direxion Daily Small Cap Bull 3X Shares
|
|
Direxion Daily Small Cap Bear 3X Shares
|
Direxion Daily MSCI South Korea Bull 3X Shares
|
|
|
Direxion Daily Technology Bull 3X Shares
|
|
Direxion Daily Technology Bear 3X Shares
|
Direxion Daily Junior Gold Miners Index Bull 3X Shares
|
|
Direxion Daily Junior Gold Miners Index Bear 3X Shares
|
Direxion Daily FTSE Europe Bull 3X Shares
|
|
|
Direxion Daily MSCI Japan Bull 3X Shares
|
|
|
Direxion Daily Homebuilders & Supplies Bull 3X Shares
|
|
|
Direxion Daily S&P Biotech Bull 3X Shares
|
|
Direxion Daily S&P Biotech Bear 3X Shares
|
Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
|
|
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
|
Direxion Daily Dow 30 Bull 3X Shares
|
|
Direxion Daily Dow 30 Bear 3X Shares
|
Direxion Daily Consumer Discretionary Bull 3X Shares
|
|
Direxion Daily Consumer Discretionary Bear 3X Shares
|
Direxion Daily Consumer Staples Bull 3X Shares
|
|
Direxion Daily Consumer Staples Bear 3X Shares
|
Direxion Daily Utilities Bull 3X Shares
|
|
Direxion Daily Utilities Bear 3X Shares
|
Direxion Daily MSCI Canada Bull 3X Shares
|
|
Direxion Daily MSCI Canada Bear 3X Shares
|
Direxion Daily Aerospace & Defense Bull 3X Shares
|
|
Direxion Daily Aerospace & Defense Bear 3X Shares
|
Direxion Daily MSCI Mexico Bull 3X Shares
|
|
Direxion Daily MSCI Mexico Bear 3X Shares
|
Direxion Daily Transportation Bull 3X Shares
|
|
Direxion Daily Transportation Bear 3X Shares
|
Direxion Daily Industrials Bull 3X Shares
|
|
Direxion Daily Industrials Bear 3X Shares
|
Direxion Daily Metals & Mining Bull 3X Shares
|
|
Direxion Daily Metals & Mining Bear 3X Shares
|
Direxion Daily MSCI Italy Bull 3X Shares
|
|
Direxion Daily MSCI Italy Bear 3X Shares
|
Direxion Daily Pharmaceutical & Medical Bull 3X Shares
|
|
Direxion Daily Pharmaceutical & Medical Bear 3X Shares
|
Direxion Daily EURO STOXX 50
®
Bull 3X Shares
|
|
Direxion Daily EURO STOXX 50
®
Bear 3X Shares
|
Direxion Daily Dow Jones Internet Bull 3X Shares
|
|
|
Direxion Daily Factor Dog Bull 3X Shares
|
|
|
Direxion Daily Lithium & Battery Tech Bull 3X Shares
|
|
|
Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
|
|
|
Direxion Daily Preferred Stock Bull 3X Shares
|
|
|
Direxion Daily Communication Services Index Bull 3X Shares
|
|
Direxion Daily Communication Services Index Bear 3X Shares
|
Last Updated: November 20, 2018
Exhibit (i)
|
|
|
|
|
|
|
K&L GATES LLP
1601 K STREET, N.W.
WASHINGTON, DC 20006
T +1 202 778 9000 F +1 202 778 9100 klgates.com
|
|
|
February 26, 2019
Direxion Shares ETF Trust
1301 Avenue of the
Americas (6th Avenue)
28th Floor
New York, NY 10019
Ladies and Gentlemen:
We have acted as counsel to Direxion Shares ETF Trust, a Delaware statutory trust (the
Trust
), in
connection with Post-Effective Amendment No. 239 (the
Post
-Effective
Amendment
) to the Trusts registration statement on Form
N-1A
(File Nos.
333-150525;
811-22201)
(the
Registration Statement
), to be filed with the U.S. Securities and Exchange Commission (the
Commission
) on or about February 26, 2019, registering an indefinite number of shares of beneficial interest in the series of the Trust listed in Schedule A to this opinion letter (the
Shares
) under the
Securities Act of 1933, as amended (the
Securities Act
).
This opinion letter is being delivered at
your request in accordance with the requirements of paragraph 29 of Schedule A of the Securities Act and Item 28(i) of Form
N-1A
under the Securities Act and the Investment Company Act of 1940, as amended (the
Investment Company Act
).
For purposes of this opinion letter, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of:
|
(i)
|
the prospectuses and statements of additional information (collectively, the
Prospectus
)
filed as part of the Post-Effective Amendment;
|
|
(ii)
|
the Trusts certificate of trust, governing instrument, and
by-laws
in effect on the date of this opinion letter;
|
|
(iii)
|
the resolutions adopted by the trustees of the Trust relating to the
Post-Effective
Amendment, the establishment and designation of the Shares of each series and the authorization for issuance and sale of the Shares; and
|
|
(iv)
|
the exemptive orders applicable to the Trust issued by the Commission under the Investment Company Act
permitting any Trust series to operate as an exchange-traded fund (the
Exemptive Orders
).
|
We also
have examined and relied upon certificates of public officials and, as to certain matters of fact that are material to our opinions, we have relied on a certificate of an officer of the Trust. We have not independently established any of the facts
on which we have so relied.
For purposes of this opinion letter, we have assumed the accuracy and completeness of each
document submitted to us, the genuineness of all signatures on original documents, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents
|
|
|
|
|
|
|
|
|
February 26, 2019
Page 2
|
submitted to us as facsimile, electronic, certified, conformed, or photostatic copies thereof, and the due execution and delivery of all documents where due execution and delivery are
prerequisites to the effectiveness thereof. We have further assumed the legal capacity of natural persons, that persons identified to us as officers of the Trust are actually serving in such capacity, and that the representations of officers of the
Trust are correct as to matters of fact. We have also assumed compliance by the applicants for the Exemptive Orders with each of the conditions contained in the related exemptive applications, as amended. We have not independently verified any of
these assumptions.
The opinions expressed in this opinion letter are based on the facts in existence and the laws in
effect on the date hereof and are limited to the Delaware Statutory Trust Act and the provisions of the Investment Company Act that are applicable to equity securities issued by registered
open-end
investment
companies. We are not opining on, and we assume no responsibility for, the applicability to or effect on any of the matters covered herein of any other laws.
Based upon and subject to the foregoing, it is our opinion that (1) the Shares to be issued pursuant to the
Post-Effective Amendment, when issued and paid for by the purchasers upon the terms described in the
Post-Effective
Amendment and the Prospectus, will be validly issued, and (2) such purchasers will have
no obligation to make any further payments for the purchase of the Shares or contributions to the Trust solely by reason of their ownership of the Shares.
This opinion is rendered solely in connection with the filing of the Post-Effective Amendment and supersedes any previous
opinions of this firm in connection with the issuance of Shares. We hereby consent to the filing of this opinion with the Commission in connection with the Post-Effective Amendment and to the reference to this firms name under the heading
Legal Counsel in the Prospectus. In giving this consent, we do not thereby admit that we are experts with respect to any part of the Registration Statement or Prospectus within the meaning of the term expert as used in
Section 11 of the Securities Act or the rules and regulations promulgated thereunder by the Commission, nor do we admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act or the rules
and regulations of the Commission promulgated thereunder.
Very truly yours,
/s/ K&L Gates LLP
|
|
|
|
|
|
|
|
|
February 26, 2019
Page 3
|
Schedule A
ACTIVELY MANAGED FUND
Direxion Auspice Broad
Commodity Strategy ETF
NON-LEVERAGED
FUNDS
Direxion All Cap Insider Sentiment Shares
Direxion
NASDAQ-100
®
Equal Weighted Index Shares
Direxion Zacks MLP High
Income Index Shares
1X FUNDS
Direxion Daily
S&P 500
®
Bear 1X Shares
Direxion Daily
7-10
Year
Treasury Bear 1X Shares
Direxion Daily 20+ Year Treasury Bear 1X Shares
Direxion Daily Total Bond Market Bear 1X Shares
Direxion Daily
CSI 300 China A Share Bear 1X Shares
Direxion Daily Small Cap Bear 1X Shares
Direxion Daily Municipal Bond Taxable Bear 1X Shares
Direxion
Daily MSCI China A Bear 1X Shares
Direxion Daily CSI China Internet Index Bear 1X Shares
Direxion Daily MSCI Real Estate Bear 1X Shares
2X BULL
FUNDS
Direxion Daily S&P 500
®
Bull 2X Shares
Direxion Daily Small Cap Bull 2X Shares
Direxion Daily CSI 300 China A Share Bull 2X Shares
Direxion
Daily CSI China Internet Index Bull 2X Shares
Direxion Daily MSCI European Financials Bull 2X Shares
Direxion Daily MSCI China A Bull 2X Shares
Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares
Direxion Daily Preferred Stock Bull 2X Shares
2X BEAR
FUNDS
Direxion Daily High Yield Bear 2X Shares
Direxion Daily MSCI European Financial Bear 2X Shares
3X
BULL FUNDS
Direxion Daily Mid Cap Bull 3X Shares
Direxion Daily S&P 500
®
Bull 3X Shares
Direxion Daily Small Cap Bull 3X Shares
Direxion Daily MSCI
Brazil Bull 3X Shares
Direxion Daily FTSE China Bull 3X Shares
Direxion Daily MSCI Developed Markets Bull 3X Shares
Direxion
Daily MSCI Emerging Markets Bull 3X Shares
|
|
|
|
|
|
|
|
|
February 26, 2019
Page 4
|
Direxion Daily FTSE Europe Bull 3X Shares
Direxion Daily MSCI India Bull 3X Shares
Direxion Daily MSCI
Japan Bull 3X Shares
Direxion Daily Latin America Bull 3X Shares
Direxion Daily Russia Bull 3X Shares
Direxion Daily MSCI South
Korea Bull 3X Shares
Direxion Daily S&P Biotech Bull 3X Shares
Direxion Daily Energy Bull 3X Shares
Direxion Daily Financial
Bull 3X Shares
Direxion Daily Gold Miners Index Bull 3X Shares
Direxion Daily Healthcare Bull 3X Shares
Direxion Daily
Homebuilders & Supplies Bull 3X Shares
Direxion Daily Junior Gold Miners Index Bull 3X Shares
Direxion Daily Natural Gas Related Bull 3X Shares
Direxion Daily
MSCI Real Estate Bull 3X Shares
Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
Direxion Daily Regional Banks Bull 3X Shares
Direxion Daily
Retail Bull 3X Shares
Direxion Daily Semiconductor Bull 3X Shares
Direxion Daily Technology Bull 3X Shares
Direxion Daily
7-10
Year Treasury Bull 3X Shares
Direxion Daily 20+ Year Treasury Bull 3X Shares
Direxion Daily Aerospace & Defense Bull 3X Shares
Direxion Daily Industrials Bull 3X Shares
Direxion Daily
Transportation Bull 3X Shares
Direxion Daily Utilities Bull 3X Shares
Direxion Daily MSCI Mexico Bull 3X Shares
Direxion Daily EURO
STOXX 50
®
Bull 3X Shares
Direxion Daily Pharmaceutical & Medical Bull 3X Shares
Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
Direxion Daily Consumer Discretionary Bull 3X Shares
Direxion
Daily Consumer Staples Bull 3X Shares
Direxion Daily Dow 30 Bull 3X Shares
Direxion Daily Metals & Mining Bull 3X Shares
Direxion
Daily MSCI Canada Bull 3X Shares
Direxion Daily MSCI Italy Bull 3X Shares
Direxion Daily Preferred Stock Bull 3X Shares
Direxion Daily
Communication Services Index Bull 3X Shares
3X BEAR FUNDS
Direxion Daily Mid Cap Bear 3X Shares
Direxion Daily S&P 500
®
Bear 3X Shares
Direxion Daily Small Cap Bear 3X Shares
Direxion Daily FTSE China Bear 3X Shares
|
|
|
|
|
|
|
|
|
February 26, 2019
Page 5
|
Direxion Daily MSCI Developed Markets Bear 3X Shares
Direxion Daily MSCI Emerging Markets Bear 3X Shares
Direxion
Daily Russia Bear 3X Shares
Direxion Daily S&P Biotech Bear 3X Shares
Direxion Daily Energy Bear 3X Shares
Direxion Daily Financial
Bear 3X Shares
Direxion Daily Gold Miners Index Bear 3X Shares
Direxion Daily Junior Gold Miners Index Bear 3X Shares
Direxion
Daily Natural Gas Related Bear 3X Shares
Direxion Daily MSCI Real Estate Bear 3X Shares
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
Direxion Daily Regional Banks Bear 3X Shares
Direxion Daily
Semiconductor Bear 3X Shares
Direxion Daily Technology Bear 3X Shares
Direxion Daily
7-10
Year Treasury Bear 3X Shares
Direxion Daily 20+ Year Treasury Bear 3X Shares
Direxion Daily
Consumer Discretionary Bear 3X Shares
Direxion Daily Consumer Staples Bear 3X Shares
Direxion Daily Dow 30 Bear 3X Shares
Direxion Daily
Aerospace & Defense Bear 3X Shares
Direxion Daily Industrials Bear 3X Shares
Direxion Daily Metals & Mining Bear 3X Shares
Direxion
Daily Pharmaceutical & Medical Bear 3X Shares
Direxion Daily Transportation Bear 3X Shares
Direxion Daily Utilities Bear 3X Shares
Direxion Daily MSCI
Canada Bear 3X Shares
Direxion Daily MSCI Italy Bear 3X Shares
Direxion Daily MSCI Mexico Bear 3X Shares
Direxion Daily EURO
STOXX 50
®
Bear 3X Shares
Direxion Daily Communication Services Index Bear 3X Shares
Exhibit (j)(ii)
Consent of Independent Registered Public Accounting Firm
We consent to the references to our firm under the captions Financial Highlights in each Prospectus and Independent
Registered Public Accounting Firm in each Statement of Additional Information and to the incorporation by reference of our report dated December 21, 2018, in the Registration Statement (Form N-1A) of Direxion Shares ETF Trust for the year
ended October 31, 2018, filed with the Securities and Exchange Commission in this Post-Effective Amendment No. 239 under the Securities Act of 1933 (Registration
No. 333-150525).
/s/ Ernst & Young
LLP
Minneapolis, MN
February 26, 2019
Exhibit (m)(i)(B)
Appendix A
ACTIVELY MANAGED FUNDS
|
Direxion Auspice Broad Commodity Strategy ETF
|
Direxion Bitcoin Shares
|
|
NON-LEVERAGED
FUNDS
|
|
Direxion
NASDAQ-100
®
Equal Weighted Index Shares
|
Direxion All Cap Insider Sentiment Shares
|
Direxion Zacks MLP High Income Index Shares
|
Direxion Factor Dog ETF
|
|
150/50 FUNDS
|
|
Direxion Russell 1000
®
Value Over Growth
ETF
|
Direxion Russell 1000
®
Growth Over Value
ETF
|
Direxion Russell Large Over Small Cap ETF
|
Direxion Russell Small Over Large Cap ETF
|
Direxion MSCI USA Cyclical Over Defensive ETF
|
Direxion MSCI USA Defensive Over Cyclical ETF
|
Direxion MSCI Emerging Over Developed Markets ETF
|
Direxion MSCI Developed Over Emerging Markets ETF
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Direxion FTSE/Russell International Over US ETF
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Direxion FTSE/Russell US Over International ETF
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1X BEAR FUNDS
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Direxion Daily
7-10
Year Treasury Bear 1X
Shares
|
Direxion Daily 20+ Year Treasury Bear 1X Shares
|
Direxion Daily S&P 500
®
Bear 1X
Shares
|
Direxion Daily Municipal Bond Taxable Bear 1X Shares
|
Direxion Daily Small Cap Bear 1X Shares
|
Direxion Daily Total Bond Market Bear 1X Shares
|
Direxion Daily CSI 300 China A Share Bear 1X Shares
|
Direxion Daily CSI China Internet Index Bear 1X Shares
|
Direxion Daily MSCI China A Bear 1X Shares
|
Direxion Daily MSCI Real Estate Bear 1X Shares
|
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LEVERAGED FUNDS
|
|
1.25X Funds
|
|
PortfolioPlus S&P 500
®
ETF
|
PortfolioPlus S&P
®
Small Cap ETF
|
PortfolioPlus 20+ Year Treasury ETF
|
Direxion 1.25X High Beta/Low Volatility Index ETF
|
PortfolioPlus Developed Markets ETF
|
|
|
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PortfolioPlus Emerging Markets
ETF
|
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Direxion 1.25X State Street GX Dynamic
Allocation ETF
|
|
|
Portfolio Plus S&P
®
Mid Cap ETF
|
|
|
PortfolioPlus Real Estate
ETF
|
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1.5X Funds
|
|
|
|
|
Direxion Factor Dog Bull 1.5X
Shares
|
2X Funds
|
|
|
|
|
Direxion Daily S&P 500
®
Bull 2X Shares
|
|
|
Direxion Daily CSI 300 China A Share Bull 2X Shares
|
|
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Direxion Daily Small Cap Bull 2X Shares
|
|
|
Direxion Daily CSI China Internet Index Bull 2X Shares
|
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Direxion Daily MSCI China A Bull 2X Shares
|
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Direxion Daily MSCI European Financials Bull 2X Shares
|
|
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Direxion Daily High Yield Bear 2X Shares
|
Direxion Daily Dow Jones Internet Bull 2X Shares
|
|
|
Direxion Daily Factor Dog Bull 2X Shares
|
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Direxion Daily Lithium & Battery Tech Bull 2X Shares
|
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Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares
|
|
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Direxion Daily Preferred Stock Bull 2X Shares
|
|
|
|
3X Funds
|
|
|
|
|
|
Direxion Daily
7-10
Year Treasury Bull 3X Shares
|
|
Direxion Daily
7-10
Year Treasury Bear 3X Shares
|
|
|
Direxion Daily 20+ Year Treasury Bull 3X Shares
|
|
Direxion Daily 20+ Year Treasury Bear 3X Shares
|
|
|
Direxion Daily MSCI Brazil Bull 3X Shares
|
|
|
|
|
Direxion Daily FTSE China Bull 3X Shares
|
|
Direxion Daily FTSE China Bear 3X Shares
|
|
|
Direxion Daily MSCI Developed Markets Bull 3X Shares
|
|
Direxion Daily MSCI Developed Markets Bear 3X Shares
|
|
|
Direxion Daily MSCI Emerging Markets Bull 3X Shares
|
|
Direxion Daily MSCI Emerging Markets Bear 3X Shares
|
|
|
Direxion Daily Energy Bull 3X Shares
|
|
Direxion Daily Energy Bear 3X Shares
|
|
|
Direxion Daily Financial Bull 3X Shares
|
|
Direxion Daily Financial Bear 3X Shares
|
|
|
Direxion Daily Gold Miners Index Bull 3X Shares
|
|
Direxion Daily Gold Miners Index Bear 3X Shares
|
|
|
Direxion Daily Healthcare Bull 3X Shares
|
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Direxion Daily MSCI India Bull 3X Shares
|
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Direxion Daily Latin America Bull 3X Shares
|
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Direxion Daily Mid Cap Bull 3X Shares
|
|
Direxion Daily Mid Cap Bear 3X Shares
|
|
|
Direxion Daily Natural Gas Related Bull 3X Shares
|
|
Direxion Daily Natural Gas Related Bear 3X Shares
|
|
|
Direxion Daily MSCI Real Estate Bull 3X Shares
|
|
Direxion Daily MSCI Real Estate Bear 3X Shares
|
|
|
Direxion Daily Regional Banks Bull 3X Shares
|
|
Direxion Daily Regional Banks Bear 3X Shares
|
|
|
Direxion Daily Retail Bull 3X Shares
|
|
|
|
|
Direxion Daily Russia Bull 3X Shares
|
|
Direxion Daily Russia Bear 3X Shares
|
|
|
Direxion Daily S&P 500
®
Bull 3X Shares
|
|
Direxion Daily S&P 500
®
Bear 3X Shares
|
|
|
Direxion Daily Semiconductor Bull 3X Shares
|
|
Direxion Daily Semiconductor Bear 3X Shares
|
|
|
Direxion Daily Small Cap Bull 3X Shares
|
|
Direxion Daily Small Cap Bear 3X Shares
|
|
|
Direxion Daily MSCI South Korea Bull 3X Shares
|
|
|
|
|
|
Direxion Daily Technology Bull 3X Shares
|
|
Direxion Daily Technology Bear 3X Shares
|
Direxion Daily Junior Gold Miners Index Bull 3X Shares
|
|
Direxion Daily Junior Gold Miners Index Bear 3X Shares
|
Direxion Daily FTSE Europe Bull 3X Shares
|
|
|
Direxion Daily MSCI Japan Bull 3X Shares
|
|
|
Direxion Daily Homebuilders & Supplies Bull 3X Shares
|
|
|
Direxion Daily S&P Biotech Bull 3X Shares
|
|
Direxion Daily S&P Biotech Bear 3X Shares
|
Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
|
|
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
|
Direxion Daily Dow 30 Bull 3X Shares
|
|
Direxion Daily Dow 30 Bear 3X Shares
|
Direxion Daily Consumer Discretionary Bull 3X Shares
|
|
Direxion Daily Consumer Discretionary Bear 3X Shares
|
Direxion Daily Consumer Staples Bull 3X Shares
|
|
Direxion Daily Consumer Staples Bear 3X Shares
|
Direxion Daily Utilities Bull 3X Shares
|
|
Direxion Daily Utilities Bear 3X Shares
|
Direxion Daily MSCI Canada Bull 3X Shares
|
|
Direxion Daily MSCI Canada Bear 3X Shares
|
Direxion Daily Aerospace & Defense Bull 3X Shares
|
|
Direxion Daily Aerospace & Defense Bear 3X Shares
|
Direxion Daily MSCI Mexico Bull 3X Shares
|
|
Direxion Daily MSCI Mexico Bear 3X Shares
|
Direxion Daily Transportation Bull 3X Shares
|
|
Direxion Daily Transportation Bear 3X Shares
|
Direxion Daily Industrials Bull 3X Shares
|
|
Direxion Daily Industrials Bear 3X Shares
|
Direxion Daily Mining & Metals Bull 3X Shares
|
|
Direxion Daily Mining & Metals Bear 3X Shares
|
Direxion Daily MSCI Italy Bull 3X Shares
|
|
Direxion Daily MSCI Italy Bear 3X Shares
|
Direxion Daily Pharmaceutical & Medical Bull 3X Shares
|
|
Direxion Daily Pharmaceutical & Medical Bear 3X Shares
|
Direxion Daily EURO STOXX 50
®
Bull 3X Shares
|
|
Direxion Daily EURO STOXX 50
®
Bear 3X Shares
|
Direxion Daily Dow Jones Internet Bull 3X Shares
|
|
|
Direxion Daily Factor Dog Bull 3X Shares
|
|
|
Direxion Daily Lithium & Battery Tech Bull 3X Shares
|
|
|
Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares
|
|
|
Direxion Daily Preferred Stock Bull 3X Shares
|
|
|
Direxion Daily Communication Services Index Bull 3X Shares
|
|
Direxion Daily Communication Services Index Bear 3X Shares
|
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|
Last Updated: November 20, 2018
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